ACIT, CIRCLE-1, BHAVNAGAR, BHAVNAGAR vs. LEELA GREENSHIP RECYCLING PRIVATE LIMITED, BHAVNAGAR

5 on 14.03.2018, which explained the discrepancy in name appearing in some invoices. The learned CIT(A) observed that the assessee had discharged the initial onus cast upon it by producing primary evidences to substantiate the fact of actual purchases. The CIT(A) noted that the Assessing Officer did not dispute the fact that payments were made through normal banking channels, that the purchases were recorded in the books of account and audited financial statements, that the goods were reflected in stock records, and that the sales arising out of these purchases were duly recorded and subjected to tax. The CIT(A) further observed that the Assessing Officer failed to rebut the documentary evidence filed by the assessee with any direct evidence demonstrating that no purchases had actually taken place or that the payments were routed back to the assessee. The conclusion drawn by the Assessing Officer was found to be based purely on suspicion, surmises, and conjectures. In respect of the Assessing Officer's reliance on field verification and non-traceability of the supplier, the learned CIT(A) observed that such verification was carried out nearly five years after the transaction and, therefore, absence of the supplier at the address cannot ipso facto vitiate the otherwise documented purchases. The CIT(A) further held that non-appearance of the supplier to summons under section 133(6) did not absolve the Assessing Officer from the responsibility of conducting effective inquiry and confronting the assessee with any adverse findings. Moreover, the material relied upon by the Assessing Officer, including third-party statements and reports from GST authorities, was neither furnished to the assessee nor was any opportunity of cross-examination provided. The CIT(A) recorded that this failure of the Assessing Officer amounted to a serious violation of principles of natural justice.

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5. The CIT(A) then analysed the applicability of section 69C and observed that this provision deals with unexplained expenditure where the source of expenditure is not explained. In the present case, the source of payment was never in dispute, as payments were made through banking channels, out of disclosed funds, and properly recorded in the audited financials. The CIT(A), therefore, held that the application of section 69C was factually and legally misplaced. However, while fully accepting the genuineness of the payments and noting that the sales have also been offered to tax, the learned CIT(A) took into account the possibility of inflation of purchases or involvement of accommodation bills to some extent and, therefore, proceeded to estimate the profit element embedded in such purchases. Following the consistent approach adopted by various High Courts and coordinate benches, the CIT(A) applied a rate of 5% profit margin on the disputed purchases. Accordingly, the addition was restricted to Rs. 7,00,184/- being 5% of Rs. 1,40,03,670/-, and the balance addition of Rs. 1,33,03,486/- was deleted.

6. Aggrieved by the order of CIT(A) both Revenue and Assessee are in cross appeal before us raising following grounds:

i. In assessee’s Appel

1. The Ld. CIT(A) has erred in law and on facts in upholding the action of the Ld. AO in reopening the assessment u/s. 147 of the Act which is bad in law and without jurisdiction.

2. The Ld. CIT(A) has erred in law and on facts in partly confirming the addition of alleged bogus purchases to the tune of Rs. 7,00,184/-.

& 2135/Ahd/2024 Leela Greenship Recycling Pvt. Ltd. vs. DCIT A.Y 2018-19 7 3. The Ld. CIT(A) has erred in law and on facts in partly confirming the addition of alleged bogus purchases made by Ld. AO without providing material relied upon and opportunity of cross-examination resulting in gross violation of principles of natural justice.

4. The Ld. CIT(A) has erred in law and on facts in upholding the invocation of S. 69C r.w.s. 115BBE of the Act despite restricting the addition based on estimated business profit.

8. The Ld. CIT(A) has erred in law and on facts of the case in confirming action of the ld. AO in levying interest u/s. 234A/B/C/D of the Act.

10. The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal

at the time of or before the hearing of the appeal. ii. In Revenue’s Appel

1. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was justified in deleting addition of Rs. 1,33,03,486/-( Rs.1,40,03,670 - Rs.7,00,184) being unexplained expenditure u/s 69C of the Act, without appreciating the facts of the case?

2. Whether on the facts and in the circumstances of the case and in law, the ld.CIT(A) has erred in ignoring the fact that the assessee engaged into transaction being bogus entries with Mahadev Trading Co., which was merely paper company and had no actual business?

& 2135/Ahd/2024 Leela Greenship Recycling Pvt. Ltd. vs. DCIT A.Y 2018-19 8 3. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary.

4. It is, therefore, prayed that the order of Ld. CIT(A) may be set aside and that of the Assessing Officer be restored? 7. During the course of hearing, the learned Authorised Representative (AR) appearing on behalf of the assessee submitted that the reopening of assessment under section 147 was bad in law and without jurisdiction. The reopening was solely based on third-party information received from the GST Department without independent application of mind by the Assessing Officer. The material was not confronted to the assessee prior to initiation of reassessment. In fact, as per the facts and circumstances, there was no independent inquiry or tangible material on record to justify "reason to believe" that income has escaped assessment. The AR strongly submitted that reopening based on borrowed satisfaction is impermissible in law.

9 registration was not cancelled ab initio but only later. GST returns were regularly filed by the supplier for the relevant financial year. The AR pointed out that both opening stock and closing stock have been accepted and no discrepancies were found by the Assessing Officer in the audited financials and books of accounts of the assessee. Without purchases, the sales reflected in the turnover could not have been achieved. The AR relied on the well-settled legal principle that without actual purchases, there cannot be any corresponding sales. Hence, the very basis of disallowance as bogus purchases was fundamentally flawed. The AR further stated that the addition made by AO was broadly based on information obtained from external sources without any opportunity of cross-examination, which is a clear violation of the principles of natural justice.

9. The AR further contended that the assessee had already declared profit at 5.11% on trading activity for the year under consideration, as reflected in audited financials. The AR argued that if the impugned addition of Rs. 1,40,03,670/- is added in entirety, the gross profit ratio would rise to an absurd level of 26.36%, which is commercially impossible in this line of business. The AR also argued that the CIT(A) erred in not granting proper set-off of profit already declared while applying 5% profit estimation on the disputed purchases. The addition should have been deleted in entirety or reduced further.

10 dealers like Mahadev Trading Co. However, this does not mean that actual purchase of goods has not taken place. The AR explained that the actual goods were indeed purchased, but possibly not directly from the supplier appearing in books and such accommodation bills merely provide documentary support for otherwise genuine purchase transactions where the physical movement of goods is undisputed. In such circumstances, AR argued, that the entire purchases cannot be treated as bogus or non- genuine. Therefore, as an alternative proposition, the AR submitted that even assuming some element of accommodation billing, the only proper course would be to estimate reasonable profit margin attributable to such purchases, rather than disallowing entire purchase amount. The AR submitted that in similar circumstances, Hon’ble Gujarat High Court has consistently held that when documentary evidences are available and sales are not doubted, entire purchases cannot be disallowed and only profit element can be estimated. The AR placed strong reliance on following decisions of jurisdictional High Court in support of his contentions: PCIT v. Surya Impex (2023) 451 ITR 395 (Guj) i. PCIT v. Pankaj K. Choudhary (2022) Tax Appeal 617 (Guj) ii. PCIT v. Jigisha Satish Mehta (2023) 155 taxmann.com 279 (Guj) iii. PCIT v. Keshri Exports (2024) 168 taxmann.com 528 (Guj) iv. PCIT v. Rakesh Kailashchand Jain (2023) 156 taxmann.com 82 (Guj) v. PCIT v. Mohit Pukhraj Kawdiya (2024) 167 taxmann.com 473 (Guj) vi. Mayank Diamonds Pvt. Ltd. v. ITO (TA 200 of 2003) (Guj) vii. CIT v. Gujarat Ambuja Export Ltd. (Tax Appeal 840 of 2013) viii.

& 2135/Ahd/2024 Leela Greenship Recycling Pvt. Ltd. vs. DCIT A.Y 2018-19

12 restored in full, and the relief granted by the CIT(A) by restricting the disallowance to 5% profit element be set aside.

& 2135/Ahd/2024 Leela Greenship Recycling Pvt. Ltd. vs. DCIT A.Y 2018-19

14 Representative thereon, we are of the considered opinion that the ratio laid down therein does not apply to the facts of the present case and is clearly distinguishable for the following reasons: a. In Shree Ganesh Developers, the Assessing Officer had issued summons under section 133(6) to all the suppliers. Most of the suppliers furnished full details including bank statements. The Assessing Officer independently verified the suppliers’ bank accounts and recorded a categorical factual finding that there were no cash withdrawals from the bank accounts after receipt of cheques from the assessee. Only two suppliers — Neptune Trading Co. and Hari Om Traders — did not furnish their bank statements despite opportunity. Thus, for these two suppliers, the crucial cash trail verification could not be carried out. In contrast, in the present case, no such independent verification of bank accounts was conducted by the Assessing Officer. The assessee herein has produced comprehensive documentary evidence such as purchase invoices, stock records, RTGS payments, GST returns, supplier confirmations, and segment- wise accounts. The Assessing Officer has not brought any independent material on record to disprove these documents or trace any cash withdrawals after payments. b. In Shree Ganesh Developers, the assessee had accepted an addition of 12.5% on the purchases from Neptune Trading Co. and Hari Om Traders. The Hon’ble Bombay High Court held that by accepting partial addition, the assessee impliedly accepted that such purchases were not fully verifiable, and therefore, the entire purchases should have been disallowed instead of estimating profit. In the present case, & 2135/Ahd/2024 Leela Greenship Recycling Pvt. Ltd. vs. DCIT A.Y 2018-19

15 the assessee has never accepted any part of the disallowance nor admitted that the purchases were bogus. Rather, the assessee has consistently maintained that the purchases were genuine and has produced extensive documentation in support of its claim. c. A key distinguishing feature in Shree Ganesh Developers was that bank trail verification played a decisive role. In the present case, such factual verification of cash trail has not been undertaken by the Assessing Officer. There is no finding that payments made by the assessee were ultimately withdrawn in cash and routed back as accommodation entries. d. Most importantly, the present appeal falls within the jurisdiction of Hon’ble Gujarat High Court, which has consistently taken a different and settled view in several binding precedents including those relied upon by the assessee, where it has been held that in cases where sales are not disputed and purchases are otherwise evidenced by books of accounts and banking transactions, entire purchases cannot be disallowed, and only embedded profit element may be estimated for addition. The principle laid down by the Hon’ble Gujarat High Court fully governs the present case. e. It may further be noted that while the Bombay High Court in Shree Ganesh Developers dealt with section 69C and its applicability, the Hon’ble Gujarat High Court has consistently applied the doctrine of real income, emphasizing that where purchases are indirectly & 2135/Ahd/2024 Leela Greenship Recycling Pvt. Ltd. vs. DCIT A.Y 2018-19

16 established by sales and books of accounts, estimation of profit is the proper course, rather than full disallowance under section 69C. We also examined the judgment of the Hon’ble Gujarat High Court in N.K. Industries Ltd. v. DCIT [2016] 72 taxmann.com 289, which was referred to by the Hon’ble Bombay High Court while delivering its decision in Shree Ganesh Developers. In our considered view, this decision is clearly distinguishable on facts and not applicable to the present case for the following reasons: a. In case of N.K. Industries, substantial incriminating material was found during the course of search conducted under section 132 at the business premises of the assessee. The search revealed blank signed cheque books, vouchers, blank bill books, letterheads, and endorsed cheques belonging to several supplier concerns. These suppliers were shown as parties from whom the assessee allegedly procured purchases. On the strength of the seized materials, the Assessing Officer held that these concerns were merely name-lenders providing accommodation entries. Thus, the factual basis for treating purchases as entirely bogus in N.K. Industries was direct material unearthed during search which exposed falsity of the purchases recorded in the books of account. In contrast, in the present case, no search was conducted on the assessee. No incriminating material has been found either in assessee’s possession or through third-party searches. The present assessment is a reassessment based solely on external information received from GST authorities. The assessee has furnished complete books of accounts, bank payments, stock records, purchase invoices, GST returns, supplier confirmations, and segment- & 2135/Ahd/2024 Leela Greenship Recycling Pvt. Ltd. vs. DCIT A.Y 2018-19

17 wise financials to establish the purchases. No direct falsification of books has been discovered here. b. In case of N.K. Industries, both the Assessing Officer and the Tribunal recorded categorical concurrent findings that the purchases recorded by the assessee were entirely bogus based on clinching evidences found during search. Even then, the Tribunal restricted the disallowance to 25% of purchases instead of disallowing the entire amount. In the present case, there is no categorical finding by the Assessing Officer that purchases were wholly bogus. The addition was made primarily on the ground that the supplier Mahadev Trading Co. was not found at the address and was suspected to be non-genuine based on external intelligence input. No direct evidence of fictitious purchases, cash back, or fund rotation was brought on record. c. It may also be noted that N.K. Industries arose in the context of block assessment under Chapter XIV-B of the Act (post-search assessment). The Hon'ble High Court was dealing with the extent of additions permissible in a search case where seized material directly exposed non-genuine purchases. In the present case, the reassessment proceeding is governed by regular provisions under sections 147/143(3), where the standards of evidence, burden of proof, and principles of natural justice operate differently. d. It is crucial to note that even after the decision of N.K. Industries, the Hon’ble Gujarat High Court in several subsequent decisions, & 2135/Ahd/2024 Leela Greenship Recycling Pvt. Ltd. vs. DCIT A.Y 2018-19

18 including those relied upon by the assessee, has consistently held that when sales are not disputed and books of account record corresponding stock movement and payments through banking channels, full disallowance of purchases is not justified and only reasonable estimation of profit element embedded therein is permissible. Thus, the present appeal continues to be governed by the prevailing ratio consistently laid down by the Hon’ble Gujarat High Court, which directly supports the estimation approach adopted by the learned CIT(A).

& 2135/Ahd/2024 Leela Greenship Recycling Pvt. Ltd. vs. DCIT A.Y 2018-19

19 20. Accordingly, while upholding the fundamental legal proposition that when sales are not doubted, entire purchases cannot be disallowed merely on the ground that suppliers were non-genuine, we deem it appropriate to restore the matter back to the file of the Assessing Officer for carrying out limited verification as under: i. The Assessing Officer shall obtain the bank account details of M/s. Mahadev Trading Co. (or any other relevant bank account connected to the transaction), and verify whether there exists any cash trail i.e., whether the payments made by the assessee through banking channels were withdrawn in cash by the supplier or its associates after deposit of cheques received from the assessee. ii. If such cash withdrawals are established, and the Revenue is able to demonstrate that the payments were routed back to the assessee or utilized as part of accommodation transactions, the Assessing Officer shall proceed to make disallowance in accordance with law, considering the full or partial disallowance as warranted. iii. However, if no such cash-back trail is established upon verification, and payments are found to have remained within the banking system, then in that event, the addition shall be restricted only to the embedded profit element, for which the profit estimation of 5% as adopted by the CIT(A) may be applied as reasonable and fair estimation, considering the segmental profit declared by the assessee and judicial precedents discussed above.

& 2135/Ahd/2024 Leela Greenship Recycling Pvt. Ltd. vs. DCIT A.Y 2018-19

20 iv. On perusal of the ledger extract placed on record (Page No. 136 and 137 of the Paper Book), it is observed that while total purchases recorded from Mahadev Trading Co. aggregate to Rs. 1,40,03,670.00, total payment made to the said party stands at Rs. 1,24,94,654.00, leaving an outstanding balance of Rs. 15,09,016.00 unpaid, which represents approximately 10.78% of the total purchase value. This aspect has not been specifically dealt with or examined by the CIT(A) in the impugned order. The Assessing Officer shall specifically verify whether the said balance payment has been subsequently made by the assessee. If the assessee establishes that the entire unpaid amount has been fully discharged, no adverse inference shall be drawn. However, if the outstanding amount or any part thereof remains unpaid, the Assessing Officer shall examine the nature, status and reasons of such unpaid amount in the context of the overall factual matrix of the transaction, and after affording due opportunity to the assessee to explain the same, shall factor such aspect appropriately while determining the addition on account of bogus purchases in accordance with the directions contained herein above. v. The assessee is directed to fully cooperate and provide all necessary evidences to facilitate the bank trail verification by the Assessing Officer. vi. The Assessing Officer shall afford reasonable opportunity of hearing to the assessee and shall complete the verification and & 2135/Ahd/2024 Leela Greenship Recycling Pvt. Ltd. vs. DCIT A.Y 2018-19

21 fresh assessment strictly within the limited scope as defined hereinabove. 21. In the result, both the appeals are treated as partly allowed for statistical purposes in terms of above directions.

Order pronounced in the Open Court on 26th June, 2025 at Ahmedabad.