DCIT 9(2)(1), MUMBAI vs. M/S B. CHOPDA CONSTRUCTION P. LTD. , MUMBAI

PER AMARJIT SINGH, JM: The revenue has filed the present appeal against the order dated 27.12.2019 passed by the Commissioner of Income Tax (Appeals) -16, Mumbai [hereinafter referred to as the “CIT(A)”] relevant to the A.Y.2011-

Sr. No. Name of hawala party Amount (Rs.)

1 Deep Enterprises 292229

2 A.Y.2012-13 2 Real Traders 972694

3 Om Traders 369221

4 Mana Traders 3048405

Total 4682549

Thereafter, the case of the assessee was reopened u/s 147/148 of the Act. Necessary notices u/s 143(2) & 142(1) of the Act were issued and served upon the assessee. Thereafter, the notice u/s 133(6) of the Act was issued to the concerned parties which was received back unserved. Thereafter, the AO raised the addition of bogus purchase to the tune of Rs.46,82,549/-. Feeling aggrieved, the assessee filed an appeal before the CIT(A) who restricted the addition to the extent of 12.5% but the revenue was not satisfied, therefore, the revenue has filed the present appeal before us.

ISSUE NO.1

“6.2.1 I have carefully gone through the assessment order, submission of the AR of the appellant and the facts of the case. The Ld. AO made the addition on the basis of information received from the Sales Tax Authorities. The Sales Tax (VAT) department, State of Maharashtra had recorded the statements of certain hawala dealers who have confirmed to have given bogus bills to certain assessees including the appellant company. The appellant company was asked

3 A.Y.2012-13 to submit the details of purported purchases made from these parties and a show cause was issued asking the appellant why the same should not be disallowed as bogus purchases. The appellant had filed their reply stating that purchases were made from regular parties supported by proper bills and the accounting entries. The payments were made by account payee cheques. The Ld. AO was not in agreement with the submissions of the appellant and observed that the appellant failed to furnish the supporting documentary evidence to support that the purchases were actually made by them. The Investigation Wing of Mumbai had provided a list of hawala bill racketeers who were involved in issuing bills and also the list of beneficiaries. The Sales Tax Department of Mumbai had investigated all these cases thoroughly and prepared a list of such hawala operators and their beneficiaries which had been uploaded in their website. The Ld. AO observed the purchases amounting to Rs. 46,82,549/- to be non-genuine and treated the same as bogus purchases " and added back to the total income of the appellant.

4 A.Y.2012-13 to force its attendance. It was for the appellant to produce it as per Civil Procedure Code which applies to the income-tax proceedings also. It is trite that once a transaction is shown to be of the nature of income, the onus shifts to the assessee to show that the same was not taxable. It can thus be safely assumed that the appellant has grossly failed in its duty to mitigate the burden cast upon it in so far as proving the genuineness of the transaction from the said parties is concerned.

5 A.Y.2012-13 by a part who relied on those recitals, if all that an assessee who wants to evade tax has to have some recitals made in a document either executed by him or executed in his favour the, the door will be left wide open to evade tax. The Hon’ble Court further held that the Taxing Authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look in to the surrounding circumstances to find out the reality of the recitals made in those documents.

7 A.Y.2012-13 against him. Therefore, onus.is always on a person who asserts a proposition or fact, which is not self-evident. The onus, as a determining factor of the whole case can only arise if the Tribunal, which is vested with the authority to determine, finally all questions of fact, finds the evidence pro & con, so evenly balanced that it can come to no conclusion, then, the onus will determine the matter. Needless to say that the onus is heavy or light, depending on the facts and circumstances of each case. There cannot be any doubt that onus as a determining factor comes into play where, either there is no evidence on either side, or where it is equally worthless or where it is equally balanced. It is imperative to mention here that where such is not the case and all available evidence is considered, without reference to the onus and without relying on the circumstances that onus lies on a particular party, the issue is determined on facts and the onus cannot be said to have influenced the decisions. However, in the instant case, the appellant has miserably failed to lead evidence and hence, onus is a determining factor.

8 A.Y.2012-13 authorities were desirous of invoking the principles of Evidence Act, in proceedings before them, they were prevented from doing so. It was further held by the Hon ble Apex Court that all that Section 110 of the Evidence Act, 1872 did, was to embody a salutary principle of common law jurisprudence viz, where a person was found in possession of anything, the onus of proving that he was not its owner, was on that person. Thus, this principle could be attracted to a set of circumstances that satisfies its conditions and was applicable to taxing proceedings.

9 A.Y.2012-13 the alleged suppliers have been found to be non-existent. This is not merely a case where the supplier has failed to appear before the Assessing Officer. Hence, the judgment of the Hon'ble Bombay High Court would also be of no help to it.

10 A.Y.2012-13 "Section 254 of the Income-tax Act, 1961, read with rule 11 of the Income-tax ( Appellate Tribunal) Rules, 1963 - Appellate Tribunal - Orders of – Assessment year 2001-02 - Assessee transferred certain land to bank - Assessee claimed to have incurred long-term and short- term capital losses on share trading transactions - Accordingly, it set off said losses against capital gain earned on sale of land - Assessing Officer found that assessee entered into sham and bogus share trading transactions resulting in capital loss with purpose to reduce tax liability arose on capital gain - Assessing Officer, therefore, discarded capital losses - Commissioner (Appeals) confirmed order of Assessing Officer – Tribunal also confirmed order of Assessing Officer, and while doing so, referred to a Supreme Court in case of Sumati Dayal v. CIT (1995) 214 ITR 801 /80 Taxman 89 to held that evidence produced must be analyzed by applying theory of surrounding circumstances and human probabilities Assesse alleged that without bringing said case to notice of parties, revenue had caused prejudice to its case; all in violation of principles of natural justice and of rule 11 - Whether since decision of Supreme Court in Sumati Dayal case (supra) was cited by Tribunal only for purpose of reiterating well settled and established position of law, it could not be said to have caused prejudice to assessee - Held, yes - Whether when a transaction is sham and not genuine as in instant case, then it could not be considered to be a part of tax planning or legitimate avoidance of tax liability - Held, yes - Whether further since issues in instant case were purely questions of facts on which there were concurrent findings of authorities below, it was to be held that there was no question of law to be considered - Held, yes (In favour of revenue).

11 A.Y.2012-13

"The majority judgment in McDowell held that "tax planning may be legitimate provided it is within the framework of law" ( para-45). In the latter part of para 45, held-that colourable device cannot be a part of tax planning and it is wrong to encourage the belief that it is honourable to avoid payment of tax by resorting to dubious methods". It is the obligation of every citizen to pay the taxes without resorting to subterfuges. The above observations should be read with para 46 where the majority holds "on this aspect one of us, Chinappa Reddy, I. has proposed a separate opinion with which we agree". The words "this aspect" express the majority's agreement with the judgment of 12 A.Y.2012-13 Reddy, I. only in relation to tax evasion through the use of colourable devices and by resorting to dubious methods and subterfuges. Thus, cannot be said that all tax planning illegal/illegitimate/impermissible. Moreover, Reddy, I. himself says that he agrees with the majority. In the judgment of Reddy, I. there are repeated references to schemes and devices in contradistinction to "legitimate avoidance of tax liability (Paras 7-10, 17 and 18). In our view, although Chinnappa Reddy, J. makes a number of observations regarding the need to depart from the "Westminster" and tax avoidance- these are clearly only in the context of artificial and colourable devices. Reading McDowell, in the manner indicated hereinabove, in cases of treaty shopping and/or tax avoidance, there is no conflict between McDowell and Azadi Bachao or between Mcdowell and Mathuram Agarwal."

Therefore where a transaction is sham and not genuine as in the present case then it cannot be considered to be a part of tax planning or legitimate avoidance of tax liability. The Supreme Court in fact concluded that there is no conflict between its decisions in the matter of McDowell (supra), Azadi Bachao (supra) and Mathuram Agarwal (supra). In the present case the purchase and sale of shares, so as to take long term and short term capital loss was found as a matter of fact by all the three authorities to be a sham. Therefore authorities came to a finding that the same was not genuine. So far as the question Nos. (ii), (iii) (iv) and (v) are concerned, we hold that these are pure questions of facts and as there are concurrent finding of the authorities below, no question of law arises for this Court to interfere.

13 A.Y.2012-13 6.2.15 Hon’ble Allahabad High Court while dealing with the issue of bogus purchase in the case of Sri Ganesh Rice Mills. Commissioner of Income-tax [2007] 294 ITR 316 (ALL.), held as under :

"Where Assessing Officer had recorded a finding that in order to lower profits, bogus purchases has been introduced and Tribunal upheld such finding, addition on account of disallowance of such purchases was justified [Assessment year 1984. 85]

The assessee was engaged in the production of gram, pulses, rice chunni-bhusi, etc. The Assessing Officer treated five purchases as bogus. That was done after making enquiries wherein he found that the parties mentioned at item Nos. 4 and 5 never existed. He therefore, made addition. The Tribunal also held that the purchases were bogus.

Held that it was not the case of the assessee that he was a trader. On the other hand, the assessee was a manufacturer and in manufacturing process, chuni-bhusi also got manufactured as a by- product. It was not the case of the assessee that it had made the purchases of chuni-bhusi from other persons also. The Assessing Officer had recorded a finding that in order to lower the profits, the bogus purchases had been introduced. Taking into consideration the entire facts and circumstances of the case, the findings recorded by the Tribunal could not be said to be based on irrelevant material and consideration. The assessee being manufacturer of chuni-bhusi had not been able to establish the purchases in question which had been made from the non-existent firms. Further, the two firms owned by the brothers of the partners of the assessee-firm were said to have purchased the goods from the non-existent firms and even the 14 A.Y.2012-13 invoices/bills had been prepared by the munim of the applicant. Merely because the applicant had been dealing with the firm, that would not make the purchases of chuni-bhusi genuine when there was sufficient evidence to the contrary. So far as the question of deduction of purchases from the corresponding sales was concerned, the assessee being a manufacturer of chuni-bhusi and purchases having been found to be bogus and as there were no other purchases of chuni-bhusi, the benefit of deduction of such purchases had rightly been disallowed.

15 A.Y.2012-13 rate would automatically go up. Under the assumption that the purchases are bogus, one situation visualised is that there are no corresponding sales can be more justifiable than by the bogus purchase itself?

Coming to the facts of the case, were the purchases worth Rs. 86,500 really bogus? There is no doubt about it. The investigations got done by the Assessing Officer leave hardly any doubt about it. The failure on the part of the assessee to show cause strengthens the Department's case. This stoic silence of the assessee also blunts the assessee's argument that Shri Hukamchand's statement was recorded at its back. It may have been recorded at its back, but the results thereof were informed to the assessce and that is what the assessee was asked to explain and failed to do so. Thus, not we are not assuming but are concluding that the purchases of Rs.6,500 were in fact bogus. In case of bogus entries, in our opinion, that could be the best remedy, has been discussed above. The Assessing Officer has simply done that. We are unable to appreciate Shri Singhvi's

16 A.Y.2012-13 contention. Had there been suppression of sales, probably, depending on the facts of the case, the addition to the extent of g,p. rate would have been sufficient. But in case of bogus purchases we do not see a better solution than the one adopted by the Assessing Officer.

"

"As regards the second contention, toe are in entire agreement with the learned solicitor-General when he says that the Income-tax Officer is not fettered by technical rules of evidence and pleadings, and that, he is entitled to act on material which may not be accepted as evidence in a court of law, but there the "gleement ends; because it is equally clear that in making the assessment under sub-section (3) of 17 A.Y.2012-13 section 23 of the Act, the Income-tax Officer is not entitled to make a pure quess and make an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion to support the assessment under section 23(3). The rule of law on this subject has, in our opinion, been fairly and rightly stated by the Lahore High Court in the case of Seth Gurmukh Singh v. CIT (1944) 12 ITR 393 …….(782)

"

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19 A.Y.2012-13 9.The Tribunal, thus, by its order dated June 10, 2002, set aside the order of the Commissioner of Income-tax (Appeals) and restored the addition of Rs. 4,37,048 in the hands of the appellant-company as was done by the Assessing Officer.

"If the transactions were genuine and if the parties had migrated somewhere else, their latest addresses should have been supplied and burden was on the assessee to prove the genuineness of the transactions when the assessee claimed that the purchases were genuine. It was true that Mio loan had been taken from those parties, the case before the Assessing Officer was that the assessee claimed some purchases from some parties, whom he could not produce or those parties were not available when the section 131 was issued. Therefore, the initial dispute was with regard to genuineness of the transaction regarding purchase of wool from the parties, the assessee had failed to discharge the onus to prove the genuineness of the transactions, mere mentioning of section 68 did not affect the addition made when transactions were found bogus.

20 A.Y.2012-13 "

21 A.Y.2012-13 should be at a particular sum or at a different sum, can never be an issue of law."

"Considering the number of coincidences involved in the scheme, we are of the view that the entire scheme has been planned and coordinated by the assessee-firm. In the case of Homi Jehangir Gheesta v. CIT (1961] 41 ITR 135, the Apex Court held that while deciding on issue, the Tribunal can consider probabilities properly arising from the facts alleged or proved and by doing so the Tribunal does not indulge in conjectures, surmises or suspicions. The Apex Court expressed a similar view in the case of Sumati Dayal v. CIT (1995] 214 ITR 801 / 80 Taxman 89 (SC) and held that the decision of an adjudicating body based on surrounding circumstances and human probabilities is not bad in law and deserves to be upheld. In the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 /22 Taxman 11, the Apex Court held that colourable devices are not part of legitimate tax planning. Going by the ratio of these decision, we are of the view that the assessee-firm cannot be dissociated from the scheme of declaration of gold under the amnesty scheme in the names of the family members of the partners of the assessee-firm, as different individuals could not have hit upon the same idea of acquiring gold in the year of account relevant for the assessment year 1978-79 and declaring such gold under the amnesty scheme and getting the gold valued by the same valuer on the same day and filing their returns

22 A.Y.2012-13 under the amnesty scheme on the same day, ie., 30-3-1987, and subsequently getting the gold converted into ornaments through Karigars on more or less the same day and subsequently selling the ornaments to fix assessee-firm in the same year of account without the planning, controlling and coordination of a central agency and that agency in the surrounding circumstances appears to be only the assessee-firm. The Apex Court has held in the case of Jammaprasad Kanhaiyalal (supra) that there is no double taxation in taxing the person to whom the income actually belonged with the persons who falsely declared them in their returns filed under the Voluntary Disclosure Scheme. That is a risk which an assessee resorting to unfair tax saving devices has necessarily to run and an assessee who has resorted to such devices has to thank himself for it.

"It cannot be laid down as a general proposition of law that the Income-tax Department cannot rely upon any evidence which has not been subjected to cross-examination An ITO occupies the position of a quasi-judicial Tribunal and is not bound by the rules of the Evidence Act, but he must act in consonance with natural justice, and one such rule is that He should not use any material against an assessee without giving the assessee an opportunity to meet it. He is not bound to divulge the source of his information. There is no denial of natural justice if the ITO refuses to produce an informant for cross- examination though if a witness is examined in the presence of the assessee, the assessee must be allowed to cross- examine him. The range of natural justice is wide and whether or not there has been 23 A.Y.2012-13 violation of natural justice would depend on the facts and circumstances of the case

"Natural justice is no unruly horse, no lurking land mine, nor a judicial cure all. If fairness is shown by the decision maker to the man proceeded against, the form, features and the fundamentals of such essential processual propriety being conditional by the facts and circumstances of such situation, no breach of natural justice can be complained of. Unnatural expansion of natural justice, without reference to the administrative realities and other factors of a given case, can be exasperating. We can neither be finical nor financial but should be flexible yet firm in this juri iction.

24 A.Y.2012-13 However, if a witness has given directly incriminating statement and the addition in the assessment is based solely or mainly on the basis of such statement, in that eventuality it is incumbent on the Assessing Officer to Adverse evidence and material, relied upon in the order, to reach the finality, should be disclosed to the assessee. But this rule is Not applicable there the material or evidence used is of Collateral Nature.

26 A.Y.2012-13 "We are of the opinion that the Tribunal committed no error. Whether the purchases themselves were bogus or whether the parties from whom such purchases were allegedly made were bogus is essentially a question of fact. The Tribunal having examined the evidence on record came to the conclusion that the assessee did purchase the cloth and sell the finished goods. In that view of the matter, as natural corollary, not the entire amount covered under such purchase, but the profit element embedded therein would be subject to tax. This was the view of this Court in the case of Sanjay Oilcake Industries vs. CIT (2009) 316 ITR 274 ( Guj.). Such decision is also followed by this Court in a judgment dated August 16, 2011, in Tax Appeal No. 679 of 2010 in the case of CIT vs. Kishor Amrutlal Patel. In the result, tax appeal is dismissed".

27 A.Y.2012-13 (supra), the estimated suppressed profit margin embedded in such amounts of purchases could only be disallowed and subjected to tax.

28 A.Y.2012-13 supplies were allegedly procured but these were encashed from a bank account in the name of another entity, possibly hawala dealer. Subsequently, the money deposited in that account was withdrawn in cash almost on the same day. The Tribunal however, held that are made from open market without insisting for genuine bills, the suppliers may be willing to sell the product at a much less rate as compared to a rate which may charge in which the dealer has to give genuine sale invoice in respect of that sale Keeping all such factors in mind, the Tribunal estimated an element of profit percentage of the overall purchase price accounted for in the books of accounts through fictitious invoices.

In the result, the appeal of the appellant is Partly Allowed.”

29 A.Y.2012-13 Ltd. 355 ITR 290 (Guj), Vijay Proteins 58 ITD 428 & CIT Vs. Simit P. Sheth (2013) 38 Taxmann.com 385 (Guj) etc., which have been discussed above while deciding the issue. The CIT(A) has also kept in mind about the profit embedded in the bogus purchase. The addition has been restricted on the basis of the above mentioned law which nowhere seems unjustifiable. Taking into account of all the facts and circumstances, we are of the view that the CIT(A) has decided the matter of controversy judiciously and correctly which is not liable to be interfered with at this appellate stage. Accordingly, we affirm the finding of the CIT(A) on this issue and decide this issue in favour of the assessee against the revenue.

30 A.Y.2012-13

आदेश की प्रनिनिनप अग्रेनर्ि/Copy of the Order forwarded to : 1. अपीलाथी / The Appellant 2. प्रत्यथी / The Respondent. 3. आयकर आयुक्त(अपील) / The CIT(A)- 4. आयकर आयुक्त / CIT 5. दवभागीय प्रदतदनदध, आयकर अपीलीय अदधकरण, मुंबई / DR, ITAT, Mumbai 6. गार्ड फाईल / Guard file. आदेशधिुसधर/ BY ORDER, सत्यादपत प्रदत //// उप/सहधिक पंजीकधर /(Dy./Asstt.