DCIT 421, MUMBAI vs. JAVED ANWAR HAWA, MUMBAI

The assessee, in its appeal, has challenged the validity of the reopening under section 147, inter alia, on the grounds that the original assessment had already been completed under section 143(3) on 27.12.2011 and that the subsequent reopening amounted to a mere change of opinion; that the reassessment was completed without valid issuance and service of the mandatory notice under section 143(2); and that there were material inconsistencies in the reasons recorded and the assessment order with regard to the quantum and particulars of the alleged bogus purchases. On

The brief facts are that the assessee is engaged in the business of trading in ball bearings. The return of income for the year under consideration was filed declaring a total income of ₹42,85,950. Subsequently, the Assessing Officer received information from the Sales Tax Department through the Investigation Wing of the Income-tax Department that the assessee had obtained purchase bills aggregating to ₹3,23,18,769 from five concerns which had been identified as suspicious or hawala dealers. Based on the said information, the assessment was reopened by issuance of notice under section 148 dated 18.03.2014.

In the course of the reassessment proceedings, the Assessing Officer observed that the concerned suppliers had allegedly admitted before the Sales Tax authorities that they were engaged in issuing accommodation bills without actual

In the first appellate proceedings, the assessee furnished purchase invoices, confirmations and ledger accounts of the suppliers, bank details, purchase register, sales register, stock register, goods receipt notes, delivery challans, tax invoices and VAT-related records. It was further submitted that the corresponding purchases and sales had been duly mapped and reconciled; payments had been made through regular banking channels; the goods purchased had entered the stock and had been sold in the ordinary course of business; the corresponding sales had not been doubted; and the books of account had neither been rejected nor had any

The learned CIT(A), after examining the material, recorded that the assessee was maintaining regular books of account and that no defect had been pointed out by the Assessing Officer in the entries relating to the impugned purchases or the corresponding sales. He further noted that the books of account had not been rejected and that the sales arising from the disputed purchases had been accepted. However, he found that the delivery challans furnished by the assessee did not contain complete particulars such as vehicle registration numbers, freight payments and corresponding details of deduction of tax at source. He, therefore, held that the assessee had not conclusively established actual delivery of the goods from the named suppliers. At the same time, following the principle that once the corresponding sales had been accepted, the entire purchases could not be disallowed, the learned CIT(A) estimated the profit element embedded in such purchases at 10% and restricted the addition to ₹32,31,877.

The learned Departmental Representative, on the other hand, submitted that the suppliers were identified by the Sales Tax Department as hawala dealers; the notices issued to them under section 133(6) remained unserved; the

We have heard the rival submissions and have carefully perused the assessment order, the impugned appellate order and the material placed in the paper book. Insofar as the grounds challenging the validity of the reopening under section 147 and the alleged absence of a valid notice under section 143(2) are concerned, the learned counsel submitted that, having regard to the relief sought on the substantive addition, these legal grounds may be treated as academic. Accordingly, without expressing any opinion upon their merits and leaving the questions of law arising therefrom open, the said grounds are treated as academic. The surviving controversy, therefore, lies within a narrow compass: whether the entire purchases of ₹3,23,18,769 are liable to be disallowed, as urged by the Revenue; whether the ad hoc addition of 10% sustained by the learned CIT(A) deserves to be deleted, as claimed by the assessee; or whether, having

On a careful examination of the record, we find that the case of the assessee does not rest merely upon purchase invoices or book entries. In support of the impugned transactions, the assessee had furnished the purchase invoices, confirmations and ledger accounts of the suppliers, relevant bank statements, purchase and sales registers, stock register, goods receipt notes, delivery challans, tax invoices and VAT-related records. More importantly, the assessee had also furnished a transaction-wise and quantitative mapping of the disputed purchases with the corresponding sales. The payments were made through disclosed banking channels; the goods were entered in the quantitative stock records; and the corresponding sales were duly recorded and accepted by the Assessing Officer. The books of account have neither been rejected under section 145 nor has any specific defect been pointed out in the quantitative reconciliation, stock register or the corresponding sales. There is also no material brought on record to demonstrate that the purchase consideration paid through banking channels had found its way back to the assessee in cash, or that the assessee had deployed any unaccounted funds for procuring the goods. Once the sales and the quantitative movement of stock are accepted, it would

Undoubtedly, the information received from the Sales Tax Department, the non-service of notices issued under section 133(6), and the inability of the assessee to produce the suppliers constituted relevant circumstances which justified a deeper and more searching enquiry. However, information received from another governmental agency can legitimately set the enquiry in motion; it cannot, without independent verification, become the conclusion of that enquiry. The Assessing Officer was required to test the information against the assessee’s books, banking trail, stock movement, quantitative reconciliation and corresponding sales and thereafter bring some cogent material on record to demonstrate that the documents furnished by the assessee did not represent actual business transactions. Likewise, the inability of the assessee to compel independent suppliers to appear before the Assessing Officer several years after the transactions, although relevant, cannot be treated as conclusive proof that the goods were never received. The assessment order also proceeds upon alleged statements made by the suppliers before the Sales Tax authorities, but the material placed before us does not indicate that copies of

At the same time, the evidentiary deficiencies noticed by the learned CIT(A) cannot be altogether brushed aside. The suppliers remained unavailable, notices issued to them were returned unserved and the delivery challans did not contain complete particulars relating to the vehicles, freight payments and related details. These circumstances may create a legitimate doubt as to whether the goods were actually procured from the precise parties whose invoices were entered in the books. However, they do not establish that the goods themselves were never purchased, particularly when their receipt is reflected in the stock records and the corresponding sales have been accepted. The distinction is material. Failure to establish procurement from the invoicing parties may justify an inference that the goods were sourced from alternative or unorganised channels, but it cannot justify treating the entire purchase value as income when the acquisition and subsequent sale of the goods are otherwise borne out from the books and quantitative records. In such a situation, the possible tax implication can only be the additional margin or saving which the assessee might have

In this regard, the judgment of the Hon’ble jurisdictional High Court in Ashok Kumar Rungta v. Income Tax Officer, Income Tax Appeal Nos.1753, 1759 and 2780 of 2018, dated 15.10.2024, assumes considerable significance. There also, the Assessing Officer had disallowed the entire purchases alleged to have been made from suspicious dealers, the learned CIT(A) had restricted the addition to 10%, and the Tribunal had endorsed such estimation despite recording that the corresponding sales had been accepted and that there was no cogent and convincing evidence supporting the conclusion of the Assessing Officer. The Hon’ble High Court held that, once the very foundation of the allegation was found to be unsupported by cogent evidence, the assessee could not still be called upon to prove its innocence and an ad hoc percentage could not be sustained merely as a convenient via media. It was specifically emphasised that the appellate authority must demonstrate why the particular percentage adopted is plausible, reasonable and necessary in the factual context of the case. Similar is the principle recognised in Principal Commissioner of Income-tax v. Paramshakti Distributors Pvt. Ltd., Income Tax Appeal No.413 of 2017, dated 15.07.2019, wherein the Hon’ble jurisdictional High

The Revenue has placed reliance upon the subsequent judgment of the Hon’ble Bombay High Court in Principal Commissioner of Income-tax v. Kanak Impex (India) Ltd., Income Tax Appeal No.791 of 2021, dated 03.03.2025, to contend that the entire addition should be restored. We are unable to accept that the said judgment lays down an inflexible proposition that every purchase made from a supplier subsequently identified as a hawala dealer must invariably be disallowed in full. In Kanak Impex, the assessee had failed to establish not merely the identity of the suppliers but also the genuineness of the purchases and the source of the expenditure, and the addition had been made under section 69C as unexplained expenditure. It was in that factual setting that the Hon’ble High Court held that, after recording a categorical finding that the purchases as well as their source remained unexplained, the appellate authorities could not substitute the addition under section 69C with an estimated profit percentage. The factual substratum of the present case is materially different. Here, the purchases are

Thus, on the one hand, the complete disallowance made by the Assessing Officer cannot be sustained because the acquisition and subsequent sale of the goods stand supported by the regular books and quantitative records; on the other hand, the deficiencies concerning the availability of the suppliers and the transportation particulars leave some uncertainty as to the precise source from which the goods were procured. The learned CIT(A), however, estimated the profit element at 10% without correlating that rate with the nature of the assessee’s trading activity, its disclosed gross- profit rate, the margins shown in the preceding or succeeding years, or any comparable instance. An estimate necessarily involves an element of approximation, but it cannot be unmoored from commercial reality or adopted merely to divide the difference between the rival positions. The assessee is

Accordingly, the Assessing Officer is directed to restrict the addition to ₹6,46,375, being 2% of the disputed purchases of ₹3,23,18,769, over and above the gross profit already disclosed by the assessee. The balance addition sustained by the learned CIT(A) is deleted. Consequently, the grounds

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