ASST. COMM OF INCOME TAX, CENTRAL CIRCLE-2, THANE vs. M/S. KUNDAN INDUSTRIES LTD., MUMBAI

The appellant craves leave to add, alter, delete or modify and/or withdraw grounds of appeal up to the date of hearing of the appeal.”

Fact in brief is that return of income declaring total income of Rs.81,18,080/- was filed on 07.11.2017. The case was subject to scrutiny assessment and notice u/s 143(2) of the Act was issued on 10.08.2018. The assessee company was engaged in the business of manufacturing and sale of steel fasteners. During the course of assessment proceedings information was received from the DDIT(Investigation) that survey action was carried out in the case of the assessee company on 25.10.2018. During the survey action various incriminating documents were found and impounded indicating that the assesse company had made purchases from non-genuine entities to inflate the expenses. On the basis of survey report the assessing office noticed that assessee has made non-genuine purchases from the following parties: Sr. Name and address of the party Amount (in Rs.) No.

Aggrieved, the assesse filed the appeal before the ld. CIT(A). The ld. CIT(A) has restricted the addition to the extent of profit embedded in bogus purchases to the extent of 20% of such purchases.

Heard both the sides and perused the material on record. The ld. CIT(A) has referred a number of judicial pronouncements of juri ictional High Court and decision of the ITAT that where the sale is not doubted by the assessing officer than only the profit element embedded in the bogus purchase should be subject to disallowance and not the entire amount of bogus purchases. During the course of assessment proceedings assessee has filed details of purchases made from the aforesaid two concerns also copies of invoices along with details of corresponding sales of goods which was purchased from these parties. The detail of corresponding sales made against such purchases are also reproduced at page no.7 and 8 of the order of the ld. CIT(A). The assessee has also claimed that payment for such purchases were also made by account payee cheques only. The ld. CIT(A) arrived at the conclusion on the basis of abovementioned facts, material and statement of the director recorded during the course of survey proceedings that assessee has purchased goods from other supplier without bills in the grey market and has been benefitted by the extra margin of purchasing goods from the grey market.

We observe that assessing officer has not doubted the corresponding sales against the said purchases, therefore, only the profit margin embedded in such transaction could be taxed. We observe that in such type of transaction the assessee purchase the goods from the grey market by making gross payment in cash without bills. The bills are obtained from the third parties and after receipt of cheque such parties adjust the same by providing cash after deducting their commission. Taking all these facts, the material purchased in the grey market are always cheaper than the material sourced from the genuine dealer. The ld. CIT(A) has restricted the addition to the extent of profit embedded in the bogus purchases @ 20% on the basis of decision of ITAT in the case of the assesse in assessment year 2010-11 wherein the addition was made upto 15% on the basis of gross profit shown by the assessee. During the course of appellate proceedings before the ld. CIT(A) the assesse has also submitted that goods purchased from the alleged two parties i.e M/s RPV Infotrading Pvt. Ltd., and M/s Vigrah Trading Pvt. Ltd. were used for trading purpose and delivered directly to the sale parties without entering in the excise register for manufacturing activity. The assessee also submitted that it had paid VAT ranging from 5 to 6% on the purchases made, therefore, the disallowance of such purchases which were used for trading purpose should be restricted to 6% of the impugned purchases. During the course of appellate proceedings before us the assessee has filed a copy of statement showing trading purchases at 16,45,20,510/- and trading sale at Rs.16,55,80,436/- excluding the purchases shown as consumed for its manufacturing. We consider that the claim of the assesse that bogus purchases were used for trading activity are required to be verified from the relevant supporting records like excise register and corresponding sale invoices issued directly against such purchases without entering in the excise register. Therefore, subject to the P a g e | 5 ITA No.3199/Mum/2022 & ITA No. 317/Mum/2023 Kundan Industries Limited Vs. ACIT, Circle-4 verification as above, we direct the assessing officer to restrict the disallowance to the extent of gross profit shown during the year @ 18% of such bogus purchases in case the purchases were used for manufacturing purpose and to the extent of 7% of such bogus purchases in case the same were used for trading activity. Accordingly, ground no. 1 & 2 of the appeal of the assessee are partly allowed for statistical purposes.

Since on similar facts and identical issue we have adjudicated the appeal of dthe assessee vide ITA No. 3199/Mum/2022 as supra and partly allowed for statistical purpose, therefore, we do not find any merit in the ground no. 1 to 4 of the appeal of the Revenue. Accordingly, the appeal of the revenue stand dismissed.

In the result, the appeal of the assessee is partly allowed and the appeal of the revenue stand dismissed. Order pronounced in the open court on 28.04.2023 (Vikas Awasthy) (Amarjit Singh) Judicial Member Accountant Member Place: Mumbai Date 28.04.2023 Rohit: PS