DEPUTY COMMISSIONER OF INCOME TAX vs. M/S. BHARAT IRON SYNDICATE,, PUNE

The assessee in the present case is a partnership firm which is engaged in the business of trading of Iron and Steel. The return of income for the year under consideration was filed by it on 14.10.2010 declaring a total income of Rs.60,13,020/-. As per the information gathered by the Assessing Officer from Sales Tax Authorities, the assessee had made certain purchases from 8 parties which were indulging in providing accommodation entries by issuing bogus bills. During the course of assessment proceedings, the Assessing Officer issued notices u/s 133(6) of the Income Tax Act, 1961 to the said 8 parties requiring them to appear for examination before him along with books of account and other supporting documents so as to establish the genuineness of the purchases claimed to be made by the assessee from the said 8 parties. The said notices issued u/s 133(6), however, were returned back unserved by the Postal Authority with the remarks “Left without intimation”. This position was confronted by the Assessing Officer to the assessee and the assessee was called upon by the Assessing Officer to produce the said parties for examination along with relevant documentary evidence. The assessee failed to comply with this requirement of the Assessing Officer. He, however, made a following submission in writing vide letter dated 18.03.2013 in support of his case :- “1. We have enclosed ledger extracts of all the said parties and it is evident that all the payments are made by cross account payee cheques.

2. We have submitted quantitative details of sales, purchases etc which also confirms purchases as sales are made and payments are realized. This automatically confirms purchases, Hence, it is requested not to disallowed the sales and purchase in view of principle of natural justice. Without prejudice to the case, we would like to quote and also put on record the following Citations where the Purchases are allowed in part/full by the Hon'ble Tribunals and High Courts.

In the income tax appellate Tribunal Bench, New Delhi : The DCI,(Cen. Cir. -13, New Delhi, (appellant) Vs Global Business India Pvt. Ltd., Zone H. 4/5, 53 & 54, Suvidha Kunj, Pitam Pura, Delhi. PAN- AABCG4567F (respondent) Judgment : It is requested that the purchases from the said parties may be fully allowed. 2) Income-tax appellate Tribunal- Ahmedabad Raj Exports, Surat Vs assessee on 11.11.2011, ITA No. 1827/1954/AHD/2005. 3) Vijay Proteins before the Hon'ble ITAT. 4) Avishkar Processing Mills Vs DCIT-before the Hon'ble ITAT, Ahmedabad- dated 12.02.2012. 5) ITAT-Mumbai- Keki J. Vakil, Mumbai Vs department of income-tax on 28.12.2011. In all the above cases where it was found that there was a purchase and sale made for the same there were partial additions or no additions laid by the ITAT Benches. We have been making purchases from manufacturer, trader, stockiest and brokers during any given Financial Year, All the payments have been routed through banking channels and complete purchases along with sales have been duly accounted in our books of account. We being a "Trader' have complete records available towards quantitative purchases and sales (which have already been provided to you in our earlier submission). With due respect sir, post above submission that it is well settled that to any sales, there is a corresponding purchases and when the sale is accounted and made, the corresponding purchases have to be admitted without any doubt. We once again request you kindly favourably consider our submission in the light of above case laws.”

The Assessing Officer did not find any merit in the submissions made on behalf of the assessee for the following reasons given in paragraph no.6 to 8 of his assessment order :- “6. I have carefully considered the submission made by the assessee. It is interesting to note the defense put forward by the assessee in this regard. There is no whisper in the submission of the assessee about the genuineness of the transaction with the parties named above. What the assessee is contending IS that in spite of the bogus nature of purchases, the A.O. is not entitled to make any addition on this account. The assessee was given an opportunity to produce all the 8 parties in person for examination to prove the genuineness of the purchase transaction claimed to have been made by the assessee. It is a fact that the assessee has not accepted the offer of producing these parties in person. Notice issued u/s 133(6) of the I.T. Act have been returned by the postal authorities unserved. This raises serious doubt about genuineness of transactions purportedly entered into by the assessee. The contention that payments have been made through banking channels to these parties and hence the transactions should be considered as genuine, holds no water since the other part of the banking transaction i.e. at the end of the hawala dealer remains unknown. Whether the cheques issued by the assessee in this regard have been credited in the bank accounts standing in the name of those parties and if so, whether immediate corresponding cash withdrawal have been made from those accounts are the issues which have not come to light in view of the failure of the assessee to produce those hawala dealers. The onus is purely on the assessee to prove beyond any iota of doubt that the assessee actually made purchases of goods from those parties by taking deliveries from them and that amount of consideration against purchases were actually credited in their bank accounts in the normal course of transactions and no siphoning of the amounts in cash or otherwise from those bank accounts standing in the name of hawala dealers have been made. Since the assessee has failed in this regard in all parameters, the purchases purportedly made from these parties have not been proved genuine and the parties have passed hawala entries to accommodate the assessee to show certain purchases made against their name. The amount of purchases shown to have been made from these parties by the assessee during the previous year relevant to assessment year under question is as under:- Sr. No. Name of Party Amount (in Rs.) 1 K.G. Sales Corporation 46,85,689/- 2 K.B. Steels 2,92,842/- 3 Deep Enterprises 43,00,279/- 4 Ridhi Sidhi Corporation 5,38,376/- 5 Tulsiani Trading Pvt. Ltd. 19,15,724/- 6 Rushabh Enterprises 67,94,890/- 7 Rohit Enterprises 23,26,628/- 8 Niddhish Impex Pvt. Ltd. 20,57,760/- Total purchases:- 2,29,12,188/- 7. Having held that the alleged purchases were bogus in nature and only hawala entries were passed showing these names of the parties in the books of account of the assessee, the question that needs to be answered is whether the purchases so made leads to making addition to the total income. It is the contention of the assessee that for every sale there is a corresponding purchase and that sale cannot happen without corresponding purchase. The assessee has stopped short of saying that in spite of the nature of purchase i.e. whether genuine or not, if it leads to corresponding sale, no addition can be made. On the first blush, this argument appears attractive and reasonable. The pitfall in approving of such argument is that purchase shown to have been made by passing only the book entries from a particular party would also stand on the same footing as genuine purchase from a recognized party. Surely, that is not the case. The inference that has to be drawn under these circumstances is that the assessee must have made purchases goods from the open market for whatever benefit or compulsion the causes of which are best known to him only and not disclosed in the books or records. However, pertaining to such purchases made from the open market parties outside the books, but shown as made from the hawala dealers, the assessee has failed to furnish the details regarding the source of expenditure incurred for the purchase of goods. Since the sources of payment, which obviously has to be in cash in respect of open market purchases remains unexplained, the provision of section 69C of the Act is attracted in respect of such purchases. The assessee has not given any indication in its submission about the source of making purchase in cash from the open market parties. In view of the failure of the assessee to explain the source of expenditure, the amount of Rs. 2,29,12,188/- is deemed as income of the assessee liable to be added u/s 69C of the Act.

While coming to aforesaid conclusion, I have also taken into account various decisions cited by the assessee in its submission. I have also considered the contention that for every sale, there has to be corresponding purchase and cost attached to that purchase. The moot point here is that having accepted the fact that the purchases as shown in the books from these parties as being bogus, there has to be corresponding purchase made from the open market not recorded in the books for making effective sales. It is here that the issue of source of payment made to market parties becomes material. When such source of payment does not find place in the books maintained by the assessee and no explanation regarding the source of payment is offered, the provision of section 69C is invited and becomes applicable. Therefore, with due respect to the decisions cited by the assessee, the specific provision available in the Act to address such instances cannot be ignored. Taking into account all these aspects, I have no hesitation in my mind in applying the provision of section 69C in the case of the assessee.”

For the reasons given above, the Assessing Officer treated the entire bogus purchases allegedly made by the assessee from the concerned Hawala parties as unexplained expenditure u/s 69C of the Act and addition of Rs.2,29,12,188/- was made by him to the total income of the assessee on this issue in the assessment completed u/s 143(3) of the Act vide order dated 28.03.2013.

Against the order passed by the Assessing Officer u/s 143(3), an appeal preferred by the assessee before the ld. CIT(A) challenging inter-alia the addition of Rs.2,29,12,188/- made by the Assessing Officer on account of alleged bogus purchases u/s 69C of the Act. During the course of appellate proceedings before the ld. CIT(A), the submissions made before the Assessing Officer during the course of assessment proceedings were reiterated on behalf of the assessee. The ld. CIT(A) found merit in the said submissions and restricted the addition of Rs.2,29,12,188/- made by the Assessing Officer on account of alleged bogus purchases of Rs.6,87,365/- for the following reasons given in para 4.1.3 of his impugned order :- “4.1.3. The assessment order and the appellant's submissions have been gone through. It is a fact that the appellant is a trader in Iron and Steel products. The purchases made by the firm are not consumed as a raw material for manufacturing purpose. All the purchases are either sold or held as a stock. There is no material difference in the quantitative analyses of the purchases and sales. As the sales have been accepted to be true and genuine, there ought to be purchases for effecting the sales. Some of the suppliers have been found to be hawala dealers by the sales tax department. These alleged hawala suppliers have not remitted the sales tax collected from the appellant on the sales made to it to the Maharashtra Sales tax department. The appellant himself paid these amounts subsequently on receiving the demands from the sales tax dept. The appellant never questioned the action of the sales tax department in recovering the taxes from him. The appellant also did not file any civil case for recovery of the vat amounts from the suppliers or criminal cases for cheating. Thus, the appellant himself has accepted the parties, to be bogus by his actions and inactions. Hence, the need to prove them to be bogus by the department is not warranted. However the question remains as to what happened to the amounts paid through cheques to these hawala suppliers. It is quite likely that the amounts would have been withdrawn at some stage in the chain and returned to the appellant in cash form. The hawala operations are very complex and it is not easy to pin down the direct and immediate link between the payments and withdrawals. It is true that the purchases could have been made from some other party which does not issue the bills. The payment may have been either paid in cash or routed through a chain to that party. It is true there is no evidence in support of such premise. The possibility however is not ruled out. Even in the event of such possibility, the question is whether there is any unaccounted payment which needs to be brought to tax u/s 69C. In my considered opinion, there is no such possibility of bringing any amount to tax u/s 69C. It is quite possible that certain amounts would have been incurred for facilitating such bills and for handing the subsequent payments. The commission payments and the handling charges for such transaction are in the range of 2 to 4% of the bill amount. In my considered opinion to meet the ends of justice an amount of 3% of the bills issued by such identified parties should be considered as the payment outside the books and the same should be treated as unaccounted payment. The AO is directed to calculate 3% of the purchases i.e. Rs.2,29,12,188/- (subject to the correction in respect of bills received from Rushab Enterprises) as the undisclosed income.”

Aggrieved by the order of the ld. CIT(A), the Revenue has preferred this appeal before the Tribunal on the following grounds :- “