M/S. HEMANT ASSOCIATES,MUMBAI vs. ITO WARD-27(1)(1), MUMBAI

The common issue contended in these appeals is the addition made under sec6tion 69C of the Act towards purchases made based on peak credit. The 2 ITAs 1421 & 1423/Mum/2023 M/s Hemant Associates assessee is a partnership firm and is involved in the business activity of trading in iron and steel. (A.Y. 2009-10) 3. The assessee filed the return of income for the assessment year 2009-10 on 28/09/2009 declaring total income at Nil. The assessee’s case was selected for scrutiny and the assessment under section 143(3) was completed on 23/12/2011 wherein the profit of the assessee was estimated at 5%. The assessee preferred appeal against the assessment order under section 143(3) before the CIT(A) who confirmed the addition. The assessee preferred further appeal before the Tribunal and the SMC bench vide order dated 28.07.2023 has held that 4% gross profit (GP) ratio be applied on the gross turnover as addition towards bogus purchase. In the meanwhile, there was a survey conducted on 22/01/2013 pursuant to information received from the sales tax authorities and during the course of survey, it was found that the assessee has made purchases from various parties, which have been held to be bogus by the Sales-tax Authorities. In view of that, the assessment was reopened under section 147 by issue of notice under section 148 which was duly served on the assessee. During the course of re-assessment proceedings, the Assessing Officer noticed that the assessee had debited purchases of Rs.3,18,97,599/- and called on the assessee to furnish the details of the purchases. The Assessing Officer issued notice under section 133(6) of the Act to 5 parties and the same were returned unserved. The Assessing Officer further called on the assessee to furnish the ledger copies, nature of goods sold with sample copies of invoices, bank statements, etc. The assessee submitted that all the purchases made were genuine and the same were duly recorded in the books of account. The assessee further submitted that the purchases have been entered into stock register 3 ITAs 1421 & 1423/Mum/2023 M/s Hemant Associates and subsequently sold and the sales are also appearing as part of the turnover of the assessee. The assessee also submitted that the payment to these parties have been made through account payee cheques and that the gross profit arising out of the entire transaction is also brought to tax. The Assessing Officer did not accept the submissions of the assessee and proceeded to make a disallowance based on the peak purchases for an amount of Rs.3,47,99,999/- under section 69C of the Act. On further appeal, the CIT(A) confirmed the addition made by the Assessing Officer. Aggrieved, the assessee is in appeal before the Tribunal.

With regard to the addition made for AY 2009-10, the Ld.AR for the assessee submitted that the assessment made under section 143(3) was completed by estimating the gross profit of the assessee at 5% and the re-assessment on the same purchases are done by making an addition under section 69C based on the credit which is a change of opinion by the Assessing Officer. The ld AR further submitted that in the appeal against the order under section 143(3), the SMC bench of the Tribunal has held that 4% of the gross turnover as an addition towards the bogus purchases by applying the ratio of Hon’ble Bombay High Court in the case of Principal CIT vs JK Surface Coatings Pvt Ltd in of 2017 dated 28.10.2021.

The Ld.DR, on the other hand, relied on the order of the lower authority.

We heard the parties and perused the material on record. We notice that the SMC bench in assessee's own case for AY 2009-04 in the appeal filed against order of the assessing officer under section 143(3) has held 4% of the gross turnover as an addition towards the bogus purchases by applying the ratio of Hon’ble Bombay High Court in the case of JK Surface Coatings Pvt Ltd (supra). From the perusal of the order of the coordinate bench it is clear that the issue of 4 ITAs 1421 & 1423/Mum/2023 M/s Hemant Associates bogus purchases have already been considered under regular assessment. Accordingly in our view, there is merit in the contention of the ld AR that the initiation of reassessment is merely a change of opinion and that no addition can be made in the reassessment for the same purchases. Considering the fact that the impugned purchases have already been considered during the assessment under section 143(3) and that the SMC bench of the Tribunal has held 4% to be the GP rate that is to be applied on gross turnover for addition towards bogus purchases, we hold that the addition based on peak credit of purchases under section 69C in the assessment under section 147 is not tenable. Accordingly the addition is hereby deleted.

For assessment year 2010-11, the assessee filed its return of income on 26/09/2010 declaring total income at NIL. In this year, the Assessing Officer on same grounds as in AY 2009-10, disallowed the peak of cumulative purchases to the tune of Rs.1,33,49,985/- and added the same to the income as unexplained expenditure under section 69C of the Act. The CIT(A) confirmed the addition and the assessee is in appeal before us against the order of CIT(A).

The Ld.AR for AY 2010-11 submitted that the peak credit addition made by the Assessing Officer on the total purchases debited by the assessee in the P&L Account is not correct. The Ld.AR also submitted that the addition has been made based on non response to notice under section 133(6) by few of the vendors ignoring the fact that the assessee has made various submissions and produced records substantiating the genuineness of the purchases. The Ld.AR submitted that 5 ITAs 1421 & 1423/Mum/2023 M/s Hemant Associates the Assessing Officer has not rejected the books of account and has also not considered the submission that all purchases have been duly entered into in the stock register and subsequently sold which is part of the turnover of the assessee. Without prejudice it is submitted that the GP rate of the assessee is around 2% for the year under consideration and the same should be considered for the purpose of making the addition. 9. The Ld.DR, on the other hand, relied on the order of the lower authority. 10. We heard the parties and perused the material on record. For proposition of the ld AR that in the absence of any discrepancy found in sales made by the assessee, the purchases cannot be disputed, We notice that the Hon’ble Bombay High Court in the case of Principal CIT vs Mohammed Haji Adam & Co in Income Tax Appeal No.1004 of 2016 dated 11/02/2019 has considered the similar issue and held that:- “8. In the present case, as noted above, the assessee was a trader of fabrics. The A.O. found three entities who were indulging in bogus billing activities. A.O. found that the purchases made by the assessee from these entities were bogus. This being a finding of fact, we have proceeded on such basis. Despite this, the question arises whether the Revenue is correct in contending that the entire purchase amount should be added by way of assessee's additional income or the assessee is correct in contending that such logic cannot be applied. The finding of the CIT(A) and the Tribunal would suggest that the department had not disputed the assessee's sales. There was no discrepancy between the purchases shown by the assessee and the sales declared. That being the position, the Tribunal was correct in coming to the conclusion that the purchases cannot be rejected without disturbing the sales in case of a trader. The Tribunal, therefore, correctly restricted the additions limited to the extent of bringing the G.P. rate on purchases at the same rate of other genuine purchases.”

In the result, the appeal for AY 2009-10 is allowed and the appeal for AY 2010-11 is partly allowed.