As soon as employees’ contribution towards PF or ESI is received by the assessee by way of deduction or otherwise from the salary/wages of the employees, it will be treated as ‘income’ at the hands of the assessee. It clearly follows there from that If the assessee does not deposit this contribution with PF/ESI authorities, it will be taxed as Income at the hands of the assessee. However, on making deposit with the concerned authorities, the assessee becomes entitled to deduction under the provisions of s. 36(1)(va). Sec. 43B(b), however, stipulates that such deduction would be permissible only on actual payment. This is the scheme of the Act for making an assessee entitled to get deduction from Income insofar as employees’ contribution is concerned. Deletion of the second proviso has been treated as retrospective in nature and would not apply at all. The case is to be governed with the application of the first proviso. If the
employees’ contribution is not deposited by the due date prescribed under the relevant Acts and is deposited late, the employer not only pays interest on delayed payment but can incur penalties also, for which specific provisions are made in the Provident Fund Act as well as the ESI Act. Therefore, the Acts permit the employer to make the deposit with some delays, subject to the aforesaid sequences. Insofar as the IT Act is concerned, the assessee can get the benefit if the actual payment is made before the return is filed. CIT vs.Vinay Cement Ltd., (2007) 213 CTR (SC) 268, CIT vs. Dharmendra Sharma (2007) 213 CTR (Del) 609: (2008) 297 ITR 320 (Del) and CIT vs. P.M. Electronics Ltd. (2008) 220 CTR (Del) 635 : (2008) 15 DTR (Del) 258 followed.
In view of the decision, the deduction of payment of employees’ contribution towards provident fund and ESI cannot be disallowed under section 43B, if paid before the due date of filing the return. In view of this fact, this ground of appeal of the revenue is dismissed.
INCOME TAX APPELLATE TRIBUNAL, DELHI
ITA Nos.2777 to 2781/Del./2010
(Assessment Years: 1999-00, 2000-01, 2001-02, 2003-04, 2004-05)
ACIT Vs. M/s. Shakti Bhog Foods Pvt. Ltd.
ORDER
PER BENCH:
All these five appeals filed by the revenue emanate from the five orders of the CIT (Appeals)-I, New Delhi all dated 15.03.2010. Some grounds of appeal are common in all the appeals, therefore, these appeals are being disposed of by this common order for the sake of convenience.
2. The assessee company engaged in the manufacture of Atta and other products like cattle feed, Rice, Dalia, Besan, Suji, Salt, etc.. Assessee is purchasing wheat as raw material.
3. Although all these appeals have been filed by the revenue however the ld. AR submitted that under Rule 27 of Income Tax (Appellate Tribunal) Rules, 1963, assessee wants to support order on the ground of reopening decided against the assessee by the CIT (A). The ld. AR submitted that there was no valid assumption of jurisdiction u/s 147 of the Income-tax Act, 1961 on the basis of which assessment was reopened u/s 147 of the Act. Ld. AR pleaded that notice u/s 148 was without jurisdiction. The reasons recorded are highly illusory and are in the nature of mere pretence. The proceedings have been initiated to examine certain transactions of purchases of the assessee. Thus, the proceedings were initiated only for the purposes of investigation. There is no material or evidence to allege that the income of the assessee company has escaped assessment. Ld. AR further pleaded that there must be existence of tangible material or formation of belief which is a pre-requisite for initiation of action u/s 147 of the Act. Section 147 postulates that Assessing Officer must have reason to believe that income has escaped assessment and there should be facts before Assessing Officer which reasonably give rise to the belief. Ld. AR pleaded that there was no material which has nexus with the formation of the reason to believe by the Assessing Officer. Ld. AR also pleaded that reassessment proceedings cannot be initiated only on the basis of reason to suspect. Ld. AR relied on the decision of Hon’ble Delhi High Court in the case of Bawa Abhai Singh reported in 253 ITR 83 (Del.). Ld. AR also submitted that the reasons to suspect are not the same as reasons to believe. For this, he relied on the decision of Hon’ble Supreme Court in the case of CIT vs. Indian Oil Corporation reported in 158 ITR 956 (SC). Ld. AR also submitted that the reason to believe must have a rational connection with or relevant bearing on the formation of the belief. For this, he relied on the decision of Hon’ble Supreme Court in the case of ITO vs. Lakhmani Mewal Das reported on 103 ITR 437 (SC). Finally, Ld. AR pleaded to set aside the order of the CIT (A) on this issue.
4. On the other hand, ld. DR relied on the decision of authorities below and also submitted that the Assessing Officer received the information from the investigation wing that assessee has received accommodation entry for the purchase bills. The investigation wing passed on the information that Shri Naresh Kumar, son of Shri Deendayal, proprietor of N.K. Trading Co. engage in providing bogus accommodation entries and assessee is also beneficiary of such bogus entries. The Assessing Officer considered this new information and made a reasonable believe that due to these bogus accommodation purchase bills, the income has escaped assessment. Notice u/s 148 was issued after recording the proper reasons as per requirement of law. Therefore, reopening was based on a belief. There was fresh information in respect of the assessee as a beneficiary of bogus accommodation purchase bills provided to it which represented undisclosed income of the assessee. The information was specific. Any reasonable person shall make a belief that income has escaped as the transaction entered into by the assessee for bogus accommodation purchase bills. These transactions were not genuine transactions. Therefore, there was sufficient material which is sufficient to make reason to believe for initiating the provisions u/s 147. There was a rational connection between the information received and escapement of the income. There is a live link between the material came to the notice of the Assessing Officer and the formation of believe that income has escaped from assessment. Ld. DR also relied on the decision of Hon’ble Supreme Court in the case of ACIT vs. Rajesh Jhaveri Stock Brokers P. Ltd. reported in 291 ITR 500 where the Hon’ble Supreme Court has held when the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, the law does not require that Assessing Officer should have finally ascertained the fact of legal evidence or conclusion. The material required for conclusively proving the escapement of income is not concerned at the stage of reopening. The information received form the investigation wing was specific. The information was sufficient for making a belief that income has escaped and the Assessing Officer was justified in initiating the proceedings for reassessment by issuing notice u/s 148 after recording the reasons as required by law. Ld. DR submitted to dismiss this plea of assessee.
5. We have heard both the sides on the issue and have considered all the material available on the record and case laws relied upon by both the sides. The Assessing Officer received information from investigation wing that assessment is a beneficiary of the bogus accommodation purchase bills. On this information, the Assessing Officer applied his mind and formed a belief that income has escaped assessment. For this, the Assessing Officer recorded the reasons as required by law. The assessee’s name was figuring in the beneficiaries of these bogus accommodation purchase bills. The amount of the accommodation purchase bills was also specified in the information. In view of these facts, we find that Assessing Officer has rightly assumed jurisdiction for initiating proceedings. There was specific information received from the office of Directorate of Investigation as regards to the transactions entered by the assessee with a concern which was indulging and providing accommodation purchase bills. These transactions were not genuine transactions. In our considered view, it was neither a change of opinion nor it conveyed a particular interpretation of a specific provision which was done in a particular manner in the original assessment. In our considered view, the reason to believe has been appropriately understood by the Assessing Officer. There was sufficient material on the basis of which notice was issued. The sufficiency of the reasons for formation of belief cannot be considered at this stage. Therefore, this plea of the assessee made through ld. AR under Rule 27 of Income Tax (Appellate Tribunal) Rules stands dismissed for all the Assessment Years under consideration.
ITA No.2777/Del/2010 (Assessment Year: 1999-00)
6. The grounds of appeal in ITA No.2777/Del/2010 read as under:-
“1. The order of the ld. CIT (Appeals) is not correct in law and facts.
2. On the facts and circumstances of the case, the Ld. CIT(A) has erred in law and on facts of the case in deleting the addition of Rs.41,56,449/-made on ground of bogus purchase made from M/s N.K. Trading Co.
3. On the facts and circumstances of the case, the Ld. CIT (A) has erred in law and facts of the case in deleting the addition of Rs.55,959/- made on account of belated payment of employee’s contribution to EPF and ESIC.
4. On the facts and circumstances of the case, the order of the Ld. CIT (A) is perverse as he has ignored the relevant facts on record as well as ignored the relevant provisions of law.
5. The appellant craves leave to add, alter or amend any/all of the grounds of appeal before or during the course of the hearing of the appeal.”
7. Ground Nos.1, 4 & 5 are general in nature and do not require any adjudication.
8. In the ground no.2, the issue involved is against the deletion of addition of Rs.41,56,449/- made on account of bogus purchases made from M/s. N.K. Trading Co..
9. While pleading on behalf of the revenue, the ld. DR submitted that the CIT (A) is not justified in holding that even if it is assumed that the purchases made from these parties are bogus or were not made but it cannot be said that no purchases had been made because the Assessing Officer has accepted the sales as per books of account. Ld. DR submitted that the assessee company is doing voluminous work and it is indulged in the production of atta and other bye-products out of wheat. Hence, there cannot be a direct link between the purchases and the sales. Therefore, the CIT (A) is completely misunderstood the business process of the assessee. Since there was no direct link between the purchase and sales, such findings of the CIT (A) are perverse. The assessee has never established the direct link between the purchase of the wheat and corresponding sales of atta and bye-products. Therefore, all these findings are presumed and not based on any evidence. These are only hypothetical presumptions which the CIT (A) has wrongly asserted. Further, he pleaded that these alleged purchases made has not produced an iota of evidence which can prove that he has supplied the goods as per bills to the assessee. No books of account even kachha books of account were produced. There is no single evidence of purchases made by this alleged supplies to the assessee. It is only a verbal assertion which cannot be taken as evidence to explain the purchases. The CIT (A) is completely unjustified in granting the relief. The CIT (A) has also negated the fact that when the N.K. Trading Co. has sales of Rs.41.56 lacs to the assessee which is more than Rs.40 lacs turnover for which the provisions of section 44AB are applicable. It is only the assessee to whom these bogus accommodation entries of Rs.41,56,449/- were made there were others also. The CIT (A)’s observation that there are provisions for penalty u/s 271B has no relevance. Such findings are irrelevant for considering the nature of such bogus transactions. The circumstantial evidences clearly establish that N.K. Trading has provided bogus entries and with the help of these entries, the assessee has siphoned of the taxable income. Ld. DR also pleaded that the statements of the Proprietor of N.K. Trading were recorded by Shri M.K. Srivastava, DDIT, Unit IV (1) on 19.10.2005 during 133A proceedings and DCIT 8(1) Assessing Officer as on 16.11.2006. On 16.11.2006, assessee’s CA, Shri Sunil Dhuper was present and he did not ask any question even he was provided opportunity to cross. The assessee has never made any further request for cross examination of Shri Naresh Kumar. Shri Naresh Kumar had never produced any books of account to explain or prove the transaction.
10. On the other hand, the ld. AR relied on the order of the CIT (A) and also pleaded that the assessee was not provided opportunity to cross examine the proprietor of N.K. Trading and relied on the decision of Hon’ble Calcutta High Court in the case of CIT vs. Eastern Commercial Enterprises reported in 210 ITR 103 (Cal.) and P.S. Abdul Mazid vs. Ag.It. reported in 209 ITR 821 (Kerala). He has also relied on the decision of Hon’ble Punjab & Haryana High Court in the case of Mukund Singh vs. Presiding Officer, Sales Tax Tribunal reported in 110 STC 330.
11. We have heard both the sides on the issue. The statements of Shri Naresh Kumar, Proprietor of N.K. Trading were recorded on 19.10.2005 by DDIT, Investigation and 16.11.2006 by Assessing Officer. The statement of 19.10.2005 was recorded by DDIT (Inv.). A copy of the statement was given to the authorized representative of the assessee. On 16.11.2006 Assessing Officer recorded statement and the statement itself shows that Assessing Officer provided opportunity to cross the person whose statement was recorded. Shri Sunil Dhupar, CA was present during the recording of statement. Shri Dhupar was offered an opportunity to cross examine Naresh Kumar whose statement was recorded in his presence. Thus, Assessing Officer provided an opportunity to cross examine Shri Naresh Kumar, Proprietor of N.K. Trading Company. Therefore, in our considered view, assessee’s plea for cross examination is baseless. Shri Naresh Kumar, Proprietor of N.K. Trading Company has never produced any documentary evidence for purchase of goods which were ultimately claimed to have been sold to assessee company. Naresh Kumar has also not produced even the copy of bank statement where the payments were claimed to have been received. Such statements could have been very well obtained by Shri Naresh Kumar from the bank even when books were claimed to have been taken away by accountant. Simply making a statement that the books of account were taken away by the accountant and the accountant had fled away, cannot be an acceptable explanation for not producing the evidence in support of contention that purchases were genuine. There is no evidence which could show that N.K. Trading has actually purchased the goods which were supplied to the assessee. Not getting the accounts audited as per the provisions of section 44AB of the Act even when the turnover exceeds the limit also solidify the belief that transactions were not genuine.
11.1 The assessee is a manufacturer of Atta and other bye products. Wheat is raw material used to produce Atta and other products. There cannot be a direct tally of raw material purchased and output sold out. CIT (A) observation that no sales can be executed without making corresponding purchases is perverse. In the assessee’s case, there cannot be direct corresponding nexus of purchase and sales. The purchases of wheat were of thousands of tons costing in many crores. To be specific during the financial year 2000-01 relevant to Assessment Year 2001-02, purchases were of 98,544 metric tons costing Rs.64.45 crores and for financial year 1999-00 relevant to Assessment Year 2000-01 the quantity was 85,267 metric tons and the cost was Rs.59.30 crores. Details of the bogus purchases are given below:-
A.Y F.Y. Bogus Purchases Quantity Wheat
debited of Wheat(MTs) Purchase in (Rs.)
1999-00 1998-99 Rs. 41,56,449/-
2000-01 1999-00 Rs. 27,05,320/- 85,267 59.30 crores
2001-02 2000-01 Rs. 2,04,389/- 98,594 64.45 crores
2003-04 2002-03 Rs. 15,82,335/-
2004-05 2003-04 Rs.1,25,30,349/-
During financial year 1999-00 and 2000-01, the installed capacity for Atta shown in accounts is 60,000 MTs while production was 73,149 MTs and 84,316 MTs respectively. Assessee was also getting grinding done on lease contract also. All these facts show that there cannot be a direct nexus between purchases and sales. Further, these bogus purchases of wheat debited were so small in comparison to total purchases that it will be difficult rather impossible to detect discrepancies on quantity basis. Considering these facts, we hold that the finding of CIT (A) on this issue as perverse. Assessee had miserably failed to establish the purchase as genuine from N.K. Trading Company. We are also not pleased by the observation of CIT (A) that there is provision for penalty for not getting books of account audited. Rather we would like to state that had the genuine turnover of the N.K. Trading Company be so, then accounts might have been audited. The conduct of proprietor of N.K. Trading Company during the investigation and facts stated in statement and also facts gathered in survey operations clearly establish that assessee had failed to prove genuineness of purchases made from N.K. Trading Company. CIT (A) had deleted the addition without any reliable evidence and cogent reasons. In view of these facts, we set aside the order of CIT (A) on this issue. We allow this ground of revenue’s appeal.
12. In the ground no.3, the issue involved is against the deletion of addition of Rs.55,959/- made on account of employees provided fund and ESIC.
13. We have heard both the sides on the issue. The details of payment of provident fund are as under:-
Month Amount Delayed by
April, 1998 9,388/- 2 days
June, 1998 10,392/- 4 days
August, 1998 9,001/- 3 days
October, 1998 9,638/- 3 days
December, 1998 8,784/- 4 days
February, 1999 8,756/- 1 day
Total 55,959/-
The assessee had made payment in the grace period permitted in Provident Fund Act and ESI Act. We find that this issue is covered in favour of the assessee by the decision of Hon’ble jurisdictional High Court in the case of CIT vs. AIMIL Ltd. reported in 229 CTR 448 and Hon’ble Supreme Court in the case of CIT vs. Vinay Cements Limited reported in 213 CTR 286 (SC). The Hon’ble jurisdictional High Court in the case of CIT vs. AIMIL Limited, cited supra, has held as under :-
“As soon as employees’ contribution towards PF or ESI is received by the assessee by way of deduction or otherwise from the salary/wages of the employees, it will be treated as ‘income’ at the hands of the assessee. It clearly follows there from that If the assessee does not deposit this contribution with PF/ESI authorities, it will be taxed as Income at the hands of the assessee. However, on making deposit with the concerned authorities, the assessee becomes entitled to deduction under the provisions of s. 36(1)(va). Sec. 43B(b), however, stipulates that such deduction would be permissible only on actual payment. This is the scheme of the Act for making an assessee entitled to get deduction from Income insofar as employees’ contribution is concerned. Deletion of the second proviso has been treated as retrospective in nature and would not apply at all. The case is to be governed with the application of the first proviso. If the employees’ contribution is not deposited by the due date prescribed under the relevant Acts and is deposited late, the employer not only pays interest on delayed payment but can incur penalties also, for which specific provisions are made in the Provident Fund Act as well as the ESI Act. Therefore, the Acts permit the employer to make the deposit with some delays, subject to the aforesaid sequences. Insofar as the IT Act is concerned, the assessee can get the benefit if the actual payment is made before the return is filed. CIT vs.Vinay Cement Ltd., (2007) 213 CTR (SC) 268, CIT vs. Dharmendra Sharma (2007) 213 CTR (Del) 609: (2008) 297 ITR 320 (Del) and CIT vs. P.M. Electronics Ltd. (2008) 220 CTR (Del) 635 : (2008) 15 DTR (Del) 258 followed.”
In view of the decision, the deduction of payment of employees’ contribution towards provident fund and ESI cannot be disallowed under section 43B, if paid before the due date of filing the return. In view of this fact, this ground of appeal of the revenue is dismissed.
ITA No.2778/Del/2010 (Assessment Year: 2000-01)
14. Ground Nos.1, 4 & 5 are general in nature and do not require any adjudication.
15. Ground No.2 is against the deletion of addition of Rs.27,05,320/- made on account of bogus purchase made from M/s. N.K. Trading Co. This issue is covered by our aforesaid decision in ITA No.2777/Del/2010 for Assessment Year 1999-00 vide paras 11 & 11.1 in favour of the revenue. Accordingly, following the same, we allow this ground of revenue’s appeal.
16. Ground No.3 is against the deletion of addition of Rs.29,340/- made on account of belated payment of employees’ contribution of EPF and ESI. This issue is covered by our aforesaid decision in ITA No.2777/Del/2010 for Assessment Year 1999-00 vide para 13 against the revenue. Accordingly, following the same, we dismiss this ground of revenue’s appeal.
ITA No.2779/Del/2010 (Assessment Year : 2001-02)
17. Ground Nos.1, 3 & 4are general in nature and do not require any adjudication.
18. Ground No.2 is against the deletion of addition of Rs.2,04,389/- made on account of bogus purchase made from M/s. N.K. Trading Co. This issue is covered by our aforesaid decision in ITA No.2777/Del/2010 for Assessment Year 1999-00 vide paras 11 & 11.1 in favour of the revenue. Accordingly, following the same, we allow this ground of revenue’s appeal.
ITA Nos.2780 & 2781/Del/2010 (Assessment Year : 2003-04 & 2004-05)
19. Ground Nos.1, 5 & 6 in both the appeals are general in nature and do not require any adjudication.
20. Ground No.2 in both the appeals is against the deletion of addition made on account of bogus purchase made from M/s. N.K. Trading Co. This issue is covered by our aforesaid decision in ITA No.2777/Del/2010 for Assessment Year 1999-00 vide paras 11 & 11.1 in favour of the revenue. Accordingly, following the same, we allow this ground of revenue’s appeal.
21. Ground No.3 in both the appeals is against the deletion of addition made on account of belated payment of employees’ contribution of EPF and ESI. This issue is covered by our aforesaid decision in ITA No.2777/Del/2010 for Assessment Year 1999-00 vide para 13 against the revenue. Accordingly, following the same, we dismiss this ground of revenue’s appeal.
22. Ground No.4 in both the appeals is against the deletion of addition of interest free loan given to sister concern of assessee.
23. The CIT (A) has granted the relief by holding as under:-
“15. I have carefully considered the submission as made by the Assessee and the observation of the AO, In this regard, the AO has been well explained by the appellant that the assessee company has net owned funds of around Rs.12.96 crores as per their balance Sheet as at 31st March, 2003, on which no interest are being paid by the assessee. It was also explained that since the company has given loans and advances (recoverable in cash or in kind or for value to be received) of only Rs.2.51 crores out of which a sum of Rs.25 lacs have been given to the sister concern is negligible and every year is an independent assessment year. AO has not substantiated the matter except that the similar interest has been disallowed in the previous assessment year, since the loan has been brought forward from the previous assessment year, hence, the same had been disallowed. In this regard, I am of the opinion that since the net owned funds of the company has considerably increased from previous Balance Sheet as at 31/3/2002 being Rs.7.84 Crores to Rs.12.96 crores as at 31/3/2003 and the Sales revenue of the company has also increased by about 50 % as compared to the previous year, hence, no notional interest can be disallowed on any single transaction entered during the course of the business of the company. Further, when company has the surplus available net owned funds, hence, additions made notionally being interest calculated hypothetically on conjectures and surmises cannot be disallowed. It must be noted that this loan has not been given in the current year, hence, interest disallowance out of current year income is not substantiated. Under the available facts, additions made amounting to Rs.3,00,000/- be hereby deleted.”
24. We have heard both the sides in detail and we have also considered the facts of this issue. We find that the issue is covered by the decision of Hon’ble jurisdictional High Court in the case of CIT vs. Basti Sugar Mills Co. Ltd. in ITA No.89 of 1993 dated 1st September, 2010 wherein the Hon’ble High Court has held as under :
“2. The facts regarding question no.1 are that the assessee company borrowed large sums of money from banks and others and paid a huge interest of about Rs. 66,00,000/- on these borrowings. The assessee also gave interest-free loans and advances to its sister-concerns details of which are mentioned in the order of the Assessing officer and of the Commissioner of Income-tax (appeals). Calculating the interest @ 16.5% on the average balances of these 8 or 9 parties, the assessing officer added an amount of Rs. 2,28,273/- to the income of the assessee.
The Commissioner of Income Tax (Appeals) observed that there was no co-relation between the sums borrowed and the amounts advanced as loans. She also found that on identical facts, the Tribunal in the assessee’s own case for assessment year 1977-78 vide order dated 3.11.1983 had deleted the addition and thereafter aggrieved of that order, the revenue filed appeal before the Tribunal. The Tribunal, inter alia, found that the revenue was not able to establish any nexus between the amount borrowed by the assessee company on interest and the amounts advanced by the assessee to its sister-concerns. In fact major parties from whom interest was not charged were the same as in assessment year 1977-78 for which the Tribunal held that there was no warrant for adding any notional or deemed interest. Even in respect of other parties, a finding of fact was recorded that balances were old and no new loans had been advanced in the year under consideration. This is when it is found that there was no nexus between the money borrowed by the assessee from the banks and utilized for its own business purpose and the money which was given by the assessee to its sister-concerns as interest free loans and advances in the earlier years, question of disallowing the interest claimed by the assessee on the money borrowed by it would not arise. This issue is now squarely covered by the judgment of Supreme Court in the case of S.A. Builders Ltd. Vs. Commissioner of Income Tax (Appeals And Another, 288 ITR 1 where the Supreme Court observed as under:-
“In order to decide whether interest on funds borrowed by the assessee to give an interest free loan to a sister concern ( e.g., a subsidiary of the assessee) should be allowed as a deduction under section 36(1) (iii) of the Income tax Act, 1961, one has to enquire whether the loan was given by the assessee as a measure of commercial expediency. The expression “commercial expediency is one of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency”
Considering these facts, we dismiss this ground of revenue’s appeal.
25. In the result, all the five appeals filed by the revenue are partly allowed.
Order pronounced in open court on this 28th day of June, 2012.
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