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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
Before: SHRI S. RIFAUR RAHMAN, HONBLE & MS KAVITHA RAJAGOPAL, HONBLEShri Bhupendra Shah
O R D E R PER S. RIFAUR RAHMAN (AM) 1. This appeal is filed by the revenue against order of the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter in short “Ld.CIT(A)”] dated 27.12.2021 for the A.Y.2010-11 in restricting the addition to 9.97% of purchases as against 100% addition made as non-genuine/bogus by the Assessing Officer.
(A.Y. 2010-11) Jain Naresh Nemichand HUF 2. Briefly stated the facts are that, the assessee an HUF engaged in the business of construction of buildings and filed return of income on 27.09.2010 declaring income of ₹.55,00,890/- for the A.Y. 2010-11 and the return was processed u/s. 143(1) of the Act. The case was selected for scrutiny under CASS and notice u/s. 143(2) and 142(1) of Income-tax Act, 1961 (in short “Act”) were issued and served on the assessee. In response AR of the assessee attended and submitted the information as called for.
During the assessment proceedings, Assessing Officer to ascertain the genuineness of purchases made by the assessee and the sundry creditors shown by the assessee, Assessing Officer issued notice u/s.133(6) of the Act to various parties as referred in the Assessment Order and the same were returned unserved by the postal authorities with the remarks “Not Known”, Left, Unclaimed. Accordingly, Assessing Officer asked the assessee to establish the genuineness of the parties and the purchases made from them with adequate supporting evidences and also to produce the parties. In response, Assessee vide letter dated 14.03.2013 furnished ledger copies and purchase bills and submitted that the purchases made are genuine. Assessee further submitted that the (A.Y. 2010-11) Jain Naresh Nemichand HUF payments are made through account payee cheques as such contended that all the purchases are genuine.
Not convinced with the submissions of the assessee the Assessing Officer treated the purchases as non-genuine and he was of the opinion that assessee had obtained only accommodation entries without there being any transportation of materials and the assessee might have made purchases in the gray market. Assessing Officer observed that the notices issued u/s. 133(6) of the Act to the parties are returned unserved with a remark “Not Known” and the assessee has not produced the parties before the Assessing Officer. It is the finding of the Assessing Officer that the assessee failed to produce the parties before the Assessing Officer to prove the claim of the assessee. Therefore, Assessing Officer treated ₹.1,55,08,023/- as non-genuine and added to the income of the assessee. On appeal the Ld.CIT(A) considering the evidences and various submissions of the assessee upheld that there are non-genuine purchases and restricted the disallowance to the extent of 9.97% of the non-genuine purchases.
(A.Y. 2010-11) Jain Naresh Nemichand HUF 5. Ld.DR relied on the order of the Assessing Officer and vehemently supported the findings of the Assessing Officer. Ld. DR prayed that the addition made by the Assessing Officer may be sustained.
Ld. AR of the assessee reiterated the submissions made before the appellate authority and relied on the order of the Ld.CIT(A).
Considered the rival submissions and material placed on record. On a perusal of the order of the Ld.CIT(A), we find that Ld.CIT(A) considered this aspect of the matter elaborately with reference to the submissions of the assessee and the averments in the Assessment Order along with the various judicial pronouncements restricted the disallowance to 9.97% of the non-genuine purchases. While holding so, the Ld.CIT(A) observed as under: - “4.4. In view of the above facts, submissions/details furnished by the appellant and judicial precedents on the issue on hand, it is held that the Assessing Officer was not justified in treating the purchases worth of Rs. 1,55,08,023/- as bogus and further not justified in treating the same as the appellant's income. Since the appellant has accepted the corresponding sales as genuine and profit thereon has been accepted therefore, in view of the facts discussed above as well as judicial pronouncements of the Hon'ble ITAT Mumbai Bench as well as Hon'ble Mumbai High Court and other legal precedents, the addition made by the Assessing Officer amounting to Rs. 1,55,08,023/- cannot be sustained as it is. Therefore, the Assessing Officer's order adding whole purchases is held as unjustifiable.
(A.Y. 2010-11) Jain Naresh Nemichand HUF 4.5. After judicious consideration, the Assessing Officer however, should have disallowed proportionate part of these purchases so as to adequately cover the peak credit appearing in the account of these bogus suppliers. There are number of decisions by the various courts, where 100% to 5% disallowance of bogus purchases, have been upheld. Particularly the decisions of Hon'ble ITAT Ahemdabad Bench in the case of Vijay Protein Ltd. vs. ACIT 58 ITD 428 and N.K. Proteins Ltd. Vs. DCIT (4 SOT 0479 (Ahd) are landmark decision on this issue. However, the percentage of disallowance of bogus purchases, has to be based on the facts of each case, hence the same cannot be generalized in every case. The decisions rendered in the cases of Vijay Protein Ltd. (supra) and N. K. Protein are distinguishable. In the case of Vijay Proteins Ltd., after examining the bank account, it was established that cheques issued to various parties were deposited in one of the account, which were found to be owned by the assessee himself but there are no such circumstances in the present case. Moreover the question whether entire purchases should be disallowed or addition should be restricted to the profits embedded in the sale proceeds was answered by Hon'ble Gujarat High Court in the case of CIT VS. President Industries (258 ITR 654) and Hon'ble Madhya Pradesh High Court in the case of CIT VS. Balchand Ajit Kumar (263 ITR 610). Considering the above decisions, it is clear that only the profits embedded in sale proceeds can be taxed instead of addition on account of entire purchases. In the instant case, it is also not in dispute that the purchase amount had paid to the alleged supplier through account payee cheques. The appellant is not the end user of material so purchased. However, in absence of documentary evidences to support the alleged purchases, there is valid ground to hold that the appellant must have inflated the purchase amount to reduce the taxable profits. In the case of ACIT Vs. Arya Texturisers & Twisters, the Hon'ble Mumbai ITAT vide its order dated 30/12/2005 upheld the application of GP on such hawala purchases. In the cited case, the AO made addition of Rs.2,86,80,336/- U/s. 69 in respect of 13 parties from whom the purchase of grey cloth was made. The assessee claimed that the grey cloth was processed and sold to sister concern. The purchase parties were not traceable, only few parties filed confirmation. However the payments were made by crossed bearer cheques. The ITAT ultimately held that only G.P. addition of 3.2% was to be applied on the sales made against these purchases. In the case of DCIT Vs. Shri Jitendra S. Motani in ITA (A.Y. 2010-11) Jain Naresh Nemichand HUF nos. 3024 to 3028 Bench "J" dated 4-08-2009 (AYS 2000-01 to 2005- 06) and 2007 dated 30-11-2011 Bench "J" (AY 2004-05), the AO made disallowance of entire purchases. Only few parties filed confirmations. The CIT(A) had applied 3% GP to all the purchases. The payments were made by account payee cheques. The Hon'ble Mumbai ITAT held that addition was to be to 3% on tainted purchases only. The Hon'ble Mumbai Tribunal also considered the decision of Hon'ble Delhi High Court in the case of CIT VS. La Medica (250 ITR 575) which was against the assessee but was distinguished by Delhi High Court in the case of CIT Vs. Hilux Automotive (P) Ltd. (23 DTR 385/183 Taxman 260). Reverting back, it is seen that in the present case, what the appellant would have actually earned in hawala transactions would be on account of saving of VAT/other taxes. The appellant has paid VAT @4% on the alleged purchases. In view of these facts, this is not a case where the entire cash has been siphoned off by debiting the bogus purchases. This is a case, where at the most, the purchase amount would have been inflated. As indicated by the surrounding circumstances viz. information received from VAT Department, non-existence of these parties and their failure to respond to notices issued by the Assessing Officer. It is a settled law that Income Tax authorities are entitled to look into the surrounding circumstances to find out the reality of the recitals made in documents. It is the duty of the court to go behind the smoke-screen and discover the true state of affairs. The court is not to be satisfied with the form but with the substance of the transactions. Though the transactions in the present case were through banking channel but these were ultimately settled in cash. Merely because a paper trail had been created, that would not by itself make the transaction genuine. It was held by Honourable Punjab & Haryana High Court in the case of Mittal Belting and Machinery Stores Vs. CIT (253 ITR 341) that if on the examination of the evidence, it is found that there was no genuine transaction between the parties, a pure paper transaction could not have entitled the assessee to claim benefit under the law. Similarly the Hon'ble Mumbai Tribunal held in the case of Balaji Textiles Industries Pvt Ltd Vs. ITO (49 LTD 177) that issue of bills by the alleged supplier was not a conclusive proof. In the light of above discussion, it is concluded that the appellant did not purchase goods from the aforesaid parties. At the same time, he did purchase goods from some other persons (may be agents or persons well known to the appellant). Though the transactions in the present case were (A.Y. 2010-11) Jain Naresh Nemichand HUF through banking channel, but, eventually they would have been settled in cash. However, the AO's action of adding the total purchase value cannot be sustained following various judicial precedents rendered in respect of cases having similar facts and circumstances. Since, the receipt of the material in question is not in doubt but the material has been received from sources best known to the appellant, therefore, proportionate disallowance has to be made in these circumstances in the light of the above decisions. The appellant has already declared GP at the rate of 9.97% on the corresponding sales relating to alleged bogus purchases. Keeping in view of the facts and circumstances of the case and various judicial precedents on the issue involved direct the AO to restrict the disallowance at the rate of 9.97% (G.P.) of the total purchase value of Rs. 1,55,08,023/-. The appellant gets partial relief on this account. The ground nos. 1 & 2 raised by the appellant regarding this issue are partly allowed.”
On a careful perusal of the order of the Ld.CIT(A) and the reasons given therein, we do not find any infirmity in the order passed by the Ld.CIT(A) in restricting the addition/disallowance to the extent of 9.97% of the total purchase value of ₹.1,55,08,023/-. Accordingly, grounds raised by the revenue are dismissed.
In the result, appeal filed by the Revenue is dismissed.
Order pronounced in the open court on 22nd August, 2022.