MAA JAGDAMBE TRADELINKS LTD,MUMBAI vs. ASSTT COMM OF INCOME TAX CIRCLE -12(3) (2) , MUMBAI

The assessee has challenged the grounds of reopening of the assessment and on the addition amounting of Rs.67,41,777/- being differential gross profit @ 1.33% on the total purchases, amounting to Rs.50,9,00,512/-.

The brief facts are that the assessee company is engaged in the business of textiles and has filed its return of income dated 30.03.2017, declaring total income at and seizure action dated 05.02.2016 u/s.132 of the Act carried out in the case of Shri Vipul Vidur Bhatt and his other related entities, the assessee’s case was reopened u/s. 148 of the Act for the reason that the Investigation Wing had received information that the assessee company has taken bogus accommodation entries from the entities operated by Shri Vipul Vidur Bhatt.

The Assessing Officer (A.O. for short) passed the assessment order u/s. 144 r.w.s.

The assessee has challenged in ground no. 1, the reopening of the assessment on the basis of the information from the Investigation Wing and that the A.O. has issued notice u/s. 148 of the Act only on the basis of the borrowed satisfaction and that the A.O. has not applied his mind for reopening the case of the assessee. It is observed that subsequent to the search and seizure action carried out in the case of Shri Vipul Vidur Bhatt, it was found that 347 bogus entities which was managed, controlled and operated by Shri Vipul Vidur Bhatt was providing bogus accommodation entries to various parties, out of which the assessee company was found to be one of the beneficiary. It is stated that the assessee has taken bogus accommodation entries from two entities namely Lunkard Textiles Pvt. Ltd. of Rs.10 lacs as undisclosed income and M/s. Shipra Fabrics Pvt. Ltd. of Rs.50,59,512/- as bogus purchase as per the information from the Investigation Wing.

The learned Authorised Representative (ld. AR for short) for the assessee contended that the reopening of the assessee’s case based upon the statement of Shri Vipul Vidur Bhatt, which was subsequently retracted was bad in law, as the A.O. has failed to apply his mind and it was merely based on the borrowed satisfaction. The ld. AR relied on the various decisions along with the decision cited above and contended that the reopening was illegal and void and that the proceeding u/s. 148 was to be quashed on this ground. the other hand, controverted the submission of the ld. AR and stated that section 147 of the Act can be invoked where the A.O. has reason to believe that the income has escaped assessment on account of failure to disclose truly and fully all the material facts. The ld. DR relied on the decision of the Hon’ble Gujarat High Court in the case of Peass Industrial Engineers (P) Ltd. vs. Dy. CIT [2016] 73 taxmann.com 185 (Guj) and Pr. CIT vs. Paramount Communications (P) Ltd. [2017] 79 taxmann.com 409 (Del), wherein it was held that the information received from the Investigation Wing was a tangible material to initiate the reassessment proceeding.

We have heard the rival submissions and perused the materials available on record. It is observed that the A.O. has initiated the reassessment proceeding based on the information from the Investigation Wing that the assessee was a beneficiary of bogus accommodation entries provided by the entities of Shri Vipul Vidur Bhatt pursuant to search and seizure action. The said information revealed around 347 companies which was confronted by Shri Vipul Vidur Bhatt, out of which the assessee is said to have received bills for purchase of fabrics from M/s. Shipra Fabrics Pvt. Ltd. which was amongst the list of bogus entities controlled by the said person.

From this, it is evident that the A.O. has reason to believe that the income of the assessee has escaped assessment and based upon it proceeding u/s. 147 was initiated. On a bare perusal of section 147, it is seen that the A.O. should have ‘reason to believe’ to reopen the assessment. On consideration of the decision cited by the parties, we are of the view that the reopening of the assessment initiated by the A.O. is made as per the initiated u/s. 147 of the Act. Ground no. 1 raised by the assessee is dismissed.

Ground no. 2 pertains to the impugned addition made on the total alleged bogus purchase made by the assessee from M/s. Shipra Fabrics Pvt. Ltd. The A.O. had recalculated the gross profit ratio for the reason that the assessee has declared a low rate compared to other companies which is in the same line of the business as that the assessee. The assessee had challenged the said addition on the ground that the A.O. has failed to mention the precise provision of law under which the impugned addition has been made and also challenged the ground that the assessee has proved the identity of the persons and genuineness of the transaction and also on the fact that the A.O. has not rejected the books of accounts of the assessee for the fact that the impugned year assessment order was not passed u/s. 143(3) of the Act. The assessee has also challenged the addition on the ground that the assessee was not provided with an opportunity for cross examination of Shri Vipul Vidur Bhatt, thereby violating the principles of natural justice.

From the facts of the case, it is observed that the assessee has made a trading turnover of Rs.120.67 crores, thereby earning a gross profit of Rs.1.41 crores , which is worked out as 1.17% of the trading sales. The assessee has submitted that the company has an average capital employed of 321.06 lacs and gross profit of Rs.140.84 lacs makes the average capital employed at 43.87%. The assessee further stated that the gross profit of 44% was very much high in textile industry which is finding it difficult to survive in the market. The assessee contended that considering the market status, the gross profit and textile industry during the impugned year ranged from 0.20% to 3% and the gross profit in trading industry range from 0.20% to 2%. The A.O.’s assessment of gross profit @ 2.5% on the alleged bogus purchase from Shipra Fabrics Pvt. Ltd. resulting in an addition of gross profit of 1.33% was exorbitant. The assessee, in addition to this stated that the lower authorities have failed to consider the documentary evidence such as ledger confirmation from M/s. Shipra Fabrics Pvt. Ltd., sample purchase bills and delivery challans, corresponding sample bills as well as challans, stock exchange register, purchase and sales of fabrics were not considered by the lower authorities. The assessee further stated that the books of accounts were audited and were not found to be false for the fact that the A.O. has not rejected the books of accounts u/s. 145 of the Act. The assessee also made a submission that M/s. Shipra Fabrics Pvt. Ltd. is still in existence and that mere reliance on the statement of Shri Vipul Vidur Bhatt is not warranted.

The assessee has made a comparative analysis of the gross profit ratio of five listed entities from textile industry and two listed entities from trading industry and has stated that the gross profit of above 7 companies is 1.08% whereas the assessee has declared gross profit of 1.17% for the impugned year.

The A.O. has specified that the profits of the assessee has to be recalculated on the basis of the materials made available by the assessee, wherein the A.O. has also relied on the decision of the Hon’ble Calcutta High Court in the case of CIT vs. Eastern Commercial Enterprises [1994] 210 ITR 103 (Cal), where it was held that if the assessee has furnished comparative analysis of gross profit ratio, the department has to rely on the analysis relied on by the assessee, the A.O. observed that gross profit varies from 0.5% to 2.5% of the turnover and thereby recalculated 2.5% on the alleged bogus purchases. It is also pertinent to point out that the lower authorities have not disputed the corresponding sales of the assessee. It is also evident from the assessment order that the assessee has shown item-wise sales of the goods purchased for which the assessee has offered income on the same. The A.O. has also stated in para 5 of the assessment order and has admitted the fact that the assessee has shown the goods item to item and that also has held that the purchases are not entirely bogus. The A.O. thereby estimated the gross profit which is said to be as per the prevailing market rate. The only allegation in this is that the A.O. has not substantiated the basis on which the gross profit was calculated. For this proposition, we would like to place our reliance on the decision of the Hon'ble Jurisdictional High Court in the case of Pr. CIT-17 vs. Mohammad Haji Adam & Co. [2019] 103 taxmann.com 459 (Bom), wherein it was held that on identical facts that the purchases cannot be rejected without disturbing the sales and that the additions was to be limited to the extent of gross profit rate on purchases at the same rate of other genuine purchases.

In the result, the appeal filed by the assessee is partly allowed.