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Facts
The assessee company, engaged in land development and construction, filed its return for AY 2009-10. A search action led to a notice u/s 153A. Despite extensions, the assessee failed to file the return, which was eventually filed late. During assessment, it was found that purchases from Shravan Impex Pvt. Ltd. were alleged to be from a hawala entry provider, with statements from directors confirming the transactions as not genuine.
Held
The Tribunal found that the lower authorities (AO and CIT(A)) had not disputed the sales corresponding to the alleged bogus purchases and that payments were made through banking channels. However, disallowances were made based on directors' statements and the non-traceability of the seller. The Tribunal noted that the AO's inquiry was not proper and that the appellate authorities had not conducted a thorough investigation either.
Key Issues
Whether purchases made from an alleged hawala entry provider, confirmed as fictitious by directors, can be disallowed when sales are not disputed and payments were through banking channels, especially when proper inquiry was lacking at all levels.
Sections Cited
132, 153A, 250, 276CC, 143(2), 142(1), 115JB, 40A(3), 69C, 131, 148, 68
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Income Tax Appellate Tribunal, MUMBAI BENCH “B”, MUMBAI
Before: SHRI OM PRAKASH KANT & SHRI RAJ KUMAR CHAUHAN
O R D E R PER RAJ KUMAR CHAUHAN (J.M.): 1. This appeal is filed by the appellant/assessee against the order of Learned Commissioner of Income Tax (Appeals) – 52, Mumbai [hereinafter referred to as the “CIT(A)”], passed under section 250 of the
The brief facts as culled out from the orders of lower authorities are that the assessee company is stated to be in business of land developers, builders and contractors and borrowing and lending money, etc. The return of income for AY 2009-10 was filed on 29.09.2011. A search action u/s 132 of the Act was initiated against the Yashovardhan Birla Group on 7.01.2014 including the assessee‟s premises. A notice u/s 153A was issued to the assessee on 21.03.2014. In response, the AR of the assessee vide letter dated 15.04.2014 sought time to file the return. In compliance to the notice u/s 153A of the Act, despite taking more time, the assessee failed to file the return. Hence a show cause notice was issued dated 09.01.15 asking the assessee as to why the provision of section 276CC of the Act should not be invoked. Ultimately on 23.11.15, the assessee filed return alongwith audit report, balance sheet, etc. In the return, the assessee declared the total return of Rs. (-) 11,73,231/- under normal provisions and Rs. (-) 14,26,107/- u/s 115JB of the Act. Statutory notice u/s 143(2) of the Act was issued on 30.09.2015 and further notice u/s 142(1) of the Act alongwith detailed questionnaire Birla Infrastructure Limited dated 16.11.15 was issued to the assessee and in response, the assessee made part compliance by filing copy of return, letter of authority, computation of total income and audited accounts. Further, the details were submitted by the assessee vide letter dated 20.01.2016 in compliance to the questionnaire issued on 16.11.2015.
During the course of assessment proceedings, it was noticed that the seized document shows that during the course of search action statement of Shri. B. L. Varma was recorded on 07.01.2014 u/s. 132(4) of the Act wherein he has informed that three purchase transactions were done by the assessee from Shravan Impex Pvt. Ltd, a Hawala entry provider concern as declared by Sales Tax Department, Maharashtra. Mr. B. L. Verma further provided the ledger copy of Shravan Impex Private Limited as Annexure-D wherein it was stated that the purchase transactions were reflected for a total value of Rs. 3,11,67,942/- for FY 2008-09 (AY 2009-10). Further, in the statement of Shri. P. V. R. Murthy on 09.01.2014, he has confirmed that both the transactions of purchase as well as sale as recorded in the books of assessee and referred to in the statement of Shri B L Varma were not genuine transaction. After the statutory notice issued u/s 142(1) of the Act on 16.11.2015, a Birla Infrastructure Limited show cause notice was issued and no reply was furnished by the assessee, however on 2701.2016, the assessee furnished certain details in response to the questionnaire dated 16.11.2015. Another show cause notice was issued on 29.01.2016 to explain firstly why the purchases made from Shravan Impex Pvt. Ltd., an entry provider, who issued bills without delivery of material, totaling to Rs. 3,11,67,942 during the FY 2008-09 relevant to the AY 2009-10, should not be treated as unexplained expenditure. Secondly, why the corresponding sale to Zenith Birla India Ltd. of Rs. 3,28,08,360/-, should not be treated as unexplained cash credit and Thirdly, why the purchase of gift worth Rs. 5.05 lakhs, should not be treated as unexplained expenditure.
4. It is alleged that the assessee did not respond to the above show cause notice issued and one final opportunity was given by issuing notice on 01.03.2016 for final compliance on or before 07.03.2016. However, no reply furnished by the assessee. The revenue authority calculated that the purchases shown to have been made from Shravan Impex Pvt. Ltd., Including VAT at 4% totaling to Rs. 3,11,67,942/- (Rs.3 crore + Rs. 11,67,942) was bogus and without delivery of goods. The said amount was treated as 'unexplained expenditure' because of statement of directors of assessee company and other group companies; Non- Page | 4 Birla Infrastructure Limited compliance to the query raised through various notices by the Department and no evidence was produced; Non-traceable of the entry provider i.e Shravan Impex P. Ltd. and non-production of the said entry provider by the assessee. It was further calculated that the alleged purchases were not genuine as assessee has failed to prove by any supporting documents; therefore the entire purchase is treated as bogus and amount of Rs. 3,11,67,942 was treated as unexplained expenditure and added to the total income of the assessee.
Further a sum of Rs. 11,67,942/- was treated as unexplained expenditure and added to the total income of the assessee which was claimed by the assessee as sales tax and no details were provided by the assessee as to how the assessee had discharged the liability on behalf of the M/s Shravan Impex, alleged seller who has been declared as bogus biller by the Sales Tax Department. The total income of the assessee was assessed as under:- Total loss as per return of income Rs. 11,73,231/- Add: Unexplained expenditure – 3,11,67,942 Unexplained expenditure – 11,67,942 Rs. 3,23,35,884/- Total income …. Rs. 3,11,62,653/- Rounded off to …. Rs. 3,11,62,650/- Income u/s 115JB of the Act: As per return dated 29.09.2010 ….. (-) Rs. 14,26,107/- Birla Infrastructure Limited 6. Aggrieved by the assessment order, the assessee filed the appeal before the Ld. CIT(A) and Ld. CIT(A) while confirming the addition of Rs 3,11,67,942/- on account of bogus purchase has observed that Mr. B. L. Verma who was the director of assessee company has informed in his statement that the purchases made from M/s Shravan Impex Pvt. Ltd. were not genuine purchase and similarly sales to M/s Zenith Birla (India) Ltd for the corresponding purchases were also not genuine sale because these were just accommodation entries. Similarly, it was noticed that Shri PVR Murthy, another director of the assessee company, stated in his statement dated 09.01.2014 that both the transactions of purchases and sales recorded in the books of the assessee were not genuine. He further stated that the amount so involved have been capitalized in the books of M/s Zenith Birla (India) Ltd. under the head „buildings‟. With regard to the contentions of the assessee before the Ld. CIT(A) that the Ld. AO has made addition merely on the basis of statement on oath of the ex-employees and without any evidence in that regard and the payment were made through account payee cheque /RTGS only and VAT was also paid on the goods purchased and that the assessee has discharged the primary burden of proof and even the goods were sold and income was offered to tax, thus once the sales were Page | 6 Birla Infrastructure Limited accepted, the purchase cannot be doubted, Ld. CIT(A) was of the view that the statement of Mr. B. L. Verma and Shri PVR Murthy has to be believed as they were the director of the assessee and were privy to all the alleged transactions and further no contrary evidence has been produced by the assessee. Regarding the payments made through banking channel, it was observed by Ld. CIT(A) that assessee cannot be given benefit on that account in view of the other material on record, therefore it was concluded by Ld. CIT(A) that there was no conclusive evidence to demonstrate that such items have actually been delivered or used, accordingly he did not agree with the assessee to restrict the addition @ 1% of the purchases.
Aggrieved by the impugned order, the assessee is in appeal before us raising the following grounds of appeal:-
The Ld. CIT(A) has erred in treating the alleged purchases of INR 3,11,67,942/- from Shravan Impex Pvt Ltd without considering facts and circumstances of the case.
2. The Ld. CIT(A) has erred in stating that" there is no quality or size description of any item in any of the invoices, which is very strange considering that no order can be placed without such quality or dimensions description" as one of the grounds to treat the alleged purchases as bogus.
3. The Ld. CIT(A) has erred in accepting the income offered to tax by sale of alleged purchases. Reliance is placed on various judicial pronouncements which conclude that once the sales are accepted, the purchases cannot be doubted. The same be considered and addition be deleted.
Without prejudice to the above, should your honour consider the above purchases as non-genuine purchases, your honour is requested to restrict the addition to 1% of the purchase amount as commission which is generally the prevalent rate of Commission in hawala transactions as the assessee has already paid VAT on the above purchases as evident from the purchase invoices. The same be considered and addition be restricted.
The assessee craves leave add, alter or delete to the grounds of appeal at the time of or before hearing..
We have heard the Ld. Counsel for the parties, considered their submissions and examined the record. The learned counsel for the assessee has contended that the purchases in question are genuine. In support of this assertion, it has been submitted: firstly, that the sales corresponding to the alleged bogus purchases have not been disputed by the Revenue; secondly, that the purchase invoices issued by the said parties, as well as the ledger accounts reflecting transactions with those parties, were duly maintained in the books of accounts and were placed
In support of his arguments, Ld. AR relied various judgments of the Jurisdictional Coordinate Benches of ITAT and also of the Hon‟ble Jurisdictional High Court which we proceed to discuss as under:- i) Shri Ganpatraj A Sanghavi vs. ACIT (ITA No. 2826/Mum/2013) dated 05.11.2014 wherein it was held as under:-
7. A perusal of the orders passed by the tax authorities would show that they have suspected the genuineness of the purchases only for the reason that the above said five parties were not available in the given addresses. It is pertinent to note that the AO himself, during the course of remand proceedings, have obtained the bank statements of the above said five parties. It is in the common knowledge of everybody that the bank account, now a days, could be opened only on submission of proper documents. Further the assessee has furnished the Sales tax documents of the above said five parties and also their income tax details to prove their existence. Thus, it is seen that the assessee has furnished many documents to prove the existence of the parties and they have not been controverted by the assessing officer.
8. Be that as it may, another important factor the bank account copies collected by the assessing officer shows that the assessee had made the payments to the above said parties by way of account payee cheques. Thus, it is seen that the transactions have been routed through the bank accounts. Further, it is not the case of the assessing Page | 9 Birla Infrastructure Limited officer that the assessee has indulged in accounting of bogus purchases. When the assessee submitted that he could not have effected the sales without making corresponding purchases, the AO has taken the view that the assessee could have effected purchases in the grey market, which conclusion is, in fact, not supported by any material. Under this impression only, the AO has further expressed the view that the assessee would have purchased the materials by paying cash thus violating the provisions of sec. 40A(3) of the Act, which is again based on only surmises. In the absence of any material to support the said view, we are unable to agree with the view taken by the tax authorities that the purchases amount is liable to be disallowed u/s 40A(3) of the Act. On the same impression only, the AO has expressed the view in the remand report that the purchases amount is also liable to assessed u/s 69C of the Act as the source of purchases were not proved. Again the said conclusion is based upon only surmises, which could not be sustained. Thus, it is seen that the assessing officer has accepted the fact that the quantity details of purchases and sales have been reconciled by the assessee. Further, various case law relied upon by the assessee also supports his case. Under these set of facts, we are of the view that the Ld CIT(A) was not justified in confirming the disallowance of purchases. Accordingly, we set aside the order of Ld CIT(A) on this issue and direct the AO to delete the disallowance of purchases.” ii) Capacite Infra Projects Ld. Vs. DCIT (ITA No. 3495/Mum/2023 dated 26.02.2024) wherein the Coordinate Bench of ITAT held as under:-
Birla Infrastructure Limited “If the payments have been made though cheques and there is corresponding sales affected on the contract work carried out and TDS has been deducted, it cannot be said that the entire payment is to be disallowed. At the most, there could be the case of profit if it is believed that assessee has taken some accommodation bills from the said party. In such case as held by the Hon’ble Bombay High Court in various cases that only GP rate should be applied.” iii) PCIT vs. Hitesh Mody (HUF) [2024] 160 taxmann.com 1110 (Bombay) wherein the Hon‟ble High Court has held as under:-
……when the A.O. himself has not doubted the quantity of purchases which has been entered in the books of accounts of appellant but only proceeds based on the information received from Sales Tax authorities that the purchases were made through bogus parties. The CIT(A) relying on Simit P. Sheth (supra) came to a conclusion that when the total sale is accepted by the A.O., then the entire purchases cannot be added to the income of assessee and what should be added is only what can be termed a fair profit margin………… It was further held that “when the sales had admittedly been recorded in the regular books during Financial Year 1997-98 is concerned, we are of the view that the assessee cannot be punished since sale price is accepted by the revenue. iv) PCIT vs. Vaman International Pvt. Ltd. (IT Appeal No. 1940 of 2017) dated 29.01.2020 (Bombay) wherein the Hon‟ble High Court has held as under:-
Birla Infrastructure Limited “Moreover, as correctly observed by the learned CIT(A), when the payment for the said purchases to the concerned two parties is through proper banking channels and there is no evidence brought on record by the AO to establish that the said payments were routed back to the assessee, the addition made by the AO under section 69C of the Act is unsustainable……… It was held that merely because the suppliers had not appeared before the Assessing Officer, no conclusion could be arrived at that the purchases were not made by the assessee.” v) Hemant M Mehta HUF vs. ACIT (ITA No. 6483/Mum/2018 dated 06.12.2018) wherein the Coordinate Bench of ITAT held as under:-
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. vi) ITO vs. Karsan Nandu (ITA No. 2651/Mum/2016 dated 30.11.2016) wherein the Coordinate Bench of ITAT held as under:-
In fact, non-service of notices issued u/s 133(6) of the Act by itself cannot be a conclusive proof that transactions with the parties are bogus because there was enough material before the Assessing Officer to show that payments have been made to the said parties through banking channels. It required further collection of evidence by the Assessing Officer to prove the bogus nature of such transactions. In fact, the Hon'ble Bombay High Court in the case of Nikunj Exim Birla Infrastructure Limited Enterprises (P.) Ltd., 372 ITR 619 (Bom) has observed that merely because suppliers did not appear before the Assessing Officer, it could not be concluded that the purchases were non-genuine when assessee had discharged his onus by showing copies of bank statement evidencing payments through account payee cheques to suppliers, stock reconciliation statement, etc.
Ld. DR on the other hand placed reliance on the orders of lower authorities and has argued that the purchases are not genuine. In support of this contention, it has been submitted: firstly, that the then directors of the assessee company, namely Shri B.L. Verma and Shri P.V.R. Murthy, have, on oath, admitted that the purchases in question were fictitious; secondly, that the parties from whom the assessee claims to have made the purchases were found to be non-existent and untraceable, as per reports of both the postal and income tax authorities; and even thirdly, that no material evidence has been furnished to establish the transportation of goods from the premises of the alleged sellers to the premises of the assessee.
We have considered the rival submissions and carefully examined the orders of Ld. AO as well as Ld. CIT(A). From the perusal of orders passed by lower authorities, we notice that Ld. AO as well as Ld. CIT(A) has not disputed the sale of the alleged purchases and also that Birla Infrastructure Limited the whole payment transaction for the purchases and sales have been routed through banking channel which has also not been disputed. The disallowances are made on the ground that the erstwhile directors Shri B. L. Verma and Shri PVR Murthy had made statement on oath before the AO that all these entries were fictitious and not genuine with respect to sale and purchase allegedly made by the assessee. The lower authorities were further swayed for making disallowances on the ground that the seller of the goods was not traceable and further the assessee has failed to produce the seller of goods before the AO when he was asked to do so. The routing of payment through the banking channel has been rejected on the ground that the same would not make the non-genuine and bogus purchases on the basis of fictitious and bogus entries as genuine purchases especially when the purchases of the goods and existence of the seller of the goods has not been established by the assessee.
We find that the Hon'ble Bombay High Court, in its recent pronouncement in the case of PCIT vs. Kanak Impex (India) Ltd. (2025) 172 taxmann.com 283 (Bom) has held that where sales corresponding to alleged bogus purchases are not in dispute, there Birla Infrastructure Limited arises a presumption that the purchases are made from someone else or the assessee has purchased goods from the grey market to effectuate such sales. In such a scenario, the Assessing Officer is duty-bound to investigate the actual source of the purchases from the grey market. The observation in that regard contained in para no. 15 of this judgment of Hon‟ble Jurisdictional High Court are extracted as under:-
The source of such unaccounted cash, which was utilised by Mr. A to buy goods originally, must be examined. Mr. B is only a paper entry provider. Therefore, the purchases are made from someone else, but through Mr. B they get formalised in the books of account so that sales can be made and recorded in the books of account. However, what needs to be examined is how he financed the original purchases. If such financing is out of unaccounted income, then the same has to be brought to tax, and if it is out of accounted income, it cannot be brought to tax. The onus is on Mr A to show the source of financing for the original purchase and to give the correct details from whom he has purchased the goods originally. This is the simplest model of accommodation entry. However, various complex models are adopted to avoid tracing the flow of money. This menace is harmful to the country's economy, and it amounts to routing unaccounted cash into the formal economy without the original unaccounted income being taxed.
In the present case, however, the Assessing Officer has not examined the issue from this perspective. Moreover, the Hon'ble Delhi High Court, in its judgment dated 11th March 2015 in the case of Jansampark Advertising and Marketing (P) Ltd., of 2014, Birla Infrastructure Limited has categorically held that where the Assessing Officer fails to undertake an inquiry on a material aspect, it becomes incumbent upon the first or second appellate authority to conduct the necessary inquiry so as to reach a just and proper conclusion in the matter. The relevant finding of the Hon'ble High Court is reproduced as under:
38. The provision of appeal, before the CIT (Appeals) and then before the ITAT, is made more as a check on the abuse of power and authority by the AO. Whilst it is true that it is the obligation of the AO to conduct proper scrutiny of the material, given the fact that the two appellate authorities above are also forums for fact-finding, in the event of AO failing to discharge his functions properly, the obligation to conduct proper inquiry on facts would naturally shift to the door of the said appellate authority. For such purposes, we only need to point out one step in the procedure in appeal as prescribed in Section 250 of the Income Tax Act wherein, besides it being obligatory for the right of hearing to be afforded not only to the assessee but also the AO, the first appellate authority is given the liberty to make, or cause to be made, further inquiry", in terms of sub-section (4) which reads as under:-
The Commissioner (Appeals) may, before disposing of any appeal, make such further inquiry as he thinks fit, or may direct the Assessing Officer to make further inquiry and report the result of the same to the Commissioner (Appeals).1
The further inquiry envisaged under Section 250(4) quoted above is generally by calling what is known as "remand report". The purpose of this enabling clause is essentially to ensure that the matter of assessment reaches finality with all the requisite facts found. The assessment Page | 16 Birla Infrastructure Limited proceedings re- opened on the basis of preliminary satisfaction that some part of the income has escaped assessment, particularly when some unexplained credit entries have come to the notice (as in Section 68), cannot conclude, save and except by reaching satisfaction on the touchstone of the three tests mentioned earlier; viz. the identity of the third party making the payment, its creditworthiness and genuineness of the transaction. Whilst it is true that the assessee cannot be called upon to adduce conclusive proof on all these three questions, it is nonetheless legitimate expectation of the process that he would bring in some proof so as to discharge the initial burden placed on him. Since Section 68 itself declares that the credited sum would have to be included in the income of the assessee in the absence of explanation, or in the event of explanation being not satisfactory, it naturally follows that the material submitted by the assessee with his explanation must itself be wholesome or not untrue. It is only when the explanation and the material offered by the assessee at this stage passes this muster that the initial onus placed on him would shift leaving it to the AO to start inquiring into the affairs of the third party.
The CIT (Appeals), as also the ITAT, in the case at hand, in our view, unjustifiably criticized the AO for not having confronted the assessee with the facts regarding return of some of the summons under Section 131 or not having given opportunity for the identity of all the share applicants to be properly established. The order sheet entries taken note of in the order of CIT (Appeals) seem to indicate otherwise. The order of CIT (Appeals), which was confirmed by ITAT in the second appeal, does not demonstrate as to on the basis of which material it had been concluded that the genuineness of the transactions had been duly established. There is virtually no discussion in the said orders on such score, except for vague description of the material submitted by the assessee at the appellate stage. Whilst it does appear that the time given to the assessee for proving the identity of the third party was too short, and further that it is probably not always possible for the assessee Page | 17 Birla Infrastructure Limited placed in such situation to be able to enforce the physical attendance of such third party (who, in the case of share applicants vis-à-vis a company, would be individuals at large and may not be even in direct or personal contact), the curtains on such exercise at verification may not be drawn and adverse inferences reached only on the basis of returning undelivered of the summonses under Section 131. Conversely, with doubts as to the genuineness of some of the parties persisting on account of non- delivery of the processes, the initial burden on the assessee to adduce proof of identity cannot be treated as discharged.
We are inclined to agree with the CIT (Appeals), and consequently with ITAT, to the extent of their conclusion that the assessee herein had come up with some proof of identity of some of the entries in question. But, from this inference, or from the fact that the transactions were through banking channels, it does not necessarily follow that satisfaction as to the creditworthiness of the parties or the genuineness of the transactions in question would also have been established.
The AO here may have failed to discharge his obligation to conduct a proper inquiry to take the matter to logical conclusion. But CIT (Appeals), having noticed want of proper inquiry, could not have closed the chapter simply by allowing the appeal and deleting the additions made. It was also the obligation of the first appellate authority, as indeed of ITAT, to have ensured that effective inquiry was carried out, particularly in the face of the allegations of the Revenue that the account statements reveal a uniform pattern of cash deposits of equal amounts in the respective accounts preceding the transactions in question. This necessitated a detailed scrutiny of the material submitted by the assessee in response to the notice under Section 148 issued by the AO, as also the material submitted at the stage of appeals, if deemed proper by way of making or causing to be made a "further inquiry" in exercise of the power under Section 250(4). This
Respectfully following the decision of the Hon'ble Delhi High Court referred to hereinabove, we consider it appropriate to restore the issue in dispute to the file of the Assessing Officer for conducting a proper inquiry, as may be deemed fit, and for adjudicating the matter afresh in light of the judgment of the Hon'ble jurisdictional High Court in the case of Kanak Impex (India) Ltd. (supra) and in accordance with law and also considering the judgments referred and relied on behalf of the assessee before us.
15. For the above reasons, the impugned order is accordingly set aside and matter is restored to the file of AO for deciding afresh as directed above.
In the result, appeal filed by the assessee is allowed for statistical purposes.
Order pronounced in the open court on 03.06.2025.