By TIOL News Service

NEW DELHI, OCT 06, 2008 : DURING the years under consideration, the assessee company was in the process of installation of plant & machinery, which was alleged to be purchased from manufacturing unit of M/s. Bermaco Industries Ltd. at Bombay. A survey operation u/s 133A of the I. T. Act was undertaken in case of Bermaco Industries Ltd. and thereafter, detailed inquiry was conducted and it was found that there was no manufacturing of any plant and machinery at the factory premises of M/s. Bermaco Industries Ltd. M/s. Bermaco Industries Ltd. also filed an application before the Settlement Commission, Mumbai wherein it has accepted bogus sales to the assessee company. In the petition, it was also admitted that a sum of Rs.15 lacs was received from the assessee, M/s. Oswal Chemicals & Fertilizers Ltd. to arrange this bogus sales. In view of all these facts, the completed assessment was reopened and claim of depreciation was disallowed and addition was made on account of payment made for providing accommodation to the assessee. In the course of reassessment proceedings, the assessee was asked to submit various information as per the questionnaire dated 11.2.2003 supporting evidence/documents for transaction undertaken, copies of M/s. Bermaco Industries Ltd, for machinery purchased, information regarding depreciation charged and at what rate depreciation has been charged on the plant & machinery supplied by M/s. Bermaco Industries Ltd., how the machinery was transported from Daman to the site of assessee at U.P., as the transport company was from Kolkata. The assessee was asked to submit reply by 9.12.2003.

The A.O. observed that no reply of the assessee was received in response to the questionnaire dated 14.11.2003 and the AR even though attended the hearing on 4.12.2003, 11.12.2003, 22.11.2003, 8.1.2004 and 21.1.2004 but only for seeking adjournments. A show cause notice dated 6/10.02.2004 was given to the assessee and copy of statement of Director of M/s. Bermaco Industries Ltd. was also provided to the assessee. The assessee asked for copy of petition filed by M/s. Bermaco Industries Ltd. before the Settlement Commission, but the same was not provided on the plea that it was confidential document. The assessee requested the A.O. to allow cross examination of Shri Viren Ahuja, Director of M/s. Bermaco Industries Ltd., who was issued summon dated 10.2.2004 u/s 131 of the Act for personal attendance on 19.02.2004. However, a letter dated 29.02.2004 was received from M/s. M/s. Bermaco Industries Ltd., wherein it was stated that M/s. Bermaco Industries Ltd. had certain transactions with the assessee company and M/s. Bermaco Industries Ltd. have approached to the Settlement Commission to settle its various issues for several years which has covered the assessment year 1996-97, which is under consideration. In this letter, it was also mentioned that proceedings of Settlement Commission are camera proceedings and the finding of the commission cannot be used as evidence against any other person. Vide letter dated 05.01.2004, the A.O. asked for various informations u/s 133(6) from the transporters M/s. Goel Roadways Pvt. Ltd. based at Calcutta. The information sought from M/s. Goel Roadways Pvt. Ltd. pertained to supply of copies of goods receipts, invoices raised giving particulars and vehicles used for transportation. Details were asked for with regard to the date on which goods were loaded, description of goods vehicle number, site from where goods were loaded, gate pass number, number of days for which vehicles were used, date on which goods off loaded destination and where loaded, the amount charged for the services etc. The A.O. also asked to furnish details of proof of octroi paid. A letter-dated 10.02.2004 was received from M/s. Goel Roadways Pvt. Ltd., Calcutta, wherein it was stated that they were "not in a position to furnish all the details/information/evidence required by you as the books of accounts and other relevant records related to the above stated year are not available because the complete set of books and other records got damaged and washed away in the heavy flood hit the area of Calcutta on 24th day of Sep. 1997."

Vide letter dated 6.10.2004, the A.O. further asked the assessee to show cause as to why the depreciation of Rs.6,57,83,000/- @ 100% on these 'bogus purchases should not be disallowed. The assessee was also asked to show cause as to why the finance charged claim on secured loans for such bogus purchases should not be disallowed. After considering the assessee's reply, the A.O. observed that as per the record of ITO Ward 6(3), Mumbai, the factory premises of M/s. M/s. Bermaco Industries Ltd. at Daman was lying closed. Local inquiry revealed that unit had been closed for more than a year back. When the unit was functional, it was making furniture and on that basis the A.O. inferred that M/s. Bermaco Industries Ltd. was not carrying on any manufacturing of plant and machinery, as claimed to have supplied to the assessee. The A.O. further observed that as per the report of the JCIT, SR-6, Mumbai, during the course of survey u/s 133A on 17.02.1999 at the premises of M/s. Bermaco Industries Ltd., no purchase vouchers and transportation receipts were found for plant and machinery claimed to have been purchased from Mumbai and installed at Daman by M/s. Bermaco Industries Ltd. Further, no transportation receipts were found for plant & machinery shifted back from Daman to Mumbai. The A.O. also observed that total plant & machinery as on 01.04.1994 and 01.04.1995 of M/s. Bermaco Industries Ltd. was of Rs.9.86 lacs and Rs.15.68 lacs respectively. Thus, value of the plant & machinery alleged to be used for manufacturing of plant and machinery supplied to assessee was found to be very low as compared to the turnover of Rs.12.73 crores made by M/s. Bermaco Industries Ltd. during the relevant year. The A.O. further observed that Shri Viren Ahuja, director of the company in his statements recorded oil 22.3.1999 admitted that all the non-existent sales of Daman unit were not in a position to be substantiated and offered tax on its non-existent sales. The A.O. also observed that in an application filed u/s 245C(1) on 24.03.2000 by M/s. Bermaco Industries Ltd before the Settlement Commission Mumbai, which was signed by its director Shri Viren Ahuja, it has been admitted that M/s. M/s. Bermaco Industries Ltd. had entered into arrangement with Oswal group to book nonexistent transactions it had made nonexistent sales to assessee for Rs.6.08 crores during the year. The corresponding purchases were made by it from several entities controlled by Oswal group. The said sales and purchase by it were fictitious. On request, transportation documents were also arranged by Oswal group. The corresponding cargo move was not feasible. It had booked nonexistent manufacturing expenses. The A.O. also observed that banking transaction of M/s. Bermaco Industries Ltd. were controlled by M/s. Oswal group. The type of products, which have been sold to the assessee company could not have been manufactured at all by the M/s. Bermaco Industries Ltd. In so far as technical knowhow for these energy saving products and manufacturing for it were not available with M/s. Bermaco Industries Ltd. The A.O., therefore, found that no real transaction took place and even the transport of machinery from Daman to site of assessee at U.P. were merely booked by assessee. After having all these observations, the A.O. stated that the total accommodation provided in the assessment years 1995-96 & 1996-97 of Oswal group was Rs.20.48 crores (6,08,00,000 + 14,40,52,242). The A.O. further stated that said application of M/s. Bermaco Industries Ltd. has been admitted by the Settlement Commission on 20.07.2001 after which the assessee's claim for depreciation was declined by the A.O. and addition was made on account of alleged payment by M/s. Oswal group for arranging accommodation.

The assessee approached the CIT(A) who has deleted all the additions by observing that assessee was not allowed cross examination by the A.O., therefore, statement of M/s. Bermaco Industries Ltd cannot be acted upon to prejudice the interest of the assessee company. The CIT(A) also called for remand report, in the remand report dated 17.10.2005, the A.O. objected that assessee company has nothing to say regarding statement that "even the transportation documents were provided by the Oswal group" made by M/s. Bermaco Industries Ltd. in its application u/s 245C. In the remand report, the A.O. also referred to the letter of M/s. Goel 'Transport Pvt. Ld. Wherein they have stated that they are not in a position to furnish the details/information/evidence required as the books of accounts and other records were damaged and washed away in the heavy flood on 24.09.1999. The A.O. therefore, drew adverse inference from the fact that no evidence for such damage was filed by the transporter in the form of insurance claim, damage claimed etc. The A.O. was thus of the view that the transportation documents were not submitted and the assessee's claim remained unsubstantiated. In the remand report, the A.O. also pointed out that only copies of M/s. Bermaco Industries Ltd. store receipt, vouchers, transportation M/s. Bermaco Industries Ltd. and copies of accounts were filed, but the date of installation of machinery and its use cannot be substantiated by the assessee company.

Thereafter, CIT(A) called for 2nd remand report, wherein vide report dated 24.03.2006, the A.O. referred to the proceedings for the assessment year 197-98 when the income tax inspector visited the plant of the assessee at Shahjahanpur on 16.03.2005 to make physical verification of the assets purchased by the assessee. As per the report of the inspector, the inspector has matched the photographs of the plant & machinery with the actual plant as well as valves at site which were found to be physically present on the plant site. As regards the verification of whether all machinery purchased during 1996-97 has been installed at factory premises, the inspector submitted that it was physically impossible to verify each and every piece of machinery as valves have been placed from ground level to top area tower which is about 100 mtrs. in length. The inspector also observed that valves available are not branded goods and cannot be distinguished on the basis of a particular make. No inventory of valves in stock was available at site. The inspector categorically stated that the physical appearance of valves given the impression that valves are quite old.

After considering the remand report sent by the A.O. along with inspector's report and the reply of the assessee on the remand report, the CIT(A) reached to the conclusion that the assessee has produced all the relevant documents relating to these purchases, and that A.O. could not produce the Director of M/s. Bermaco Industries Ltd. for cross examination by the assessee. In view of these facts and situation, the CIT(A) concluded that the A.O. could not use information which is not admitted by M/s. Bermaco Industries Ltd. itself before him. As per CIT(A), it was incumbent on the part of the A.O. to allow the assessee opportunity to cross examine M/s. Bermaco Industries Ltd./its director. The CIT(A) also justified the non production of relevant transportation documents by transporter M/s. Goel Roadways Pvt. Ltd., on the plea that they have been washed away / destroyed in the flood. Finally, the CIT(A), on the basis of 2nd remand report observed that existence of assets i.e. valves installed at the plant of the assessee, could not be denied in so far as the income tax inspection had admitted the existence of valve and the valves were integral part of the machinery without them, there can be no production. As per CIT(A) admission of the M/s. Bermaco Industries Ltd. before Settlement Commission, may have its own reason but the fact that M/s. Bermaco Industries Ltd. did not depose before the A.O. regarding non genuineness of transaction, no adverse view is possible. Accordingly all the additions made by the A.O. were deleted.

The Tribunal observed that CIT(A) on the basis of physical inspection of plant and machinery, was satisfied regarding existence of plant and machinery of which the assessee was the owner, therefore, claim of depreciation thereon was held to be justified by him. Moreover, there is no denial to the facts that assessee has specifically asked the A.O. to allow cross examination in respect of the statement given by the director of M/s. Bermaco Industries Ltd., but the A.O. could not arrange the same.

The Tribunal agreed with the assessee that cross examination of witness is must before the department places reliance on the statement of witness for making the addition. Hon'ble Supreme Court in case of Kishan Chand Chelaram had also categorically held that any evidence/statement used against the assessee without giving any opportunity to cross-examination and to controvert the same, such evidence would not be admissible in support of the addition. It was specifically held that IT authorities are bound to accede to the request for cross-examination and if they do not do so, the addition cannot be sustained. In the instant case, no opportunity has been given by the A.O. to the assessee for cross examining the Director of M/s. Bermaco Industries Ltd., who had given statement on the basis of which sales was treated as bogus, in spite of specific request by the assessee.

The Tribunal therefore held that disallowance of depreciation so made on the basis of such statement is not sustainable.

So the Tribunal restored the matter to the file of the A.O. with a limited object to decide the rate of depreciation and the amount on which the same is to be allowed to the assessee.

(See 2008-TIOL-466-ITAT-DEL in 'Income Tax' + 2008-TIOL-466-ITAT-DEL in 'Legal Corner')