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

Briefly stated facts necessary for consideration and adjudication of the issues at hand are : the assessee is a partnership firm engaged in the business of trading in iron and steel. The return of income filed by the assessee declaring total income at Nil was subjected to scrutiny. The Assessing Officer (AO) noticed that the assessee has declared Nil profit and gross profit at Rs.5,81,083/- on turnover of Rs.3,24,78,682/-. The assessee made purchases from various parties namely Deepali Enterprises, Renuka Sales, Deepak Trading Co., G.R. Tradelink & National Trading Co. who are registered VAT dealers. The AO noticed during the assessment proceedings that there was no supporting signed and stamped cash receipts for cash sales and also certain transactions were settled by book entries and as such certain purchases and sales made in cash 4 M/s. Hemant Associates were not verifiable. So in the absence of supporting documents and vouchers the AO rejected the books of accounts and proceeded to determine gross profit @5% of the turnover and thereby estimated gross profit at Rs.16,23,934/- and thereby made an addition of Rs.10,45,852/- (Rs.16,23,934/- – Rs.5,81,082/- already gross profit declared by the assessee = Rs.10,42,852/-) to the total income of the assessee. The AO also made addition of Rs.8,50,000/- to the total income of the assessee under section 143(3) of the Act.

The assessee carried the matter before the Ld. CIT(A) by way of filing appeal who has confirmed the addition by dismissing the same. Feeling aggrieved with the impugned order passed by the Ld. CIT(A) the assessee has come up before the Tribunal by way of filing present appeal.

I have heard the Ld. Authorised Representatives of the parties to the appeal, perused the orders passed by the Ld. Lower Revenue Authorities and documents available on record in the light of the facts and circumstances of the case and law applicable thereto.

Undisputedly since the assessee has failed to get certain purchases/sales verified by producing the supporting documents and vouchers and even there was no supporting signed and stamped cash receipts for cash sales the AO has proceeded to reject the books of account of the assessee and estimated the gross profit @5% of the turnover. It is settled principle of law that in such circumstances where books of account have been rejected gross profit is to be estimated keeping in view the gross profit earned by 5 M/s. Hemant Associates the assessee in the earlier years more particularly when sales by the assessee have not been disputed.

Hon’ble Bombay High Court in case of Pr. CIT vs. JK Surface Coatings Pvt. Ltd. in of 2017 order dated 28 October, 2021 upheld the view taken by the Tribunal that in such circumstances gross profit should be in the range of 5% to 12.5% as reasonable estimation of profit element embedded in the bogus purchases by returning following findings: “4. Having considered the memo of Appeal and the Orders passed by AO / CIT(A) and the Order of ITAT, the only issue that comes up for consideration is with respect to the extent of ad-hoc disallowance to be sustained with respect to bogus purchases. The AO has observed 100% of the purchase value to be added to the income of Assessee, the CIT(A) has said it should be 15% and ITAT has said it should be 10%. First of all, this would be an issue which requires evidence to be led to determine what would be the actual profit margin in the business that Assessee was carrying on and the matter of calculations by the concerned authority. According to the Tribunal, in all such similar cases, it is ranged between 5% to 12.5% as reasonable estimation of profit element embedded in the bogus purchase when material consumption factor do not show abnormal deviation. 5. Whether the purchases were bogus or whether the parties from whom such purchases were allegedly made were bogus was essentially a question of fact. When the Tribunal has concluded that the assessee did make the purchase, as a natural corollary not the entire amount covered by such purchase but the profit element embedded therein would be subject to tax.”

The Ld. A.R. for the assessee contended that in the assessee’s trade of iron and steel gross profit is not more than 2% but has failed to bring on record any assessments made in the earlier years assessing the gross profit @ 2%. In the given circumstances both the Ld. A.Rs for the parties to the appeal have stated that in such circumstances gross profit should be estimated @4% of the gross turnover which would be fair and reasonable. So in these 6 M/s. Hemant Associates circumstances we restrict the addition on bogus purchases held by the AO by estimating the gross profit @4% of the gross turnover. The AO to make the addition accordingly.

So far as ground No.2 raised by the assessee that the Ld. CIT(A) has erred in confirming the addition of Rs.8,50,000/- on account of introduction of capital during the year under consideration is concerned the Ld. A.R. for the assessee contended that the capital has been introduced by one of the partners of the firm namely Smt Sharmishta Mehta by way of cheque to the tune of Rs.6,00,000/- and brought on record bank statements and remaining Rs.2,50,000/- was introduced in cash which was credited to the partner’s capital account. I have perused the bank statement pertaining to the assessee firm issued by Bank of India wherein amount of Rs.6,00,000/- is shown to have been credited in the firm account from the account of SA Mehta.

The Ld. A.R. for the assessee further contended that the cash amount of Rs.2,50,000/- was introduced by Smt Sharmishta Mehta out of her personal savings and Hemant Mehta has also introduced cash of Rs.1,50,000/- from his personal savings. Keeping in view the turnover of the assessee during the year under consideration which is to the tune of Rs.3,24,78,687/- on which gross profit of Rs.5,81,083/- has been shown by the assessee firm one of the partners namely Smt Sharmishta Mehta is proved to have the capacity of saving to the tune of Rs.2,50,000/- and remaining Rs.6,00,000/- was lying in bank account which she has stated to have introduced as capital in the firm. So I am of the opinion that the assessee has duly proved the introduction of the capital in the 7 M/s. Hemant Associates firm to the tune of Rs.8,50,000/-. The AO to allow the same after due verification of the bank account.

Resultantly the appeal filed by the assessee is party allowed.