ITO - 28(3)(3), MUMBAI vs. SHRI SUREKHA ANIL LOKRE, MUMBAI

The aforesaid appeal has been filed by the Revenue challenging the impugned order dated 15/03/2019, passed under section 250 of the Income Tax Act, 1961 ("the Act") by the learned Commissioner of Income Tax (Appeals)–26, Mumbai, [“learned CIT(A)”], for the assessment year 2010–11.

Shri Surekha Anil Lokre ITA no.3238/Mum./2019 dated 16/09/2020, passed under section 254(1) of the Act was recalled and the appeal was directed to be re-fixed for hearing.

On the facts and in the circumstances of the case and in law, the Ld. CIT (A) as erred in allowing relief to the assessee to the extent impugned in the grounds numerated below: (1) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in directing the A.O. to restrict the addition of bogus purchases to 12.5% as against addition of 25% made by the Assessing Officer on account bogus purchases without appreciating the fact that parties from whom these purchases were made proven accommodation entry providers, as concluded by Sales Tax Authorities pursuant to the investigation carried out by them"? (2) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in not considering the latest Apex Court decision in the case of N.K.Proteins Ltd Vs DCIT (769 OF 2017), wherein the Hon'ble Supreme Court has confirmed 100% addition made on account of bogus purchases? (3) The appellant prays that the order of Ld. CIT (A) on the above grounds be reversed and that of the Assessing officer be restored. (4) The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary.”

Shri Surekha Anil Lokre ITA no.3238/Mum./2019 engaged in the business of manufacturing transformer bushing parts meant for electricity/power supply companies. For the year under consideration, the assessee filed his return of income on 09/10/2010 declaring a total income of Rs.2,57,160. The return filed by the assessee was processed under section 143(1) of the Act. Subsequently, on the basis of information received from the Sales Tax Department that the assessee was engaged in the practice of inflating the purchases through hawala parties, proceedings under section 147 of the Act were initiated and notice dated 19/01/2015 under section 148 of the Act was issued and served on the assessee. In response to the aforesaid notice, the assessee requested the Assessing Officer (“AO”) to treat the return filed on 23/09/2009 as one filed in response to notice under section 148 of the Act. As per the information received from DGIT, Mumbai, during the year under consideration, the assessee had entered into hawala transactions with various parties for purchases of goods/materials. In order to verify the correctness and genuineness of the transaction, notices under section 133(6) of the Act were issued to these parties at the address available on record and to submit documentary evidence in respect of transactions entered with the assessee. However, notices issued under section 133(6) of the Act were returned by the postal authorities with the remark „not known/left‟ except one of the parties, wherein the party denied having any transaction with the assessee. Accordingly, a questionnaire along with a show cause notice was issued to the assessee for furnishing the details along with substantiating evidence. In response thereto, the assessee furnished copies of bills, Ledger accounts, delivery challan, transportation details, stock register, and bank statements showing payments made to these parties through banking

Shri Surekha Anil Lokre ITA no.3238/Mum./2019 channels. The assessee was also asked to produce the parties involved for verification along with documentary evidence to prove the genuineness of the transaction. However, the assessee expressed his inability to produce these parties for verification. The AO vide order dated 23/03/2016 passed under section 143(3) of the Act did not agree with the submissions of the assessee and held that the assessee failed to furnish documentary evidence substantiating receipt of the material claimed to be purchased from these parties. The AO also held that the assessee has not furnished any documentary evidence to show that material was really received by the firm. Further, the AO held that the assessee has failed to produce the parties, from whom purchases were made, for verification or furnish the present whereabouts of such parties despite the opportunity being granted to the assessee. Accordingly, the AO held that the assessee did not purchase the material from the parties mentioned in the sale bills and the purchase mentioned in the alleged sale bills cannot be accepted. As a result, the AO by treating the purchase transaction as bogus and made an addition of Rs.5,55,248 being 25% of the non-genuine purchases for the year under consideration.

“6.1 Ground No. 1 of the appeal is against the order treating purchases to the tune of Rs. 22,20,991/- as bogus and adding 25% of the same. As per the investigations carried out by the Sales Tax Authorities, the these parties were found to be involved in giving accommodation entries only without actually supplying the goods. The logical inference is that the purchases made by the appellant would also be in the nature of accommodation entries only. To verify the same, the AO had made enquiries by issuing notices u/s 133(6) which were returned unserved by the postal authorities. This party was found to be non existent at the address given by the appellant. However, the Page | 4

Shri Surekha Anil Lokre ITA no.3238/Mum./2019 appellant could not produce the party before the AO inspite of apportunity being given. The onus of proving the genuineness of such purchases is on the appellant which the appellant had not been able to discharge fully. When the hawala party had admitted on oath that it had given accommodation entries only without actually supplying the goods, the genuineness of purchases made from these parties will have to be considered taking this into consideration while examining the documentation submitted by the appellant in support of its claim. The documentary evidences such as purchase bills, payments by cheques, etc. would all have been orchestrated to present a facade of genuineness and does not necessarily mean that the purchases from these parties are genuine. The Courts have held that payment by cheque by itself is not sacrosanct so as to prove genuineness of purchases when the surrounding circumstances are suspect. However, the appellant has shown onward sales which has not been doubted by the Assessing Officer. Since there can be no sales without corresponding purchases, the only logical explanation is that the appellant would have made purchases from undisclosed parties in the grey market at lower rates and purchases were shown as being made from the impugned parties to suppress its profits.. In such a situation, the various Courts including the Hon'ble Gujarat High Court in the case of CIT vs Simit P. Sheth, 356 ITR 451 have held that not the entire purchases but only the profit element embedded in these purchases was to be disallowed. The Hon'ble Gujrat High Court in this case has held that profit margin of 12.5% of the bogus purchases will be reasonable. Respectfully following the Order in the case of Simit P. Sheth the addition is restricted to 12.5% of the bogus purchases of Rs. 22,20,991/-. This ground of appeal is 'Partly Allowed.” Being aggrieved, the Revenue is in appeal before us.

8. We have considered the rival submissions and perused the material available on record. In the present case, on the basis of the information received from the Sales Tax Department that the assessee is the beneficiary of bogus purchases, reassessment proceedings in the case of the assessee were initiated. Further, notices issued under section 133(6) by the AO to these entities were also returned unserved except in the case of one party. The AO made an addition of 25% of the alleged bogus purchases made from these suppliers. It is the plea of the assessee that all the purchases were made through brokers and therefore it is not possible to get all the details of the supplier as sought by the Revenue. In support of his claim, the assessee furnished copies of bills, Ledger accounts, delivery challan, transportation details, stock register, and bank statements showing payments made to these parties through banking channels before the lower authorities. However, we find that before the lower authorities, the assessee was unable to produce the Page | 5

Shri Surekha Anil Lokre ITA no.3238/Mum./2019 parties. Even before us, no such detail is available on record. Therefore, from the material available on record it is evident that the assessee has failed to prove the genuineness of the purchases made from these entities. However, at the same time, the Revenue has not doubted the sales declared by the assessee. Further, it cannot be doubted that without the purchase of material, the manufacturing activity of the assessee‟s concern cannot be carried out. Therefore, it appears to be a case of bogus bills arranged from the aforesaid entity and material purchased from somewhere else at a lower cost. Thus, we are of the considered view that entire bogus purchases cannot be added in such a case. We are of the considered view that a reasonable disallowance of the purchases would meet the possibility of revenue leakage. Therefore, in view of the above findings, we find no infirmity in the addition of 12.5% of disputed purchases as sustained by the learned CIT(A). We find that the same is also in line with the judgment of the Hon‟ble jurisdictional High Court in PCIT vs Paramshakti Distributors Ltd. in of 2017 decided on 15/07/2019. As a result, the grounds raised by the Revenue are dismissed.