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Facts
The assessee, a wholesale dealer, filed a return declaring income. The case was selected for scrutiny due to substantial purchases from non-filers or parties with low turnover. The Assessing Officer treated purchases from two parties as bogus, estimating a 3.92% GP disallowance.
Held
The Tribunal held that sustained disallowance solely on the basis of third-party non-response is not tenable, especially when the assessee has provided adequate primary evidence. The Tribunal found the CIT(A)'s decision to sustain a 2% disallowance to be contradictory.
Key Issues
Whether disallowance of purchases can be sustained solely due to non-response from third-party suppliers when the assessee has provided primary evidence?
Sections Cited
250, 133(6), 44AB
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Income Tax Appellate Tribunal, “B” BENCH, AHMEDABAD
Before: DR. B.R.R. KUMAR, VICE-SHRI T.R. SENTHIL KUMAR
(Assessment Year: 2021-22) Rajendrakumar Chhanalal Shah, Income Tax Officer, Vs. Prop. Of Rina Brothers, Ward-1, Sardar Chowk, Unjha, Patan Mehesana-384170 [PAN : AELPS 5123 B] (Appellant) .. (Respondent) Appellant by : Shri Mehul K. Patel, Advocate Respondent by: Shri Ankit Jain, Sr DR Date of Hearing 24.04.2025 Date of Pronouncement 02.05.2025 O R D E R PER DR. B.R.R. KUMAR, VICE-PRESIDENT:- This appeal has been filed by the Assessee against the order passed by the Ld. Commissioner of Income-tax (Appeals), National Faceless Appeal Centre [NFAC], Delhi (hereinafter referred to as "CIT(A)" for short), dated 25.09.2024 passed under Section 250 of the Income-tax Act, 1961 [hereinafter referred to as "the Act" for short], for Assessment Year (AY) 2021-22.
The Assessee has taken following grounds of appeal:-
1. That on facts, in law, and on evidence on record, the learned NFAC has grievously erred in confirming the disallowance @ 2% (out of 3.92% made by AO) of the alleged bogus purchases of Rs.12,61,68,630/- without any basis and on presumption only.
2. That on facts, in law, and on evidence on record, the learned NFAC ought to have deleted the entire addition in respect of alleged bogus purchases, as prayed for.”
The brief facts of the case are that the assessee has been carrying on wholesale business in Jeera, Souff, Oil Seeds, Methi, Isabgul, Coriander, Suva, Magaj Tarabuj etc.. The assessee has filed his return of income for the year under consideration on 11.03.2022 declaring total income at Rs.27,13,530/-. The case of the assessee was selected for scrutiny by CASS and the reasons for selection of scrutiny was that the assessee had made substantial purchases from suppliers who are either non-filers or have filed non-business ITR or reflected a substantially lower turnover in ITR.
4. The Assessing Officer, during the course of assessment proceedings, observed that the assessee had made purchases from two parties viz.
(i) Mayur Bharatbhai Raiyani - Rs. 6,81,97,715/- and Raiyaraj Industries – Rs. 5,79,70,915/-, (ii) total amounting to Rs. 12,61,68,630/-.
5. The Assessing Officer treated the purchases made from these two parties as bogus purchases on the ground that these two parties had not replied to the notices u/s 133(6) of the Act issued to them. The Assessing Officer, therefore, estimated 3.92% GP i.e. Rs. 56,08,545/- on purchase amount of Rs.12,61,68,630/
Aggrieved by the order of the Assessing Officer, the assessee preferred appeal before the Ld. CIT(A) who, after considering all the documents produced by the assessee before him, held that third party verification had not been possible in assessee’s case; however, the GP ratio has been reduced to 2% from 3.92% as estimated by the Assessing Officer.
Aggrieved by the order of the Ld. CIT(A) confirming the disallowance @ 2% of the alleged bogus purchases of Rs.12,61,68,630/-, the assessee is now in appeal before the Tribunal.
We have heard the rival contentions and perused the material available on record. We find that the reason for making the impugned addition was that, in response to the notice issued to the parties u/s 133(6) of the Act, no reply was submitted by any of the parties for confirmation of purchases made by the assessee. The Assessing Officer therefore disallowed 3.92% of total purchase considering it to be bogus purchase. The Ld. CIT(A) reduced the same to 2% of the alleged bogus purchases of Rs.12,61,68,630/-, by observing as under:-
“5.1 I have gone through the facts of the case, findings by the AO and the submissions made by the appellant. Grounds No. 1 of appeal are related to disallowance of purchases made by two parties. Reason for making this addition was that AO issued Notice u/s 133(6) of the IT Act, 1961 to the parties however, no reply was submitted by any of the above parties for confirmation of purchases made by the assessee. Accordingly, AO disallowed 3 percent of total purchase considering it to be bogus purchase. 5.2 In response to the notice, the assessee submitted his reply on 24.12.2022, wherein the assessee submitted detailed reply/ documentary evidences alongwith confirmation letters from both the parties; i.e. Mayur Bharatbhai Raiyani (ARRPR5623G) and Raiyaraj industries (AARFR7264E).The reply of the assessee is reproduced as under: 5.3 During assessment proceeding and appeal proceeding assessee submitted Confirmation letters dtd. 23-12-2022 received from both the Parties before AO and during appeal proceeding also wherein they have accepted as under :-
1. 1. To have sold goods of a particular amount to my Proprietary Firm Rina Bros. during F.Y. 2020-21.
2. Payment was received through Banking Channel. 3. Price of goods were fixed F.O.R. Unjha. 4. Have given copy of my ledger from their books.
5. Copy of ITR acknowledgement for A Y. 2021-22.” In view of above documentary evidences assessee also submitted- 1. Purchases made by me from Giriraj Corporation (Prop. Mayur Bharatbhai Raiyani) and Raiyaraj Industries are also shown as sales made to me in their books of accounts also. Both of them have shown sales made to my firm in their GSTR1 Returns and therefore their sales are reflected as my purchases in my GSTR-9 Table 8A.
2. Payment for purchases is made by RTGS through my Firm’s two Bank Accounts with Kotak Mahindra Bank.
3. Goods have been moved from Gondal to my place or to the Buyers to whom I have sold these goods.
Goods purchased are duly recorded in my books and sales have also been made of these goods and whatever goods were not sold on 31- 03-2021 was shown in closing stock and sold in next year.
The purchase transactions with these two Parties are not dubious or doubtful transactions but they are genuine and real transactions. They are not Bogus Purchases to inflate the purchases but they are real purchases accounted in my books of account. 5.4 Thus assessee has produced all the documents available with them as above but third party verification had not been possible in this case. Keeping in view of the natural justice with the assessee, GP to turnover ratio taken by AO as 3.92 percent is further reduced to 2 percent.”
The Ld. CIT(A) also held that the assessee has maintained commodity wise Trading accounts with complete quantity details. The total turnover of the sales amounted to Rs. 81 Crores during the year. The purchases were to the tune of Rs.78 Crores. The books of account of the assessee are audited as per provisions of section 44AB of Act and the commodity-wise sales and purchases in value and in quantity are given in audited Trading Account and Tax Audit Report. We find that the during the assessment proceedings and the appellate proceedings before Ld. CIT(A), the assessee has submitted the confirmation letters received from parties namely Mayur Bharatbhai Raiyani and Raiyaraj Industries, alongwith documentary evidences regarding the purchases made from Giriraj Corporation (Proprietor of Mayur Bharatbhai Raiyani) and Raiyaraj Industries. We have also noted that the Ld. CIT(A), while acknowledging the production of documentary evidence and maintenance of detailed trading records, still sustained 2% of the purchases as disallowance due to absence of third-party verification. It is pertinent to note that the Hon'ble Courts have held time and again that addition cannot be sustained solely on the basis of third-party non-response, especially when the assessee has produced adequate primary evidence substantiating the transaction. No discrepancy or adverse inference has been pointed out in the assessee’s books or audit findings. Therefore, in view of the totality of facts and circumstances, we are of the considered opinion that, having held the transactions are genuine by the Ld. CIT(A) and sustaining the disallowance @ 2% by the Ld. CIT(A) is an anathema to itself. The decision of the Ld. CIT(A) cannot be affirmed.
In the result, the appeal of the assessee is allowed.