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Facts
The revenue challenged the CIT(A)'s order restricting the addition on account of bogus purchases to 12.5%. The Assessing Officer had made additions of 100% based on information from the Maharashtra Sales Tax Department, which identified parties involved in issuing bogus purchase bills. The assessee claimed the purchases were genuine, supported by invoices and banking channels.
Held
The Tribunal held that while the assessee failed to discharge the onus of proving the genuineness of the purchases from the identified parties, the addition should be restricted to the profit element embedded in such purchases, not the entire amount. Following judicial precedents and its own order in a similar case, the Tribunal restricted the addition to 12.5% of the bogus purchases.
Key Issues
Whether the disallowance for bogus purchases should be 100% or limited to the profit element, and whether the CIT(A)'s restriction to 12.5% was justified.
Sections Cited
250, 133(6), 143(3), 147, 133(6)
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Income Tax Appellate Tribunal, “B” BENCH MUMBAI
Before: HON’BLE SHRI SANDEEP GOSAIN & HON’BLE SMT. RENU JAUHRI
Date of Hearing 19.03.2025 Date of Pronouncement 20.05.2025 आदेश / ORDER PER SANDEEP GOSAIN, JM:
The present appeal has been filed by the revenue challenging the impugned order 19.08.2024 passed u/s 250 of the Income Tax Act, 1961 (‘the Act’), by the National Faceless Appeal Centre, Delhi / CIT(A), for the A.Y 2010- 11. 2 Badamidevi Tejraj Mutha, Mumbai
All the grounds raised by the revenue are interrelated and interconnected and relates to challenging the order of Ld. CIT(A) in restricting the addition @ 12.5% on account of bogus purchases by the assessee. Therefore we have decided to take all the grounds together and to adjudicate the same through the present consolidated order.
The Ld. DR appearing on behalf of the revenue / appellant while placing reliance upon the order of AO submitted that Ld. CIT(A) has erred in restricting the additions @ 12.5% as against 100% made on account of bogus purchases from four hawala traders by ignoring the fact that the action of the AO was based on credible information received from Maharashtra Sales Department. It was submitted that parties from whom the assessee has shown to have made purchases are bogus traders who are not doing any business but were involved in providing only accommodation entries. It was further submitted that M/s. Kailash Metals Pvt, M/s. Raj Trading Co., M/s. Bharat Steel Corporation and M/s. Paras Enterprises were involved in providing accommodation entries and the assessee was the beneficiary of the same. The AO in this regard had issued notice u/s 133(6) of the Act to verify the genuineness of the transactions with hawala traders, but notices were returned back and could not be served and in this way the assessee has failed to establish the 3 Badamidevi Tejraj Mutha, Mumbai genuineness of four parties. It was also submitted that assessee has also neither produced any delivery challan, transport bills / invoices nor could produce any details from whom suspicious purchases was claimed to have been made. In this regard Ld. Ld.DR relied upon the decision of Hon’ble Supreme Court in the case of N.K Proteins Ltd., Vs. DCIT, [2016] 292 CTR (Guj) 354.
On the contrary Ld. AR reiterated the same arguments as were raised by him before the Ld. CIT(A) and also relied upon its order, the operative portion of the order of Ld. CIT(A) is reproduced herein below:
7. Ground No. 1 pertains to the addition of Rs. 1,23,39,748/- made by the AO on account of bogus purchases.
7.1 The AO in this case found that the assessee had made purchases from certain parties whose name was appearing in the list of parties investigated by the Maharashtra Sales Tax Department, who issuing bogus purchase bills. The assessee was also found to be one of the beneficiaries of such bogus bills. During the course of the assessment proceedings, the AO made enquiries by issuing notices u/s 133(6) of the Act but in the case of four parties the notices were returned back unserved. The AO, relying on various case laws and facts of the case of the assessee, came to conclusion that the assessee made purchases from the three parties appearing in sales tax hawala list i.e. M/s. Kailash Metal Pvt. Lta amounting to Rs. 84,01,170/- and the purchases made from this party were treated as bogus by the AO. The AO also held that the assessee was unable to prove the genuineness of purchases of Rs. 21,31,759/- from M/s. Raj Trading Co., Rs. 11,55,315/- from M/s. Bharat Steel Corporation and Rs. 6,51,504/- from 4 Badamidevi Tejraj Mutha, Mumbai M/s. Parus Enterprises. The AO made disallowance of the total purchases made from these four parties amounting to Rs. 1,23,39,748/- and added the amount to the total income of the assessee.
7.2 The appellant on the other hand has argued that she had produced before the AO the copies of the invoices, the delivery challans and the payments had been made through banking channels and that the purchases were genuine. According to the appellant, the Hon'ble ITAT in her own case for AY 2009-10 on similar facts of alleged bogus purchases, in order dated 03.07.2017, restricted the disallowance to 12.5% of such bogus purchases. The relevant "13. However, I find that it may not be appropriate in this case to take away the relief that has been granted by the Assessing Officer. Hence, in these circumstances, I find that it is clear that the assessee has made the purchases from grey market give benefit to the assessee in the form of non-payment of taxes and others. Hence, disallowance of 12.5% of the bogus purchases is very reasonable. Hence, I do not find any infirmity of the Ld CIT(A). Accordingly, I uphold the same."
7.3 The settled position of the law is that the onus lies on the appellant to prove the genuineness of the purchase transactions claimed as genuine. However, as seen from the records, this onus has not been discharged. The Courts have time and again held that if the investigation done by the department leads to a doubt in respect of the genuineness of the transactions/purchases, it is incumbent on the assessee to produce the parties along with the necessary documents to establish the genuineness. In the instant case, there is uncontroverted evidence regarding the bogus nature of the purchases from an impeccable source i.e the Maharashtra Sales Tax Department and the evidences include admission from the so-called sellers that they have been issuing bogus bills. The AO has made enquiries by issuing notices u/s 133(6) of the Act but the notices have remained unserved. The assessee has also not been able to produce these parties or 5 Badamidevi Tejraj Mutha, Mumbai even file any confirmations from them. Thus, the genuineness of these purchases could not be proved by the appellant.
7.4 However, in such cases of bogus purchases, the Hon'ble Courts have also held that what can be added is the profit element embedded in such bogus purchases. Reliance is placed in this regard on the decision of Hon'ble Gujarat High Court in the case of CIT vs. Simit P. Sheth reported at 356 ITR 451 wherein the Hon'ble High Court held as under:
"5. We are broadly in agreement with the reasoning adopted by the Commissioner (Appeals) with respect to the nature of disputed purchases of steel. It may be that the three suppliers from whom the assessee claimed to have purchased the steel did not own up to such sales. However, the vital question while considering whether the entire amount of purchases should be added back to the income of the assessee or only the profit element embedded therein was to ascertain whether the purchases themselves were completely bogus and non- existent or that the purchases were actually made but not from the parties from whom it was claimed to have been made and instead may have been purchased from grey market without proper billing or documentation.
6. In the present case, the Commissioner of Income-tax (Appeals) believed that when as a trader in steel the assessee sold certain quantity of steel, he would have purchased the same quantity from some source. When the total sale is accepted by the Assessing Officer, he could not have questioned the very basis of the purchases. In essence, therefore, the Commissioner (Appeals) believed the assessee's theory that the purchases were not bogus but were made from the parties other than those mentioned in the books of account.
That being the position, not the entire purchase price but only the profit element embedded in such purchases can be added to the income of the assessee. So much is clear by the decision of this court. In particular, the court has also taken a similar view in the case of CIT v. Vijay M. Mistry Construction Ltd. [2013] 355 ITR 498(Guj) and in the case of CIT v.
6 Badamidevi Tejraj Mutha, Mumbai Bholanath Poly Fab (P.) Ltd. [2013] 355 ITR 290 (Guj). The view taken by the Tribunal in the case of Vijay Proteins Ltd. v. Asstt. CIT [1996] 58 ITD 428 (Ahd.) came to be approved.
If the entire purchases were wholly bogus and there was a finding of fact on record that no purchases were made at all, counsel for the Revenue would be justified in arguing that the entire amount of such bogus purchases should be added back to the income of the assessee. Such were the facts in the case of Pawanraj B.Bokadia (supra).
9. This being the position, the only question that survives is what should be the fair profit rate out of the bogus purchases which should be added back to the income of the assessee. The Commissioner adopted the ratio of 30per cent of such total sales. The Tribunal, however, scaled down to 12.5 per cent. We may notice that in the immediately preceding year to the assessment year under consideration the assessee had declared the gross profit at 3.56 per cent of the total turnover. If the yardstick of 30 per cent, as adopted by the Commissioner (Appeals), is accepted the gross profit rate will be much higner. In essence, the Tribunal only estimated the possible profit out of purchases made through non-genuine parties. No question of law in such estimation would arise. The estimation of rate of profit return must necessarily vary with the nature of business and 7.5 Therefore, respectfully following the judicial precedents and also the Hon'ble Mumbai ITAT in the assessee's own case, the addition on account of impugned bogus purchases is restricted to the 12.5% of such bogus purchases. This ground of appeal is, therefore, partly allowed.
We have heard the counsels for both the perusal of material placed on record, judgements cited before us and the orders passed by the revenue authorities. From the records, we noticed that as per the facts of the present 7 Badamidevi Tejraj Mutha, Mumbai case, assessee is an individual and engaged in the business of ferrous and nonferrous metals in the name of Proprietorship firm M/s Rajendra Ferromet (P) Ltd, the assessee being a director filed the return of income and had shown to have earned GP of Rs. 66,56,335/- (4.79% of the sales) and the net profit of Rs. 11,37,444/- (0.82%) of sales as against sales of Rs. 13,89,09,167/-.
The Maharashtra Sales Tax Department displaced a been listed of 2000 persons / dealers on its website who are involved in issuing bogus purchase bills, therefore during the assessment proceedings necessary notices u/s 133(6) of the Act were issued to the parties for verification but the same were returned back ‘unserved’. Therefore additions were made by the AO.
7. It is important to mentioned here that during the appellate proceedings remand report was called by Ld. CIT(A) in respect of submissions and documents filed by the assessee. All the documentary evidences related to purchase made from these parties were already provided by the assessee to the AO as all the purchases were supported by respective bills and payments were made through accounts payee cheques.
8 Badamidevi Tejraj Mutha, Mumbai
8. Therefore, after considering the entire factual position Ld. CIT(A) observed that assessee had already discharged her initial onus by submitting all the connected documents called for to prove the genuineness of the purchases including chart of whole year purchase and corresponding sales, party wise and quantity wise.
Even otherwise the Coordinate Bench of ITAT in assessee’s own case for A.Y 2009-10 under the similar facts and circumstances restricted the additions to the tune of 12.5% of the bogus purchases. Therefore after having gone through entire factual and legal position in this case. We also noticed that for the year under consideration the assessment in the case of assessee was reopened and the order of assessment was passed u/s 143(3) r.w.s 147 of the Act on 15.03.2016, wherein also department itself has restricted the additions under the identical circumstances @ 12.5% of the purchases made by the assessee from non genuine / tainted parties to rope in element of diluted income while relying upon the decision of Hon’ble Supreme Court in the case of Smt. P. Sheth [2013] 356 ITR 451.
Now, when once the department itself has restricted the additions @ 12.5% of the bogus purchase while passing the order of assessment for the same year u/s 143(3) r.w.s 9 Badamidevi Tejraj Mutha, Mumbai 147 of the Act therefore department cannot be allowed to approbate and reprobate in the same breath. Apart from the above, the Coordinate Bench of ITAT in assessee’s own case for A.Y 2009-10 in has restricted the disallowance @ 12.5% of such bogus purchases.
Moreover no new evidences or documents have been placed on record by the revenue to controvert or rebut the findings of Ld. CIT(A), therefore we see no reasons to interfere or to deviate from the lawful findings so recorded by the Ld. CIT(A). Hence, the grounds raised by the revenue stands dismissed.
In the result the appeal filed by the revenue is dismissed.