MAHENDRAKUMAR GULRAJ JAIN,MUMBAI vs. ITO-19(2)(3), MUMBAI

This is an appeal preferred by the assessee against the order of the Ld. CIT(A)/NFAC, Delhi dated 24.03.2023 for AY. 2010-11.

The main grievance of the assessee is against the action of the Ld. CIT(A) confirming the action of the AO in disallowing 12.50% of purchases amounting of Rs.2,16,63,455/- made from two (2) dealers (M/s. Anand Deep Metal & M/s. Viraj Steel & Alloys). 3. Brief facts as noted by the AO is that the assessee had filed its original return of income on 15.09.2010 for AY. 2010-11 declaring total income of Rs.7,39,169/-. And the case was reopened u/s 147 of the Income Tax Act, 1961 (hereinafter “the Act”) by issuing notice u/s 148 of the Act dated 23.03.2016. The AO noted that he received an information from the DGIT(Inv.), Mumbai from which he understood 2 A.Y. 2010-11 Mahendrakumar Gulraj Jain that the DGIT received communication/information from Sales Tax Department of (State of Maharashtra) which conveyed that the assessee was involved in taking accommodation entries of purchases from two (2) dealers (i) M/s. Anand Deep Metal Rs.2,05,90,383/- and (ii) M/s. Viraj Steel & Alloys Rs.10,73,072/- (total Rs.2,16,63,455/-). The AO confronted the assessee with the aforesaid adverse information and asked the assessee to prove the genuineness of the purchases. The AO acknowledges that the assessee has provided stock statement and entries made in its books of the said purchases. The AO, also noted that from the documents filed by the assessee the ledger account and cheque payments made to the two (2) dealers was submitted by assessee to prove the genuineness of the purchases. And he concluded that assessee might have purchased goods from grey market and to authenticate its purchase in its books had resorted to arranging accommodation bills issued by the two (2) parties named (supra). And thus according to AO, the assessee might have benefited from the margins of such purchase of goods from grey market. According to the AO, since the purchase rate as mentioned in the supplier’s sales invoice cannot be accepted, books of accounts need rejection as provided in section 145 (3) of the Act. And in order to estimate the benefit derived from such action of assessee, he estimated the profit at the rate of 12.5% of the purchases made from the aforesaid two (2) parties to the tune of Rs.2,16,63,455/- and thus made an addition of Rs.27,07,931/-. Aggrieved, the assessee preferred an 3 A.Y. 2010-11 Mahendrakumar Gulraj Jain appeal before the Ld.CIT(A) who was pleased to confirm the same. Aggrieved, the assessee is before this Tribunal.

I have heard both the parties and perused the records. The aforesaid facts since not disputed are not repeated for the sake of brevity. According to the assessee he is engaged in trading business of ferrous and non-ferrous metals under the name and style of M/s. Vivek Steel. It was brought to my notice that the assessee is required u/s 44AA of the Act to maintain records which includes stock register and other statutorily required books. It is noted that assessee’s accounts have been audited u/s 44AB of the Act. And in order to prove he purchase in question the assessee had filed tax invoices and delivery challan issued by the alleged dealers in support of such purchases as well as sales invoices issued by the assessee for proving the corresponding sales made on the such purchases to third party (refer page no. 4 to 143 of PB), a perusal of which documents per-se, evidences purchase and sale of such goods. These relevant documents according to assessee were furnished before the AO/Ld. CIT(A) and both the authorities have not found any defects in these documents. By drawing my attention to the Stock Register for the entire year (Refer page no. 144 to 179 of PB part-2), the Ld. AR also drew my attention to the page no. 182 to 209 of PB part-2 wherein bank-statement highlighting the payments made by assessee to both the alleged dealers have been found placed there in; and a perusal of which reveals that payments have been made through banking channel to those two (2) dealers. According to the assessee, the adverse statements even if 4 A.Y. 2010-11 Mahendrakumar Gulraj Jain given by these dealers, cannot be relied upon by AO, since the same were recorded behind the back of the assessee; and further it should not be used against assesse, without affording opportunity of cross- examination of the makers of allegation. It is noted that the entire exercise of reopening the assessment was based on information from the Sales Tax Department of State of Maharashtra which in-turn was forwarded by DGIT(Inv.) to the AO. And based on inquiry/report of the Sales Tax Department the re-opening and later addition was made by AO without furnishing the assessee the third party statements which has not been tested on the touch-stone of cross-examination. So, the basis for re-opening assessment and additions made are erroneous. Be that as it may, it is noted that the AO has given finding of fact that “The purchases of the assessee, per-se, was not the “issue” here and hence these alleged purchases were not being treated as non-genuine until specific information was received from Sales Tax Department. The Sales Tax department came down hard on the pernicious practices indulged in by these un-scrupulous traders figuring in the list of suspicious dealers and hence they declared them to be a Hawala Dealer” under MVAT Act, 2002. And further held “It is evident that the assessee has not purchased the goods from these alleged suppliers. It is equally also true that the goods have, in fact, somehow entered in the assessee’s regular business premises. However, the assessee has been unable to give any convincing or cogent explanation, as to how, these goods happened to come in their possession. The assessee has this incurred expenditure on such purchases which he has failed to 5 A.Y. 2010-11 Mahendrakumar Gulraj Jain fully explain with documentary evidences.” From the aforesaid finding of fact, it is clear that the AO has accepted that the assessee has purchased the goods in question, but according to him, the goods might have been purchased from grey market, and in order to show it in the regular books, bills were arranged from the two (2) dealers (M/s. Anand Deep Metal & M/s. Viraj Steel & Alloys). Merely on the ground that the purchase rate mentioned in the sale invoices may be incorrect cannot be the sole ground to reject the books. In this context, it is noted that AO has rejected the books of assessee without giving any finding that assessee has not regularly followed the method of accounting as mandated u/s 145(1) of the Act. It is also not the case of AO that assessee has not computed the income in accordance with the accounting standard notified u/s 145(2) of the Act. Therefore, condition for invoking section 145(3) of the Act as per section 145(1) & (2) of the Act was not satisfied. However, if the expenses/sales are not verifiable (if there is deficiency in vouchers/bills supporting the incurrence of such expenses/sale) then it cannot be the sole basis to hold that accounts maintained by the assessee are incorrect or incomplete. At the most then AO can disallow the expenses to the extent not supported by vouchers etc but it cannot be ground to hold that accounts maintained by assessee are not correct or incorrect. Therefore, the action of AO to reject the books cannot be accepted.

Coming next to the action of Ld. CIT(A) confirming 12.5% of purchases from the two parties to the tune of Rs.27,07,931/-, it is also noted that the AO has made a finding that the assessee has not effected 6 A.Y. 2010-11 Mahendrakumar Gulraj Jain the corresponding sales of such quantities out of the books of account is also in-correct because it is noted from a perusal of the relevant documents placed at page no. 210 of PB part-2 which contents show the particulars of alleged disputed purchases from M/s. Anand Deep Metal & M/s. Viraj Steel & Alloys and a perusal of page no. 211 to 214 reveals the particulars of sale made to the third party out of such disputed purchases. Therefore, AO’s adverse finding that corresponding sale of such purchases made from M/s. Anand Deep Metal & M/s. Viraj Steel & Alloys as stated (supra) cannot be accepted. In such a scenario, it is noted from page no. 254 that over-all GP rate shown by assessee is 3.85% and the GP declared on disputed purchases is to the tune of 7.78% which is a higher G.P. shown by assessee in his return. However, when assessee purchases goods from grey market, it gives the assessee savings on account of non-payment of taxes and other incidental expenses. In such a situation 12.5% disallowance out of bogus purchases makes the ends of justice. However the prayer of assessee is that when only the profits earned by the assessee on these bogus purchases transaction is to be taxed, the Gross-profit already shown by assessee and offered to tax should be reduced from the standard 12.5% being directed to be disallowed on account by bogus purchases. I find merit in such a contention of assessee and direct that the disallowance in this case be restricted to 12.5% of the bogus purchases as reduced by the gross profit rate already declared by the assessee on these transactions.