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Facts
The revenue appealed against the CIT(A)'s order restricting the addition on account of alleged bogus purchases to 12.5% instead of disallowing 100%. The Assessing Officer disallowed 100% of purchases from alleged hawala dealers, stating the assessee failed to produce sufficient evidence.
Held
The Tribunal held that the entire transaction cannot be treated as income, but only the profit element embedded in such transactions. The CIT(A) was reasonable in restricting the disallowance to 12.5% of the purchases.
Key Issues
Whether the CIT(A) was justified in restricting the addition on account of bogus purchases to 12.5% instead of 100%.
Sections Cited
254(1), 133(6), 144
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PER PAWAN SINGH, JUDICIAL MEMBER;
This appeal by revenue is directed against the order of Ld. CIT(A) / NFAC dated 29.08.2024 for assessment year (AY) 2011-12. The revenue has raised following grounds of appeal:
“1. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A)has erred in restricted the addition @ 12.5% of alleged bogus purchases as against the addition made by the Assessing Officer by disallowing the total non- genuine purchases debited by the assessee, ignoring the facts that the assessee failed to produce sufficient documentary evidence before the Assessing Officer to prove the genuineness of the parties and the associated purchase transactions?
2. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was justified in restricting the addition on account of purchases from the bogus parties to 12.5% ignoring the findings of the Hon'ble Gujarat High Court in the case of N.K.Protein Ltd. vs DCIT, against which the SLP was dismissed by Hon'ble Supreme Court (2017) 84 taxmann.com 195, wherein 100% of addition was confirmed by the Court?"
3. The appellant craves leave to add, amend, alter substitute or modify any of the above grounds or add a fresh ground as and when found necessary either before or at the time of hearing.”
Rival submissions of both the parties have been heard and record perused.
The learned Senior Departmental Representative (ld. Sr. DR) for the revenue submits that assessing officer while passing the assessment order made addition on account of disallowance of certain purchases. The assessing officer disallowed 100% of purchases shown from alleged hawala dealers.
The assessee has shown such bogus purchases only to inflate the expenses.
During assessment, the assessing officer gave clear finding about non- existence of dealers, from whom the assessee has shown purchases, thus impugned purchases were not proved. Therefore, the assessing officer was fully justified in making 100% disallowance of purchases from such hawala dealers. The ld. Sr. DR for the revenue submits that sale is not a dispute. The assessee may have purchased such material from Grey Market, source which is not known. The ld. CIT(A) restricted the addition to the extent of 12.5%.
The ld. CIT(A) accepted the explanation of assessee without considering the fact that assessee failed to prove the purchases. The ld Sr DR for the revenue submits that The ld. Sr. DR for the revenue relied on the decision of jurisdiction High Court of Bombay in the case of Pr. CIT Vs Kanak Impex (India) Ltd., Income Tax Appeal No. 791 of 2021.
On the other hand, learned authorised representative (ld. AR) of the assessee supported the order of ld. CIT(A). The ld. AR of the assessee submits that assessee is in manufacturing business and making various types of brushes. All the material purchases by assessee were consumed in the manufacturing activities. Both the parties that is H.R. Corporation and D.R.
Trader, from whom the purchases were made are registered with VAT Department. During assessment, the assessee furnished ledger copy of both the parties and the bank statement. Despite furnishing complete details of the purchases, the assessing officer disallowed 100% of the purchases shown from both the dealers. The assessing officer disallowed the purchases by disregarding the evidences furnished by the assessee. The sale of assessee is not disputed. Manufacturing of such item is not possible in absence of purchases. Before ld. CIT(A), the assessee again filed all such details to substantiate the purchase. On the submission of assessee, remand report was obtained from assessing officer. The ld. CIT(A) on considering the submission of assessee and restricted such disallowance to the extent of 12.5%. The ld. CIT(A) restricted such disallowances by following the decisions of jurisdiction Tribunal. The facts of case in Kanak Impex (supra), relied by ld Sr DR of the revenue is at variance and is not applicable on the facts of this case. To support his contentions, the ld AR of the assessee relied on the decision of Mumbai Tribunal in ITO Vs Khimchand Okchand Bhansali (2025) 174 taxmann.com 148 (Mumbai – Trib.).
I have considered the rival submissions of both the parties and have gone through the orders of lower authorities carefully. I have also deliberated on the case laws relied by both the parties. I find that during assessment, the assessing officer noted that assessee has shown certain purchases from H.R.
Corporation and D.R. Trader. The names of both the dealers were in the list of hawala traders uploaded on by Sales Tax Department, Govt. of Maharashtra, on their website. The assessing officer issued notice under section 133(6) to both the parties for calling certain information. The ld. AO recorded that nobody attended from such hawala dealers nor file any reply.
The assessing officer issued show cause notice to assessee to substantiate the expenditure of such purchases. The assessing officer recorded that no response was received from assessee. The assessing officer on the basis of report of Sales Tax Department and DIT Investigation treated the entire purchases from both the dealers as accommodation entry and disallowed the entire purchases. Before ld. CIT(A), the assessee stated that during assessment, they have furnished ledger copy of bank statement to substantiate the purchases. The purchases were made through account payee cheque. The said details were furnished before assessing officer on 23.01.2014. The assessee also stated that in case of purchases from suspicious dealers reported by Maharashtra VAT Department, Income Tax Officers made addition of certain percentage of purchases. On the submission of assessee, a remand report was obtained from assessing officer.
During the remand proceedings, the assessee again furnished copy of ledger account, bank statement to substantiate the purchases. The assessing officer noted that no PAN was mentioned from ledger furnished by assessee. The ld. CIT(A) on considering the submission of assesse and remand report furnished by assessing officer that on similar cases, the Tribunal held that only profit element embedded in such purchases is to be taxed and not a total purchase. The ld. CIT(A) made an estimation of 12.5% of such purchases of Rs. 23,81,706/- thereby restricted the disallowance to the extent of Rs. 2,97,713/-.
Before me, the ld. Sr. Dr for the revenue failed to bring any adverse fact or law to take a different view. I have independently examined the facts of the case and keeping in view a series of decision of Tribunal and Higher Courts that entire transaction can never by treated income of the assessee rather profit element embedded in such transaction can only be brought to tax. The ratio of decision in Kanak Impex (supra) is not applicable on the facts of the present case. The facts of present case are variance. In the present case, the assessee has furnished sufficient evidence before assessing officer to substantiate purchases. However, in Kanak Impex (supra) assessment was completed under section 144. Moreover, in Kanak Impex (supra), the assessing officer doubted the sources of purchases itself. In the present case, the assessee is a manufacturer and the sale of assessee is not disputed, therefore, in my view, the ld. CIT(A) was reasonable in making disallowance @12.5% of such purchases, hence, the order passed by ld. CIT(A) is upheld with my additional observation. In the result, grounds of appal of revenue is dismissed.
In the result, the appeal of revenue is dismissed.