Loading judgment…
Facts
The assessee, a proprietor of a steel corporation, filed a return of income. Information received by the DGIT (Investigation) suggested the assessee obtained accommodation entries for bogus purchases. The Assessing Officer (AO) identified specific parties and transaction amounts totaling over Rs. 2.81 crore, which were added to the assessee's income.
Held
The Tribunal found that the AO had established that purchases from the listed parties were not genuine. While the assessee provided some documentation, the notices to the parties were returned unserved, and the parties could not be produced for verification. The Tribunal set aside the orders of the lower authorities and restored the matter to the AO for de novo assessment, allowing the assessee another opportunity to produce the concerned parties.
Key Issues
Whether the addition made by the Assessing Officer on account of alleged bogus purchases is justified, and if the assessee has been provided a sufficient opportunity to prove the genuineness of the purchases.
Sections Cited
143(1), 148, 133(6), 271(1)(c), 234A, 234B, 234C, 131, 145
AI-generated summary — verify with the full judgment below
Detected automatically from the text. The count shows how many other judgments on BharatTax rely on the same authority.
Income Tax Appellate Tribunal, MUMBAI BENCH “F” MUMBAI
Before: SHRI OM PRAKASH KANT & SHRI RAHUL CHAUDHARY
This appeal by the assessee is directed against order dated 10/10/2024 passed by the learned Commissioner of Income- tax(Appeals)-51, Mumbai [in short the Ld. CIT(A)] for assessment year 2009-10, raising following grounds:
1. On the facts and in the circumstances of the case and in law, the Learned CIT (A) erred in making addition of Rs. 70,39,378/- (i.e @25% of Rs 2,81,57,511/-) on account of fictitious invoices Vinod Omprakash Kainya 2 booked in the name of bogus parties arbitrarily and added to total Income. 2.. On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in not giving effect of purchase return to the party M/s Shivraj traders amounting to Rs 55,97,436 made in Assessment Year 2010-2011 and arbitrarily added 25% on Gross Purchase made from the party in Asst Year 2009-10 amounting to Rs 82,91,550 without netting off the purchase return.
3. On the facts and in the circumstances of the case and in law, the assessment order has been framed by the Learned A.O. on mere surmise and conjecture and therefore it is prayed that the same be declared void and cancelled 4. On the facts and in the circumstances of the case and in law, the Learned Assessing Officer erred in charging Interest u/s 234A, 234B & 234C arbitrarily 5 On the facts and in the circumstances of the case and in law, the Learned Assessing Officer erred in initiating penalty proceedings u/s 271 (1) (c) of the Income Tax Act, 1961 2. Briefly stated facts of the case are that the assessee is a sole proprietor of “M/s Kainya steel Corporation” and was engaged in the business of trading in iron, steel, ferrous and nonferrous metals. For the year under consideration, the assessee filed return of income on 27/09/2009 declaring total income at ₹13,18,610/-. The return of income filed by the assessee was processed under section 143(1) of the Income-tax Act, 1961 (in short the Act). Subsequently, information was received from the office of the Director General of income tax (DGIT), investigation that the assessee obtained accommodation entries of bogus purchases from following parties:
Vinod Omprakash Kainya 3 S. No. Name of the Hawala TIN Transaction Traders /Bogus amount (in Rs") Biller 1. SHIVRAJ TRADERS 27920665638V 82,91,551/- 2. R K ENTERPRISE 279806671 57V 69,93,8967- 3. MAHAVIR 27560556517V 48,43,815/- ENTERPRISES 4. SHREE GANESH 27470246118V 80,28,249/- STEEL TRADING CO. Total 2,81,57,511/-
In view of the information, the Assessing Officer recorded reasons to believe that income escaped assessment and accordingly issued notice under section 148 of the Act on 23/03/2015. The assessee responded and submitted that original return of income filed on 27/09/2009 might be treated as return of income filed in response to notice under section 148 of the Act. Subsequently statutory notices were issued by the Assessing Officer. The Assessing Officer asked the assessee to justify the genuineness of the purchases from the parties listed in the above table. The learned Assessing Officer also issued notice under section 133(6) of the Act to the parties listed in above table, however the notices sent were returned back un-served. The Assessing Officer sent inspector of his office for verification of the addresses of those parties but those parties were not found at the addresses provided by the assessee. Therefore, the Assessing Officer asked the assessee to produce those parties. The assessee though filed copy of delivery challan and proof of the Vinod Omprakash Kainya 4 payment through banking channel but failed to produce evidence in support of the transport of the goods corresponding to bills raised by the above listed parties. In the circumstances, the Assessing Officer held that assessee might have procured goods from the grey market for supplying to the sales parties, which were not doubted. The learned Assessing Officer accordingly made addition observing as under:
“3.5 The contention of the assessee that the purchase are genuine is not acceptable for the following reasons : I. The production of invoice is of no help to the assessee, since in the activity of accommodation entry; such documents are meticulously maintained both by the entry provider and the entry seeker. II. The contention that the payment was made by account payee cheque is not a full proof method of substantiating assessee’s claim as it was already accepted by person on whom enquiry was done by Sales Tax Department that cash is given back after deduction of commission once the cheque is realized. Further the payment through banking channel does not give certificate to the assessee that the purchases made by him were from genuine and existing parties support is drawn from the decision of the Hon’ble ITAT Jaipur in the case of M/s Kachwala Gems Vs JCIT ( dated 10.12.2003), affirmed by the Hon'ble Supreme Court in the case of M/s Kachwala Gems Vs JCIT (2006) 206 CTR (SC) 585:288 ITR 10(SC), it has been held that even payment by account payee cheque is not sufficient to establish the genuineness of purchases. III. Assessee did not produce the purchase party for verification. The onus to prove the genuineness of existence of the paity lies on the assessee. The assessee railed to discharge this responsibilicy. io serious efforts were made by the assessee to discharge such burden proving the genuiness of transactions with these parties. In this regards reliance is place on decision of Calcutta High Court in the case of CIT vs Korlay Trading Co. Ltd reported in 232 TR 820 where the Hon'ble court has held that the initial burden is on the assessee to prove the aenuineness of purchases.
Vinod Omprakash Kainya 5 3.6 In view of the above facts, it is clear that even if the material in question shown as purchase from the abovementioned parties through fictitious invoice was actually purchased by the assessee, it was purchased from a sourse best known to the assessee, and not frem the above mentioned bogus parties cecause the parties simply do not exist. The receipt of material is not in much doubt because the assessee is a trader and without receiving such material the corresponding sales would not have been possible However, it is amply clear that bill from the said party has been procured for accommodating purchase from the grey market. 3.7 After considering the entire material, i am or the opinion that the assessee did not purchase the goods from the party mentioned in the sale bill. Therefore, purchase rate mentioned in the alleged sales bill cannot be accepted. Any person who purchases goods from the grey market does it for getting some benefit. The rates may be lower in grey marker, or there could be benefit of sales tax. The suppliers or the manufacturers make a substantial, saving in the income tax in respect of income from sale of unaccounted goods produced and sold by them. This may also be one of the factors due to which the seller may be willing to charge lower rates for unaccounted goods as compared to accounted goods, Hence the margins achieved must be higher than those made in the course of normal trading. Therefore, I am inclined to believe that an addition on account of a higher margin would be fair and equitable. 3.8 However, the vial question that arises for consideration here is 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 purchase 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 billing or documentation. As stated above, during the course of assessment proceedings, the assessee has submitted that he sold the goods purchased from the alleged bogus parties to various parties. That being the position, only the profit element/purchase inflation/cost saved on account of sales tax, Excise duty, Central Excise tax (CST) etc. embedded in such purchases can be added to the income of the assessee. All the above taxes put together will easily exceed 20% on average. Further, there will be inflation of purchases also, which must be taken into account. These two items added together will definitely be above 20% of the cost of disputed purchases. Hon’ble ITAT Mumbai in the case of Madhukant B Gandhi v. ITO I dated 23.02.2019 after considering the facts Vinod Omprakash Kainya 6 ITA No. 6429/MUM/2024 and circumstances of the case restricted the addition to a certain percentage of disputed purchases. Further, the Hon’ble Gujarat High Court in the case of CIT v. Bholanath Ply Fab P Ltd. (2013) 355 ITR 390 has confirmed the decision of the ITAT that the addition should be restricted to profit element/benefit accrued to the assessee. The Hon’ble Gujarat High Court in the case of M/s Vijay Protins Ltd. v. CIT (2015) 58 taxmann.com 44 (Gujarat) has held as under: It is a matter of fact that the goods were not received from the parties from whom it is shown to have been purchased but, such material was received from a different source which is exclusively within the knowledge of the assessee and none else. Therefore, it is evident that the assessee had inflated the expenditure in question by showing higher amount of purchase price through the fictitious invoices in the names of bogus suppliers. Thus, the Tribunal was justified in disallowing certain amount of purchase price. 3.9 In the instant case also, the purchase have been made by the assessee not from the parties from whom it is shown to have been purchased but from a different source which the assessee did not prove purchase from the parties it was claimed to have been purchased. Hence, onus was not discharged by the assessee. 3.10 It is evident that the books of accounts maintained by the assessee do not reflect the true and genuine picture of the financial status of the assessee. The books of account of the assessee ds not represent correct or complete financial status of the assessee Therefore, I am not satisfied with the correctness or compfeteness of the books of the accounts of the assesseefirp. Hence-I qr rejecting tht: books of account of the assessee u/s L45 of the I T Act, 1961. After making independent enquiries, findings of SalesTax Department and details submitted by the assessee I have come to conclusion that the assessee's purchases is Questionable and it is to bring down the profitability thereby avoiding the payment of taxes. 3.11 Vide order sheet noting dated 28.10.2015 and show cause letter dated 28.10.2015, the assessee was show caused why 100% of bogus purchases should not be made. In response to the above, the assessee could not furnish a satisfactory reply.
Vinod Omprakash Kainya 7 ITA No. 6429/MUM/2024
In view of the discussion at foregoing paras, it is held that the assessee has inflate the purchases price/cost saved in buying from unaccounted sources to the trune of Rs.70,33,375/- being 35% of non-genuine purchases of 2,81,57,511/- for the year under consideration and the same is accordingly, disallowed and added back to the total income of the assessee. Penalty proceedings u/s 271(1)(c) are separately initiated fro furnishing inaccurate particulars of income and for concealing the income.” 4. On further appeal, the Ld. CIT(A) upheld the finding of the Assessing Officer observing as under:
“ 6.3.1 The matter in the instant appeal pertains to bogus purchase leading to inflation of expenses by the appellant. The AO has marshaled the facts in his assessment order and has clearly established that the purchases made from 4 parties, namely M/s Shivraj Traders, M/s R K Enterprises, M/s Mahavir Enterprises and M/s Shree Ganesh Steel Trading Co were not genuine. In addition to relying on the findings contained in the report of the Investigation Wing, the AO has done independent enquiries of his own. Notices U/s 133(6) were issued to these parties by the AO and as detailed in para 3.1 of his order, the notices returned unserved to him. Requests made to the appellant to produce these parties were also not complied with. The appellant in the statement of facts has argued that the AO has erred in making this addition as all the bills and documents relating to the purchases were submitted with the AO and that these payments were made through account payee cheques. The contention of the appellant is devoid of merit since it is a normal practice in the case of accommodation entries that bills and vouchers and ledger accounts are up to date. The fact that the Sales Tax Department has cancelled their TIN and also it has been brought out in extensive enquiries done by them that the entities in question are not genuine and are only providing accommodation entries. In view of the above and also in view of the detailed findings given by the AO in his assessment order, I hold that there is no infirmity in the action of the AO in treating these purchases as bogus. The AO has further gone ahead and rejected the books of accounts of the appellant and proceeded to estimate the income attributable to these bogue purchases. The AO has relied upon various judicial decision and concluded that since the appellant is a trader, the profit element embedded in such bogus purchases needs to be added to the total income and therefore added back 25% of the purchases as the income component on account of these purchases. The appellant has not made any submission as to why the income estimation of the AO is not correct and needs to be relooked. The GP ratio of the appellant is also not available with me and hence there is no basis or document to reduce the income estimation done by the AO.
Vinod Omprakash Kainya 8 Thus, the addition of Rs.70,39,378/- made by the AO is therefore confirmed. This ground of appeal is dismissed.”
5. Before us the learned counsel for the assessee submitted that ground No. 2 (two) of the appeal was not pressed by the assessee and therefore same is dismissed as infructuous.
6. Regarding Ground No. 1 of the appeal, the learned counsel for the assessee referred to the submissions made before the lower authorities and stated that during the year under consideration, the assessee reported a gross profit of ₹69,35,931 on total sales of ₹15,11,05,803, resulting in a gross profit rate of 4.60%, which is reasonable by industry standards for a trading business. He further pointed out that the assessee declared a net profit of ₹13,88,594, reflecting a net profit rate of 0.92%. It was submitted that the assessee’s books of accounts were duly audited under tax audit provisions, and the Assessing Officer did not raise any objections regarding sales invoices or business expenditures. The counsel explained that notices issued under Section 133(6) of the Act might have been returned undelivered because the respective parties had relocated, and the assessee was unaware of their updated business addresses. The counsel emphasized that during the assessment proceedings, the assessee had submitted copies of the ledger accounts of the concerned parties, along with their purchase invoices, delivery challans, bank statements showing payments made through account payee cheques, and item-wise quantitative details of purchases and sales. However, this material was not duly Vinod Omprakash Kainya 9 considered by the Assessing Officer. According to the learned counsel, the fact that payments were made via cheques itself demonstrated the genuineness and bona fides of the assessee. He argued that the mere fact that some suppliers were later listed as defaulting or "hawala" dealers under the Maharashtra VAT Act cannot, by itself, justify treating the purchases as non-genuine. There was no evidence on record indicating that the assessee received cash back from the suppliers. It was contended that a businessman is primarily concerned with obtaining materials for their operations and cannot be expected to verify the credentials of every individual issuing the invoice or supplying the goods. Since the sales have not been doubted, it logically follows that the purchases were genuine. Therefore, the addition made by the Assessing Officer ought to be deleted.
7. On the other hand, the learned Departmental Representative submitted that the orders of the lower authorities should be upheld, as the assessee failed to produce the parties listed above from whom the purchases were purportedly made, and also failed to furnish their current addresses. In such circumstances, it was not possible for the Assessing Officer to conduct inquiries or issue summons under Section 131 of the Act. Accordingly, the Departmental Representative relied on the findings of the lower authorities.
Vinod Omprakash Kainya 10 ITA No. 6429/MUM/2024
We have heard the rival submissions advanced by the learned representatives of both parties and have carefully perused the material available on record, including the judicial precedents relied upon. The assessee submitted copies of the ledger accounts of the concerned parties, along with their purchase invoices, delivery challans, bank statements showing payments made through account payee cheques, and item-wise quantitative details of purchases and sales, but, the Assessing Officer disallowed the purchases in question primarily on the ground that the notice issued u/s 133(6) of the Act issued by post for verification returned unserved and the assessee failed to either furnish the current addresses of the concerned parties or produce them for verification. The assessee also did not produce evidence in support of transport of material. Having regard to the totality of the facts and circumstances of the case, and in the interest of substantial justice, we are of the considered view that the assessee must be provided one more opportunity to produce those parties for verification particularly looking the claim of the assessee that those parties are genuine and thus the matter warrants a fresh examination. Accordingly, the order passed by the learned Commissioner of Income Tax (Appeals) and the AO on the issue under dispute are set aside, and the matter is restored to the file of the Assessing Officer for de novo assessment. The Assessing Officer shall afford a reasonable opportunity of being heard to the assessee and permit the assessee to produce the concerned parties referred to above.
Vinod Omprakash Kainya 11 Thereafter, the Assessing Officer shall pass a reasoned order in accordance with law, interalia, the recent judgment of the Hon’ble Bombay High Court in Kanak Impex (India) Ltd. reported in (2025) 172 taxmann.com 283 (Bom). The ground Nos. 1 and 3 of the appeal of the assessee are accordingly allowed for statistical purposes.
In the result, the appeal of the assessee is allowed for statistical purposes.
Order is deemed to be pronounced under Rule 34(4) of ITAT Rules, 1963 by way of display on notice board, in the open Court on 20/05/2025.