INCOME TAX OFFICER, MUMBAI vs. R MEHTA & CO, MUMBAI

The grounds of appeal raised by the assessee in the present appeal reads as under: “1. Whether in the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in restricting the addition @3% as against 100% bogus purchases of Rs.1,05,64,083/- made from M/s. Kangan, a paper entity/concerns, were involved in providing bogus bills without any actual supply of materials to assessee firm and has not appreciated the fact that AO has given detailed reasoning for quantifying the additions.

Whether in the facts and circumstances of the case and in law, the Ld. CIT(A) has not appreciated the fact action of the AO was based on information/report received from the DGIT( Investigation Wing), Mumbai that Rajendra Jain Group and Dharmichand Group, all are hawala truders who were indulged in the practice of providing accommodation entries of issuing bogus Sales/Purchase bill without supplying any goods and the assessee firm was found to be one of the beneficiaries of such practices, who have obtained accommodation entries of Rs. 1,05,64,083/- from M/s. Kangan, a paper concerns without actual delivery or supply of materials to suppress the true profit."

"Whether in the facts and circumstances of the case and in law, the Ld. CIT(A) has restricted the addition @3% as against 100% addition of bogus purchases, by ignoring the fact that, Mr. Dharmichand Group has admitted in his recorded statement during the search operations Mis. Kangan Jewels, was only paper concerns and controlled and managed by him & his syndicates and no action sales purchases was executed through any of this concerns and the assessee firm has availed accommodation entries from M/s. Kangan for bogus purchases of Rs 1,05,64,083/-"

“Whether on the facts and circumstances of the case and in law, Id. CIT(A) has erred in restricting the disallowance to the extent upto 3%, without appreciating the decision of the Hon'ble Supreme Court in the case of M/s. N. K. Proteins Ltd. Va. Dy. CIT (2016) 292 CTR (Gul) 354, Dated. 16.01.2017, wherein the Hon'ble Court has held that price a findings of act has been given that entire purchases shown on the basis of fictitious invoices and debited in the P & L account are established as bogus, then restricting the addition to a curtained percentage goes against the principles of section 68 and 690 of the Income Tax Act, 1961 ?"

“Whether on the facts and circumstances of the case and in law, the order of the Ld. CIT(A) perverse in not considering the order of Hon'ble Supreme Court in the case of M/s. N. K. Proteins Ltd. Vs. Dy. CIT (2016) 292 CTR (Guj.) 354, Dated. 16.01.2017, which is on the similar issue of bogus purchases, was already the law of the land when the Ld. CIT(A) has pronounced it's order on 18.06.2025?"

"Whether on the facts and circumstances of the case and in law, Ld. CIT(A) has erred in restricting the addition without appreciating the fact that in the case R Mehta & Co

“Whether on the facts and circumstances of the case and in law, the decision of the Ld. CIT(A), is right in view of the decision of the Hon'ble High Court Mumbai , in the case of Pr. Commissioner of Income-Tax-5, Mumbai Vs. Kanak Impex (India) Ltd(2025)172 Taxmann.com 283 (Bombay) Dated. 03.03.2025, wherein the decision of 100% addition made by AO has been allowed, by rejecting the ITAT's decision of estimating the profit rate @3% on bogus purchases and thereby impliedly grant deduction of such unexplained expenditure incurred u/s. 690 of the Act, eventhough the assessee failed to discharge its onus to prove the genuineness of alleged purchases and has offered no explanation of the sources of expenditure incurred on account of such purchases?"

The tax effect involved in this case is Rs. 32,64,300/-, which is below the prescribed limit mentioned in the CBDT's Circular F.No.279/Misc. 142/2007- ITJ(Pt) amended vide No. 09/2024 dated. 17.09.2024. However, the appeal is being filed before the Hon'ble ITAT, as this case also falls under one of the exceptions specified in paragraph 3.1th) of the of the CBDT's Circular No 05/2024 Dated, 15.03.2024, wherein it is stated that in cases involving “Organized Tax Evasion", in such cases the decision to file appeal/SLP shall be taken on merit without regard to the tax effect and the monetary limit.

The appellant craves, leave to amend or alter any grounds or add a new ground which may be necessary.”

As per brief facts of the case, assessee’s the case was reopened under section 147 r. w. S. 148 considering certain information received from the office of DCIT (Inv.) Mumbai, that the assessee has received bogus entries in the form of purchase bills from M/s Kangan Jewels Pvt. Ltd., a party related to Rajendra Jain / Dharmichnad Jain & Group (who have admitted through Shri Dharmichand as per statement u/s 132(4)/131 during search action on them on 04.10.2013, to be involved in providing accommodation entries without anu actual business carried out) for an amount of Rs. 1,05,64,083/-. Assessee was R Mehta & Co

Before Ld. AO, assessee submitted that the alleged bogus purchases are actual transactions, delivery of goods was made, paid through banking channel, the identity and genuineness of the creditors is fully established. Such submissions of the assessee were not enough to impress upon the ld. AO; accordingly, the addition have been made, with the following observation: “7.2. The submission details furnished by the assessee and also the materials available on record have been carefully perused and considered. From the above discussions, the followings facts emerge The Income tax Department has conducted search & seizure action in the case of the Group concerns of Rajendra Jain/Dharmichand Jain and conclusively proved that these parties are engaged in the business of providing accommodation entries only, as can be clearly seen from the discussions in the above paragraphs. The parties are issuing bills without delivering any goods and services. (ii) Evidently, the assessee had adopted a modus operandi to reduce its true profits by inflating its expenses including purchase expenses by taking accommodation entries from such parties. (ii) Thus, in the books of accounts of the assesse, the purchases to the extent made from the above said parties remained unverifiable and hence I arrive at a conclusion that the purchases shown by the assessee in the books of accounts are inflated and bogus purchases are debited to trading account to suppress the true profits to be disclosed to the department. (iv) The onus was upon the assessee to establish the genuineness of purchases made by the assessee. R Mehta & Co

Aggrieved with the aforesaid addition, the assessee preferred an appeal before the Ld.CIT(A), who decided the issue in favour of the assessee, with the following observations: In this case, there was no discrepancy between purchases shown by assessee and sales declared, the question arises whether the entire amount of bogus purchases could be treated as income of assessee or addition was to be limited to extent of bringing gross profit rate on purchases at same rate as applied in other genuine purchases.

In the present case, as noted above, the assessee was a trader of fabrics. The A.O. found three entities who were indulging in bogus billing activities. A.O. found that the purchases made by the assessee from these entities were bogus. This being a finding of fact, we have proceeded on such basis. Despite this, the question arises whether the Revenue is correct in contending that the entire purchase amount should be added by way of assessee's additional income or the assessee is correct in contending that such logic cannot be applied. The finding of the CIT(A) and the Tribunal would suggest that the department had not disputed the assessee's sales. There was no discrepancy between the purchases shown by the assessee and the sales declared. That being the position, the Tribunal was correct in coming to the conclusion that the purchases cannot be rejected without disturbing the sales in case of a trader. The Tribunal, therefore, correctly restricted the additions limited to the extent of bringing the G.P. rate on purchases at the same rate of other genuine purchases. The decision of the Gujarat High Court in the case of N.K. Industries Ltd. (supra)cannot he applied without reference to the facts. In fact in paragraph 8 of the same Judgment the Court held and observed as under—

In these circumstances, no question of law, therefore, arises. All Income Tax Appeals are dismissed, accordingly. No order as to costs . Applying the decision in the case of Mohammad Haji Adam (supra), it was held in Principal Commissioner of Income-tax v. Dhondiram Naryan Limbhore [2023]153 taxmann.com 539 (Bombay) that Where there was no discrepancy between purchases shown by assessee and sales declared, entire amount of bogus purchases could not be treated as income of assessee and addition was to be limited to extent of bringing gross profit rate on purchases at same rate as applied in other genuine purchases Applying the ratio in the decisions cited above to the facts of the case it is held that addition cannot be made of the entire purchases from the above parties as bogus. The additions is limited to the extent of bringing the G.P. rate on purchases at the same rate of other genuine purchases.

We noticed that the Ld.CIT(A) has simply placed reliance on the report given by the Investigation Wing. While confirming the addition, the Ld.CIT(A) has observed that the assessee has also not furnished the detailed computation in respect of how these transactions were accounted in his books of accounts. We are unable to understand the same. Had the assessee not accounted for the purchases, the question of disallowance would not have arisen. Thus, we notice that the above said observation of the Ld.CIT(A) is out of context and deserves to be rejected. We further notice that the AO did not find any defect or deficiency in the documents furnished by the assessee to prove the purchases. The report given by the Investigation Wing is a generalized report. Hence, it is the duty of the AO to conduct independent enquiry to disprove the claim of the assessee that the purchases were genuine. The onus on the AO further increases, when the supplier confirms the transactions. However, the AO did not conduct any such independent enquiry. He has simply placed reliance on the investigation report given by the Investigation Department. The Ld.AR also submitted that the AO did not furnish any of those materials to the assessee. The Ld.AR also stated that Shri Rajendra jain has retracted his statement later. He further submitted that it is not shown that the transactions of the assessee have been identified as bogus by Shri Rajendra Jain in his statement. Thus, we notice that the AO has proceeded to disbelieve the purchases made by the assessee on the basis of general statement given by Shri Rajendra Jain.

However, on the contrary, it is seen that all the three suppliers have confirmed the sale of diamonds to the assessee. They have responded to the notices issued by the AO. The Ld.AR submitted that some of the purchases have been exported after clearance from custom authorities. We also notice that the assessee also could match the purchases with sales. The Ld.AR submitted that the rate of gross profit earned on sale of the alleged bogus purchases inAYs.2011-12 and 2012-13 respectively was 9.06% and 8.40%, while the overall rate of gross profit declared by the assessee in those years was 6.71% and6.68%, respectively. We notice that the Hon’ble Bombay High Court, in the case of The PCIT vs. M/s Mohammad Haji Adam & Co (Income tax Appeal No. 1004of 2016 dated February 11, 2019), has upheld the decision of the Tribunal in restricting the addition limited to the extent of bringing the G.P rate on purchases at the same rate of other genuine purchases.

We notice that the Hon’ble Bombay High Court has observed that the decision rendered by the Hon’ble Gujarat High Court in the case of N.K. Industries (supra) will not apply, when the sales recorded by the assessee has been R Mehta & Co

In the instant case also, the AO has accepted the sales recorded by the assessee. The assessee could not have affected sales without purchasing the goods. The assessee could match the sale with corresponding purchases.

At the outset, Ld AR representing the assessee, placed his reliance on the order of Ld.CIT(A) and have further relied on the following decisions: 1. CIT-7, New Delhi Vs. M/s Odeon Builders Pvt. Ltd.Civil Appl. Nos. 9604-9605 of 2018 (21.08.2019)(SC) – upheld the decision of ITAT and Hon’ble Delhi High Court, that disallowance based on third party information gather by the investigation wing without independent verification, even copies of statements of third party not provided to the assessee, thus denying the opportunity to cross examine. While initial burden of substantiating the purchase is discharged by the assessee by furnishing the relevant documents, such purchases found to be acceptable. R Mehta & Co

N.K. Industries Ltd. Vs. DCIT, Tax Appeal Nos. 240,261,242,260 & 241 of 2003, Hon’ble Gujarat High Court dated 20.06.2016

CIT vs. Nikunj Eximp Enterprises Pvt. Ltd., Hon’ble Mumbai High Court, ITA No. 5604 of 2010, 17.12.2012. 4. PCIT Vs. Tejua Rohitkumar Kapadia, Hon’ble High Court of Gujarat, ITA No. 691 of 2017, 18.09.2017. 5. PCIT Vs. Mohommad Haji Adams & Co., ITA 1202, 1012 of 2016, Hon’ble Mumbai High Court.

ITA No 4567/Mum/2017, M/s A.J.M. & Co. Vs. DCIT, ITAT Mumbai, dated 25.03.2019. 7. ITA 5877 & 6724/M/2016, Polar Star Vs. ACIT, ITAT Mumbai, dated 05.09.2017

ITA 6483/Mum/2018, Hemant m Mehta HUF Vs. ACIT, ITAT Mumbai, 06.12.2019. 7. Per contra Ld. Sr. DR vehemently supported the order of Ld. AO and submitted to reverse the finding of Ld. CIT(A), by restoring the addition/disallowance made by the AO.

We have considered the rival submissions, perused the material available on record as well as the decisions / case laws referred to and relied upon. Admittedly, the additions in present case have been made under similar circumstances, which have been dealt with and deliberated upon by the Hon’ble R Mehta & Co

We, thus, reject the contentions raised by the revenue in the present appeal, being devoid and bereft of any merits, as discussed. R Mehta & Co

In result the appeal of revenue in the instant case is dismissed, in terms of our aforesaid observations.