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Mohan Polyfab P. Ltd. v. Cit
Tribunal Opinion Summary — ITA No.62/Ahd/2018
Factual and Procedural Background
The assessee filed its return of income on 21.09.2009 declaring total income as NIL. The Assessing Officer (AO) received information by letter dated 04.03.2016 from DCIT, Central Circle 4(3), Mumbai arising from an investigation into the Satish Saraf group. Statements recorded during that investigation from persons including Shri Vishal Bhubani, Shri Rahul Jhunjhunwala and Shri Satish Saraf admitted providing accommodation entries (bogus unsecured loans, bogus share capital, bogus sales/purchases, etc.), charging commissions for such entries.
On the strength of that information, the AO recorded reasons and issued a notice under section 148 dated 22.03.2016. The assessee replied indicating the original return be treated as response to the notice. A notice under section 143(2) was issued and the AO passed a reassessment order dated 23.12.2016 under section 143(3) read with section 147, making an addition of Rs.28,03,000 being disallowance of alleged bogus commission paid to M/s Sunlight Agency Pvt. Ltd.
The assessee appealed to the CIT(A). At the Tribunal, the assessee's counsel stated that although reopening was involved, the assessee did not press the reopening issue and consented to confirmation of the reopening by the CIT(A). The primary grievance before the Tribunal therefore related to the merits of the addition of Rs.28,03,000. The CIT(A) had confirmed the addition; the Tribunal examined the correctness of that confirmation and ultimately allowed the assessee's ground on the basis described below.
Legal Issues Presented
- Whether the addition of Rs.28,03,000 (disallowance of commission alleged to be bogus paid to M/s Sunlight Agency Pvt. Ltd.) was correctly sustained by the AO and affirmed by the CIT(A).
- Whether statements and investigative material recorded by other authorities (relating to Shri Rahul Jhunjhunwala and others) could be used against the assessee without affording the assessee an opportunity to cross-examine those persons (principle of natural justice).
Arguments of the Parties
Appellant's (Assessee's) Arguments
- The assessee denied availing any bogus commission entry and disputed the AO's conclusion that the commission paid to M/s Sunlight Agency Pvt. Ltd. was bogus.
- The assessee requested the opportunity to cross-examine the concerned persons (specifically Shri Rahul Jhunjhunwala and others) whose statements were relied upon by the AO but were recorded by other investigative authorities during separate investigations.
- The assessee relied upon the Supreme Court judgment in Andaman Timber Industries Vs. Commissioner of Central Excise (2015) 62 Taxmann.com 3 (SC) to contend that statements relied upon by the tax authority must be put to the assessee and, if relied upon, the witnesses should be made available for cross-examination; failure to permit cross-examination renders the order vitiated for violation of natural justice.
Respondent's (AO / CIT(A)) Position
- The AO treated the information received from DCIT, Central Circle 4(3) and the admissions allegedly made by Shri Rahul Jhunjhunwala as establishing that M/s Sunlight Agency Pvt. Ltd. was a paper/shell company used to provide accommodation entries and launder unaccounted money; on that basis the AO disallowed the commission.
- The CIT(A) confirmed the AO's addition. In doing so, the CIT(A) recorded that M/s Sunlight Agency Pvt. Ltd. was used to provide accommodation entries. The CIT(A) relied on the Tribunal decision in Pavankumar M. Sanghvi Vs. ITO (2017) 81 Taxmann.com 308 (Wd. 3(1 )(2), Baroda) for observations on shell entities and their functioning, and on a Mumbai High Court decision in Sanjay Vimalchand Jain (L/H) Shantidevi Vimalchand Jain Vs. Pr. CIT - 1, Nagpur (Income Tax Appeal No. 18/2017 dated 10/04/2017) which examined transactions of a Rahul Jhunjhunwala controlled company and held the group was indulged in dubious transactions to account for undisclosed income. The CIT(A) treated these authorities and the recorded admissions as supporting the disallowance.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Pavankumar M. Sanghvi Vs. ITO, Wd. 3(1)(2), Baroda [2017] 81 Taxmann.com 308 | The decision contains observations about the characteristics of shell entities (entities without significant genuine operations that are used as vehicles to provide accommodation entries and to facilitate laundering of illicit monies) and how to assess genuineness in light of ground realities. | The CIT(A) invoked these observations to support the conclusion that M/s Sunlight Agency Pvt. Ltd. was a shell company used to provide accommodation entries and to justify disallowance of the commission. |
| Sanjay Vimalchand Jain (L/H) Shantidevi Vimalchand Jain Vs. Pr. CIT - 1, Nagpur (Income Tax Appeal No. 18/2017 dated 10/04/2017) | The Mumbai High Court (as referenced by the CIT(A)) examined transactions of companies controlled by Shri Rahul Jhunjhunwala and held that the group was involved in dubious transactions intended to account for undisclosed income. | The CIT(A) relied on this High Court finding as corroborative material to treat the transactions involving entities controlled by Rahul Jhunjhunwala (including M/s Sunlight Agency Pvt. Ltd.) as non-genuine and to confirm the addition. |
| Andaman Timber Industries Vs. Commissioner of Central Excise, Kolkata (2015) 62 Taxmann.com 3 (SC) | The Supreme Court held that where adjudicating authorities base orders on statements of witnesses, denying the affected party an opportunity to cross-examine those witnesses is a serious flaw and violates principles of natural justice; such denial can render the order a nullity. | The Tribunal applied this principle: because the statements and material the AO relied upon were recorded by other authorities and the assessee was not afforded the opportunity to cross-examine the relevant witnesses, the Tribunal held those statements could not be treated as conclusive against the assessee and excluded them, leading to deletion of the addition. |
Court's Reasoning and Analysis
The Tribunal's analysis proceeded along the following lines, as recorded in the opinion:
- Source and Nature of Material: The AO's disallowance was primarily founded on an information letter from DCIT, Central Circle 4(3), Mumbai arising from the Satish Saraf group investigation, and on statements attributed to persons such as Shri Rahul Jhunjhunwala, which allegedly admitted providing accommodation entries. These statements were not recorded by the AO during assessment proceedings but by other authorities during separate investigations.
- Procedural Shortcoming — No Cross-examination: The assessee specifically requested cross-examination of the persons whose statements were relied upon (e.g., Shri Rahul Jhunjhunwala and Shri Satish Saraf). The AO did not grant this opportunity and simply treated the information supplied by DCIT, Central Circle 4(3) as conclusive ("gospel truth").
- Legal Principle from Supreme Court: The Tribunal relied on the Supreme Court's decision in Andaman Timber Industries (supra) which emphasizes that when an order is based on statements of witnesses, denying the affected party the opportunity to cross-examine those witnesses is a violation of natural justice and can render the order unsustainable.
- Effect of Excluding the Statements: The Tribunal reasoned that, once the statements recorded by other authorities (and not put to the assessee for cross-examination) are excluded in view of the cited Supreme Court authority, there remains no material to sustain the AO's conclusion that the commission payment was bogus. The AO had produced no other independent incriminating material beyond the information and the other authorities' statements.
- Conclusion on Merits: For these reasons, the Tribunal concluded that the addition could not stand and deleted the addition. The Tribunal expressly noted that the reopening point was not pressed by the assessee and thus the CIT(A)'s finding on reopening remains confirmed, but the substantive disallowance was reversed on procedural and natural justice grounds.
Holding and Implications
Holding: The Tribunal allowed the assessee's appeal on the merits and deleted the addition of Rs.28,03,000 relating to alleged bogus commission. The Tribunal emphasized that statements and investigative material recorded by other authorities, relied upon by the AO, could not be used against the assessee without affording the assessee an opportunity to cross-examine the persons who made those statements; in the absence of such confrontation, the statements were excluded and nothing remained to sustain the disallowance.
Implications:
- Direct effect: The immediate consequence for the parties is deletion of the addition of Rs.28,03,000 in the reassessment order dated 23.12.2016; the assessee succeeds on the substantive ground.
- Procedural implication: The decision underscores the requirement that when adverse action is based on statements of witnesses recorded by other agencies, principles of natural justice require that those statements (or the witnesses) be placed before the affected party for cross-examination before such material is used to sustain an assessment. The Tribunal applied Supreme Court authority to invalidate use of the untested statements in this case.
- Precedential note: The opinion does not state that a new legal principle was laid down; it applies existing Supreme Court authority (Andaman Timber Industries) to the facts at hand. No broader new precedent is claimed by the Tribunal in the text.
Note: This summary is strictly confined to the contents of the provided opinion and does not add or infer facts beyond what the opinion itself records.
PER RAJPAL YADAV, VICE-PRESIDENT Assessee is in appeal before the Tribunal against order of the ld.CIT(A)-2, Ahmedabad dated 19.12.2017 passed for the Asstt.Year 2009-
2. The ld.counsel for the assessee at the very outset submitted that though the issue of reopening is involved in the present appeal, but the assessee does not want to press this issue, therefore, the finding of the ld.CIT(A) to the extent of upholding of reopening of the assessment, is confirmed. On merit, ITA No.62/Ahd/2018 the grievance of the assessee is that the ld.CIT(A) has erred in confirming the addition of Rs.28,03,000/-.
3. Brief facts of the case are that the assessee has filed its return of income on 21.9.2009 declaring total income at NIL. The AO has observed that an information vide letter dated 4.3.2016 was received from DCIT, Cent.Cir.4(3), Mumbai exhibiting the fact that during the investigation in the case of Satish Saraf group statements of key persons of the group, Shri Vishal Bhubani, Shri Rahul Jhunjhunwala and Shri Satish Saraf were recorded. In these statements, they have admitted that they were engaged directly or indirectly in providing accommodation entries in various forms like bogus unsecured loans, bogus share capital, bogus sales and purchase etc. and charged commission thereon at the rate of 0.10% to 0.30% depending on the nature of entry. According to the AO, the assessee was found to be one of the beneficiaries whereby it has taken entries in the form of bogus commission expenditure from such paper company viz. M/s.Sunlight Agency P.Ltd. On the strength of this information, reasons were recorded and notice under section 148 dated 22.3.2016 was issued to the assessee. In response to the notice received under section 148, the assessee has filed a letter contending therein that return filed originally be treated as filed in response to this notice. Notice under section 143(2) was issued, and thereafter the ld.AO has passed reassessment order dated 23.12.2016 under section 143(3) r.w.s. 147 of the Act. The ld.AO has made an addition of Rs.28,03,000/-. Appeal to the CIT(A) did not bring any relief to the assessee. The ld.CIT(A) has confirmed this addition by recording the following finding: 2.3. I have carefully considered the facts of the case, assessment order and submission of the appellant. The AO has made the disallowance of bogus commission of Rs.28,03,000/- on the basis of investigation carried out in the case of Shri Satish Saraf Group, where Shri Rahul ITA No.62/Ahd/2018 Jhunjunwla has admitted that he was indulged in providing accommodation entries to various companies through his paper company M/s. Sunlight Agency Pvt. Ltd. 2.4. The appellant company has claimed commission of Rs.28,03,000/-paid to M/s. Sunlight Agency Pvt. Ltd. for the sale made to M/s. Sajjan India Limited, Mumbai. The AO in the assessment order has noted that M/s.Sunlight Agency Pvt. Ltd. is a paper company of Shri Rahui Jhunjunwla which has been used to provide entry. The Honourable ITAT, Ahmedabad in the case of Pavankumar M. Sanghvi Vs. ITO, Wd. 3(1 )(2), Baroda [2017] 81 Taxmann.com 308 has observed on such type of transaction as under:- "8. As I proceed to deal with genuineness aspect, it is important to bear in mind the fact that what is genuine and what is not genuine is a matter of perception based on facts of the case vis- a-vis the ground realities. The facts of the case cannot be considered in isolation with the ground realities. It will, therefore, be useful to understand as to how the shell entries, which the loan creditors are alleged to be, typically function, and then compare these characteristics with the facts of the case and in the light of well settled legal principles. A shell entity is generally an entity without any significant trading, manufacturing or service activity, or with high volume low margin transactions - to give it colour of a normal business entity used as a vehicle for various financial manoeuvers. A shell entity, by itself, it not an illegal entity but it is their act of abatement, of, and being part of, financial manoeuvring to legitimize illicit monies and evade taxes, that takes it actions beyond what is legally permissible. These entities have every semblance of a genuine business - its legal ownership by persons in existence, statutory documentation as necessary for a legitimate business and a documentation trail as a legitimate transaction would normally follow. The only thing which sets its apart from a genuine business entity is lack of genuineness in its actual operations. The operations carried out by these entities, are only to facilitate financial manoeuvring for the benefit of its clients, or, with that predominant underlying objective, to give the colour of genuineness to these entities. These shell entities, which are routinely used to launder unaccounted monies, are a fact of life, and as much a part of the underbelly of the financial world, as many other evils. Even a layman, much less a Member ITA No.62/Ahd/2018 of this specialized Tribunal, cannot be oblivious of these ground realities." 2.5. It is noticed that M/s. Sunlight Agency Pvt. Ltd. has been engaged in providing accommodation entry and has been used to launder unaccounted money. The above company is shell company and its name have recently been struck off from Registrar of Companies in the cracking down the shell companies by government. Recently, Honourable Mumbai High Court in the case of Sanjay Vimalchand Jain (L/H) Shantidevi Vimalchand Jain Vs. Pr. CIT - 1, Nagpur in the Income Tax Appeal No. 18/2017 dated 10/04/2017, after examining the transaction of Shri Rahul Jhunjunwala controlled company has held that the group was indulged in dubious transaction meant to account for the undisclosed income. In view of the above, the addition made by the AO is found to be correct and justified and hence the same is confirmed.
4. A perusal of the record would indicate that stand of the AO is that Shri Rahul Jhunjhunwala was found to be indulged in providing only accommodation entries, and not in carrying any business. This fact revealed during the search carried out at the premises of Shri Rahul Jhunjhunwala. He has admitted this fact before search party. Thus, the AO on the strength of entries found in the books of accounts of Rahul Jhunjhunwala assumed that commission paid by the assessee to M/s.Sunlight Agency P.Ltd on account of sale facilitated by this concern to Sajjan India Ltd. is bogus commission, and it deserves to be disallowed as expenditure of the assessee. The case of the assessee is that it has not availed any bogus commission entry. It has requested for cross-examination of such concerned person viz. Shri Rahul Jhunjhunwala that or any other person who has disclosed this fact. The ld.AO did not provide cross-examination, rather concluded that as far as the fact of admission by Shri Rahul Jhunjhunwala that he was indulged in providing only accommodation entry is concerned, this has been resolved by DCIT, Cent.Cir.4(3). In other words, the information submitted by the DCIT, Cent.Cir.4(3)was treated by the AO as gospel truth for making a disallowance ITA No.62/Ahd/2018 in the case of the assessee. 5. On the other hand, the assessee put reliance upon the judgment Honble Supreme Court in the case of Andaman Timber Industries Vs. Comm. Of Central Excise, Kolkata (2015) 62 taxmann.com 3 (SC) and contended that unless incriminating material put to verification of the assessee, and the statement and the material used against the assessee is put-forth for cross-examination, such material as well as statement cannot be used against the assessee. Honble Supreme Court in this judgment has observed as under: According to us, not allowing the assessee to cross-examine the witnesses by the Adjudicating Authority though the statements of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity inasmuch as it amounted to violation of principles of natural justice because of which the assessee was adversely affected. It is to be borne in mind that the order of the Commissioner was based upon the statements given by the aforesaid two witnesses. Even when the assessee disputed the correctness of the statements and wanted to cross-examine, the Adjudicating Authority did not grant this opportunity to the assessee. It would be pertinent to note that in the impugned order passed by the Adjudicating Authority he has specifically mentioned that such an opportunity was sought by the assessee. However, no such opportunity was granted and the aforesaid plea is not even dealt with by the Adjudicating Authority. As far as the Tribunal is concerned, we find that rejection of this plea is totally untenable. The Tribunal has simply stated that cross- examination of the said dealers could not have brought out any material which would not be in possession of the appellant themselves to explain as to why their ex-factory prices remain static. It was not for the Tribunal to have guess work as to for what purposes the appellant wanted to cross-examine those dealers and what extraction the appellant wanted from them.
6. In the present case, the AO except confronting the assessee with some details obtained from Shri Rahul Jhunjhunwala and his company, not able to produce any other material. The AO should have granted an opportunity to cross-examine Shri Rahul Jhunjhunwala, Shri Satish Saraf or any other ITA No.62/Ahd/2018 concerned whose statements he was relying upon, because all these statements were not recorded by the AO during the course of assessment proceedings. These were recorded by some other authorities during some other investigations. This can be used only as an information for initiating action against the assessee. They cannot be treated as gospel truth against the assessee. Therefore, if these statements are excluded on the strength of Honble Supreme Court judgment cited (supra), then nothing remained against the assessee to doubt the alleged commission expenses. Therefore, in view of the above facts and circumstances, we allow this ground of appeal, and delete addition.
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