SAURABH PLASTO PRODUCTS PRIVATE LIMITED,BORIVALI, MUMBAI vs. INCOME TAX OFFICER, WARD-8 (1)-3 , MUMBAI

We have considered the condonation application and the material placed in support thereof. It is stated that the wife of the Director of the assessee-company was suffering from cancer and passed away during 2025. Thereafter, the Director himself suffered from severe lower backache and difficulty in walking, as supported by the medical documents enclosed with the application. It is explained that these circumstances prevented him from taking timely steps to engage a consultant and prepare the appeal papers, and that steps were taken to file the appeal once his condition permitted. An affidavit has also been furnished in support of the explanation that he was sick. Having regard to the cumulative effect of the bereavement, the stated medical condition and the supporting documents, we are satisfied that sufficient cause has been shown for the delay. The delay of 97 days in filing the appeal is, therefore, condoned and the appeal is admitted for adjudication on merits.

Briefly stated, the assessee is a company engaged in the manufacture of plastic bags, plastic rolls and other related plastic products. For the year under consideration, it filed its return of income on 30 September 2010 declaring total income of Rs.77,471/-. The return was initially processed under section 143(1). On the basis of information that the assessee had obtained accommodation entries in respect of purchases allegedly made from parties identified by the Maharashtra Sales Tax Department as suspicious dealers, reassessment proceedings were initiated and the assessment was completed under section 143(3) read with section 147 of the Act. The Assessing Officer identified purchases aggregating to Rs.16,80,732/- shown from Nikhil Enterprises, Sun Enterprises, Blue Nile Enterprises, Shubh Laxmi Sales Corporation and Aayushi Enterprises.

During the reassessment proceedings, notices under section 133(6) were issued to the parties to verify the purchases. The notices issued to four parties were returned unserved, while Aayushi Enterprises stated that it had not transacted with the assessee. The Assessing Officer observed that the parties appeared on the Maharashtra Sales Tax Department’s list of suspicious dealers. Although the assessee contended that the purchases were recorded in its books and that payments had been made by account-payee cheques, the Assessing Officer found that the assessee had not produced the suppliers and had not furnished sufficient supporting material, including transport particulars and lorry details, to establish the genuineness of the purchases. The Assessing Officer further recorded that the goods had been obtained from other sources in the open market, allegedly in cash and without bills, and that bills were procured from hawala operators to avoid disallowance under section 40A(3) and payment of applicable taxes. Treating the purchases of Rs.16,80,732/- as unexplained expenditure under section 69C, the Assessing Officer added the entire amount to the returned income and initiated penalty proceedings under section 271(1)(c). The assessed income was computed at Rs.17,58,200/-.

In the first appeal, the assessee contended, inter alia, that the purchases were genuine; that the material was required and used in the manufacturing process; and that the relevant books of account, invoices, delivery challans, lorry receipts and bank-payment particulars had been furnished. It was argued that the conclusion of the Assessing Officer was based substantially on third-party information available on the Sales Tax Department’s website, without independent verification or an opportunity to cross-examine the persons concerned. The assessee also disputed the invocation of section 69C and contended that the addition could not be sustained merely because the suppliers could not be produced. The learned Additional/Joint Commissioner of Income Tax (Appeals) rejected these submissions. The appellate authority held that the primary onus to establish the genuineness of the purchases rested on the assessee; that the suppliers had not been produced; and that payment by account-payee cheques, by itself, did not establish the genuineness of the transactions. The addition made by the Assessing Officer was accordingly confirmed and the appeal was dismissed.

Before us, the grounds of appeal challenge the confirmation of the addition on the ground that it was made merely on the basis of third-party information, without proper inquiry or an opportunity to cross-examine the persons whose statements or information were relied upon. The assessee submits that it had furnished books of account and supporting documents, including bank-payment details, lorry receipts and delivery challans, and that the material purchased was used in its manufacturing activity. It is further contended that the authorities below failed to appreciate that income-tax is chargeable on real income and that section 69C does not, in every case, mandate an addition of the entire expenditure where the source or genuineness of the expenditure is disputed. According to the assessee, even if the purchases were not accepted as having been made from the named suppliers, the entire purchase amount could not be added when the corresponding goods and sales were reflected in the business records; at most, the profit element embedded in such purchases could be brought to tax.

The learned Departmental Representative (ld.DR), on the other hand, supports the orders of the authorities below. It is submitted that the assessee did not discharge the primary onus of proving the genuineness of the purchases, particularly when four notices were returned unserved and one supplier expressly denied having transacted with the assessee. The assessee also failed to produce the suppliers or to establish the movement and delivery of the goods through reliable contemporaneous records. It is accordingly contended that the conclusion that the named suppliers had merely provided accommodation bills was justified and that the addition under section 69C was rightly sustained. The ld.DR also relies on the reasoning adopted by the first appellate authority in support of the full addition.

We have considered the rival submissions and perused the material on record. The assessee’s failure to establish the identity and genuineness of the named suppliers, coupled with the returned notices and the denial by one of the parties, gives rise to a legitimate doubt regarding the purchases as recorded in the names of those parties. The assessee has not satisfactorily established that the goods were in fact supplied by the five parties named in the purchase records. To this extent, the findings of the authorities below cannot be said to be without evidentiary basis. At the same time, the Assessing Officer has himself recorded in paragraph 5.6 of the assessment order that the goods were obtained from other sources in the open market and that the bills of the hawala operators were obtained to give the transactions a colour of regular purchases and to avoid payment of applicable taxes. The assessment order thus proceeds on the premise that the goods were procured from undisclosed sources, while the bills issued by the named suppliers were accommodation bills. The dispute, therefore, concerns the source and the recorded particulars of the purchases rather than a finding that the assessee carried on its manufacturing business without procuring the material required for the goods sold.

The Assessing Officer has not disputed the sales as such; rather, the assessment order acknowledges that goods were procured from other sources and that the purchases from the named suppliers were not genuine. Where the corresponding sales are accepted and the existence of the goods required for the business is implicit in the assessment findings, the entire amount of the purchases recorded against the alleged accommodation-bill providers cannot automatically be treated as income. Such an approach would result in taxing the whole purchase value, even though the case made by the Assessing Officer is that the assessee obtained the goods from the grey market and used bills from the named parties to account for those purchases. The appropriate consequence in such circumstances is to bring to tax the profit element embedded in the purchases, taking into account the likely saving arising from purchases made outside the regular channel and the tax implications avoided by obtaining accommodation bills. The assessee’s failure to establish the exact source of the goods does not justify ignoring the distinction between the purchase value and the profit element arising from the alleged mode of procurement.

The above approach finds support in the decision of the Hon’ble Bombay High Court in Principal Commissioner of Income Tax v. Mohommad Haji Adam & Co. [2019] 103 taxmann.com 459 (Bombay), arising from Income Tax Appeal No.1004 of 2016, decided on 11 February 2019. The Court held, in the factual setting before it, that where the Department had not disputed the sales and there was no discrepancy between the purchases and the sales, the entire purchase amount could not be added and the addition was to be worked out by bringing the gross profit rate on the disputed purchases in line with that on the other genuine purchases. The Court also distinguished the decision in N.K. Industries on the basis of the facts before it. Similarly, in Principal Commissioner of Income Tax v. Paramshakti Distributors Pvt. Ltd., Income Tax Appeal No.413 of 2017, decided on 15 July 2019, the Hon’ble Bombay High Court upheld the Tribunal’s approach of restricting the addition to the profit embedded in the purchases covered by accommodation bills, rather than disallowing the entire expenditure. In Principal Commissioner of Income Tax v. Pinaki D. Panani, Income Tax Appeal No.1543 of 2017, decided on 8 January 2020, the Hon’ble Bombay High Court also observed that even if purchases are treated as bogus, the entire amount cannot be disallowed where consumption of raw materials and completion of work are not disputed, and that an appropriate percentage of profit may be estimated. The decision in Principal Commissioner of Income Tax v. Rishabhdev Technocable Ltd. [2020] 115 taxmann.com 333 (Bombay), Income Tax Appeal No.1330 of 2017, decided on 10 February 2020, likewise follows the principle that, where the sales are accepted, the entire purchases cannot be disallowed and only the appropriate profit element can be brought to tax. The principle is also consistent with the decisions of the Hon’ble Gujarat High Court in CIT v. Bholanath Poly Fab (P.) Ltd. [2013] 355 ITR 290 (Guj.) and CIT v. Simit P. Sheth [2013] 356 ITR 451 (Guj.).

Having regard to the facts of the present case, including the nature of the assessee’s manufacturing activity, the Assessing Officer’s own finding that the goods were obtained from other sources in the open market, and the failure to establish that the named parties were the actual suppliers, we consider it appropriate to estimate the profit element embedded in the disputed purchases at 12.5% of Rs.16,80,732/-. The addition on this account shall accordingly be restricted to Rs.2,10,091.50/-, rounded off to Rs.2,10,092/-, in place of Rs.16,80,732/- sustained by the first appellate authority. The Assessing Officer shall recompute the total income accordingly and grant consequential relief. The balance of the addition is deleted. This finding is confined to the facts and material of the present case.

In the result, the appeal of the assessee is partly allowed.