THE DY. CIT, (OSD)-I, CIRCLE-4,, AHMEDABAD vs. M/S. KINTECH SYNERGY PVT. LTD., AHMEDABAD

Per Pramod Kumar, Vice President: These two appeals, and the related Cross Objections challenge the order dated 27th 1. May 2015, passed by the learned CIT(A), in the matter of assessment under section 143(3) r.w.s. 147 of the Income Tax Act, 1961 for the assessment years 2009-10 and 2010-11.

ITA Nos.2377 & 2378/Ahd/2015 C.O. Nos.186 & 187/Ahd/2015 Assessment Years: 2009-10 & 2010-11 Page 2 of 5 “1. The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.79,05,758/- made on account of purchases made treating it as bogus and non-genuine, without properly appreciating the facts of the case and the material brought on record. 2. On the facts and in the circumstances of the case, the ld. CIT(A) ought to have upheld the order of the Assessing Officer. 3. It is, therefore, prayed that the order of the ld. CIT(A) may be set aside and that of the Assessing Officer may be restored to the above extent.”

“On a careful consideration of entire facts of the case, it is noted that the appellant has made purchases of the parties in respect of which there was sufficient evidence with the Sales Tax Dept to prove that they were involved in issue of bogus bills in respect of materials. The parties have accepted before the Sales Tax Authorities about the modus operandi and on receipt of the information in respect of these parties, the assessments have been reopened and additions have been made by disallowing the purchases made from those parties. The appellant has made following purchases from the parties which were involved in issue of bogus bills in two different years as under: -

A.Y. 2009-10

Sr. Name of the Hawala Party Amount involved No. (Rs.)

1 DHARMESH TRADING COMPANY 13,83,471 2 JAIN CORPORATION 17,36,445 3 KRSNA ENTERPRISES 13,73,964 4 OM ENTERPRISE 20,99,599 5 YASH IMPEX 24,41,674 90,35,153/-

A.Y. 2010-11

Sr. Name of the party Rs. No. 1 Bharat steel Corporation 16,11,480/- 2 Jain Corporation 8,36,160/- 3 Krsna Enterprise 72,563/- 4 Mahavir Enterprise 6,76,915/- 5 Riddhi Siddhi Trading Co. 5,70,960/- Total 37,68,078/-

ITA Nos.2377 & 2378/Ahd/2015 C.O. Nos.186 & 187/Ahd/2015 Assessment Years: 2009-10 & 2010-11 Page 3 of 5 It is noted that the information received in respect of the above parties from the Sales Tax Dept were specific. The entire method of issuing bogus bills was accepted by various owners of the above mentioned parties and the assessing officer has relied on the information received while making the addition. The appellant has not produced any credible evidence except relying on the fact that the payment has been made by cheque and the material has been received. In view of the specific acceptance by the above parties that they were involved in issue of bogus bills, the action of the AO by treating the purchases from above parties as bogus is upheld.

However, it is also noted that the appellant has been able to reconcile the purchases made and the materials consumed by it, against which it issued bills to the parties from whom it has done construction work. It is also noted that the appellant has been showing consistent GP ratio in earlier years. The GP ratio of the years under appeal are also in line with the earlier years. The appellant has given a chart showing the GP which is reproduced hereunder for the sake of clarity: -

Financial Year Turnover (in Gross Profit Net profit & lacs) & Ratio Ratio 2008-09 3061.03 601.68 72.64 19.66% 2.37% 2009-10 3081.97 562.47 89.13 18.25% 2.89% 2010-11 6527.67 1183.72 . 287.03 18.13% 4.40%

It is noted from the above chart that there is a minor variation in GP and that can be attributed to normal business circumstances. On an overall consideration of facts, it is seen that the appellant has consumed the material which has been purchased but at the same time, the enquiries made by the Sales Tax Dept also show that the bills issued by the above mentioned parties from whom the appellant has claimed to have purchased the material were bogus. It is, therefore, apparent from these facts that the appellant has purchased the material from open market and obtained the bills from the above mentioned parties. It is also noted that, there is no finding by the AO to show that the appellant has tried to inflate the raw material purchases. It has been observed on examination of the records and the details furnished by the appellant that the appellant is issuing separate bills for material consumed against the construction at different sites and labour bills in respect of those work are issued separately. Therefore, it is possible to reconcile the amount of material consumed at each site. The appellant has accordingly given a reconciliation of the material purchased and consumed. Considering the fact that the appellant has been able to reconcile the quantity of purchases with the consumption, and the bills issued, it is clear that the appellant has purchased raw material from one person and obtained the bill from somebody else. In these circumstances, it would not be appropriate to disallow the entire purchases as the appellant has consumed the raw material and there is no inflation in purchases. It would, therefore, be proper to tax a reasonable percentage of total purchases made for which the bills have been found to be bogus. The view finds supports from the following judgements: -

i. CIT v Sathyanarayan P. Rathi (2013) 351 ITR 150 (Guj.) :-

Section 143 of the Income-tax Act, 1961 - Assessment - Additions to income [Purchases from market] - Assessment year 2003-04 - Assessing Officer made addition of entire amount of purchase on ground that concerned suppliers had never supplied goods as named by assessee - Commissioner (Appeals) as well as Tribunal

ITA Nos.2377 & 2378/Ahd/2015 C.O. Nos.186 & 187/Ahd/2015 Assessment Years: 2009-10 & 2010-11 Page 4 of 5 having found that though purchases were not made from parties from whom assessee claimed but such materials were purchased from open market incurring cash payment and bills were procured from various sources, held that only profit element at rate of 12.5 per cent was to be added to income of assessee - Whether present case being one of only purchase but not from disclosed sources it would be only profit element embodied in such purchase which could be added in income of assessee and thus, rightly so done by Commissioner (Appeals) and Tribunal - Held, yes [Paras 6 & 7] [In favour of assessee]

ii. CIT v Simit P. Sheth (2013) 219 Taxman 85 (Guj.) :-

Section 145 of the Income-tax Act, 1961 - Method of accounting -Estimation of Profits [Bogus purchases] - Assessment year 2006-07 - Assessee was engaged in business of trading in steel on wholesale basis - Assessing Officer having found that some of alleged suppliers of steel to assessee had not supplied steel to assessee but had only provided sale bills, held that purchases made from said parties were bogus - He, accordingly, added entire amount of purchases to gross profit of assessee - Commissioner (Appeals) having found that assessee had indeed made purchases, though not from named parties but other parties from grey market, sustained addition to extent of 30 per cent of purchase cost as probable profit of assessee - Tribunal however, sustained addition to extent of 12.5 percent - Whether since purchases were not bogus but were made from parties other than those mentioned in books of account, only profit element embedded in such purchases could be added to assessee's income - Held, yes - Whether hence, order of Tribunal needed no interference - Held, yes [Paras 6, 7 & 9] [In favour of assessee]

Even in the case of the appellant firm the purchases though not verifiable the utilization of the material has been explained.

iii. CIT v Bholanath Polyfab (P) Ltd. (2013) 355 ITR 290 (Guj.):-

Section 69 of the Income-tax Act, 7967 - Undisclosed investments [Bogus purchases] - Assessment year 2005-06 - Assessee was engaged in business of trading in finished fabrics - Assessing Officer found that concerned parties from whom material was purchased were not found at their addresses and held that purchases made by assessee were bogus - Accordingly, he made disallowance - Tribunal found that though purchases were made from bogus parties, but purchases themselves were not bogus as entire quantity of stock was sold by assessee and held that only profit margin embedded in such purchases would be subjected to tax and not entire purchases - Whether no illegality was committed by Tribunal - Held, yes [Para 6] [In favour of assessee]

The facts of the present case are identical and similar to the case decided by honourable Gujarat High Court. The appellant has explained the consumption of the raw material purchase. The Gross Profit &. Net Profit ratios shown by it during the years under dispute are also normal. The profits have in fact improved in these two years. It is also noted from the copies of account furnished by the appellant that there have been regular purchases and payments in the accounts of above suppliers therefore, there is enough rotation of funds. Considering overall facts and circumstances of the case, it would be appropriate to apply a profit percentage of 12.5% its approved by Hon’ble Gujarat High Court in above referred cases on the bogus purchases made by the appellant during each year. The AO is directed to work out the addition accordingly.”

ITA Nos.2377 & 2378/Ahd/2015 C.O. Nos.186 & 187/Ahd/2015 Assessment Years: 2009-10 & 2010-11 Page 5 of 5 4. Respectfully following the esteemed views of Hon’ble High Court, and as no contrary decision has been cited before us, we approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter.

Sd/- Sd/- Ms. Madhumita Roy Pramod Kumar (Judicial Member) (Vice President) Ahmedabad, the 5th day of April, 2019

PBN/*

Copies to: (1) The appellant (2) The respondent (3) Commissioner (4) CIT(A) (5) Departmental Representative (6) Guard File

By order TRUE COPY

Assistant Registrar Income Tax Appellate Tribunal Ahmedabad benches, Ahmedabad