ACIT, CENTRAL CIRCLE - 2(2), KOLKATA, KOLKATA vs. M/S MAGNETIC NIRYAT PVT. LTD., KOLKATA

Per Rajpal Yadav, Vice-President (KZ):- The Revenue is in appeal before the Tribunal against the order of ld. Commissioner of Income Tax (Appeals)- 20, Kolkata dated 29.10.2021 passed for A.Y. 2012-13.

5. Sonthalia Group had introduced huge amount of its undisclosed income as share capital in the Group companies. Subsequently, action u/s. 132(1) had taken place and search assessments were completed on 31.03.2014. Perusal of the AO’s comments shows that Group has manipulated its accounts by showing bogus entries and artificial business transactions have been shown in many of the Group Companies by doing circular tradinc among themselves. Although, AO has not specifically said anything about this particular Company but his comments suggests that the business transactions shown in the books of the Company may not be genuine and the assessee had indulged into such window dressing with ulterior motive. IrfalT probability the sales and purchases both are bogus in many of the group companies. However, AO has not examined the sales part and he has concentrated only on the purchases made and expenses claimed to have been incurred. AO has made huge disallowance on account of unverified ‘creditors for goods'. The turnover of the assessee, separately, reported by the AO is Rs.43,17,07,827/-. Out of these, AO has made a disallowance of Rs.30,02,54,353/-. This way the gross profit of the business would be about 70%, which is not possible in any genuine trading activities. Although, AO gives an impression that both the sales and the purchases 4 Assessment Year: 2012-2013 M/s. Magnetic Niryat Pvt. Limited of the assessee company are bogus but in the absence of any evidence in this regard it is presumed that assessee was doing some genuine business. Under the circumstances, the profit margin assessed by AO is not sustainable. Assessee has claimed to have traded in cotton hosiery fabrics/cotton hosiery yarn. In the case of PCIT, Vadodara-2 Vs. Synbiotecs Ltd. (2019) 106 taxmann.com 316 (Guj), the Hon'ble High Court of Gujarat has held that where AO made addition on account of bogus purchase of raw material by assessee company and since CIT(A) and ITAT concurrently found that assessee had yielded huge profits during the year from sales which would not be possible without utilizing huge raw material, tribunal was justified in restricting impugned additions on account of bogus purchases to 25%. In the case of Puja Paper Trading Company Pvt. Ltd. Vs. ITO-4(3)(1), Mumbai (299) 104 taxmann.com 95(Bombay), the Hon'ble High Court of Mumbai didn’t find any substantial question of law in assessee’s appeal when AO had found that assessee was involved in hawala transactions and substantial purchases made by it were bogus in nature and he disal Jwed the purchases. In this case of, CIT(A) held that even if purchase transactions were not verifiable what was taxable was only income component and not entire purchase. He adopted average profit rate at 3.67% which was enhanced to 12.05% by the ITAT. Appeal of the assessee, against order of ITAT was dismissed as the Hon'ble High Court did not find any question of law involved here. In the case of PCIT-15, Mumbai Vs. Jakharia Fabrick Pvt. Ltd. (2020) 118 taxmann.com 406 (Bombay), the Hon'ble Bombay High Court has held that where information was received by AO to the effect that 8 parties from whom purchases were made by assessee engaged in job work of dyeing of fabric were howala dealers who had issued bogus bills and the AO treated such purchases as bogus purchases, and since without purchase of materials it was not possible for assessee to complete job work of dyeing, then entire purchases could not be added as bogus. Only profit element embedded in such transactions had to be added to total income of the assessee. It is apparent from several judicial pronouncements that if sales receipts are considered as genuine, appropriate allowances for purchase of raw material / traded goods have to be allowed, even if the assessee does not produce 5 Assessment Year: 2012-2013 M/s. Magnetic Niryat Pvt. Limited supporting documents regarding purchases made. It is only the profit element in the sales made is to be brought to tax. Entire purchases or a very substantial part of purchases cannot be disallowed. In the present case, AO’s actions would lead to as abnormally high profit element, which is not justifiable in view of several judicial pronouncements. Around 10 appeals of this Group, for AY: 2012-13 and AY: 2013-14, are pending before me on the same issue. In all these cases, AO has made huge disallowances on account of bogus purchases and has further made disallowance of administrative and personnel expenses. However, 3 appeals of AY: 2J314-15 in the case of M/s. Magnetic Niryat Pvt. Ltd., Raunak Vanijya Pvt. Ltd. & Agni Trade Com. Pvt. Ltd. (all Group Companies) are also pending for disposal. These assessments were completed in the subsequent year. AO is also different. While completing assessments in these cases, AO has taken the net profit (consequently net income) at 5% of total turnover. Given the background of the Group and the doubts about genuineness of its business Transactions I am of the opinion that assessing the net income for the current year at 5% of the total turnover of the assessee company would serve the ends of justice. Further, there is no need to make any disallowances on account of any administrative, personnel, financial expenses etc., as the estimated profit has taken into account all purchases and expenses. The turnover of the assessee company in the current year is Rs.43,17,07,827/-. Hence, the net income (total income) of assessee company @ 5% of the turnover may be taken as Rs.2,15,85,391/-. Hence, additions to the extent of Rs.2,15,85,391/- only is confirmed”.