ITO - 32(1)(5), MUMBAI vs. HARSHAD V. SHETH 9HUF), MUMBAI

The assessee in this case is engaged into metal trade. The assessment was reopened upon information from Sales tax department that assessee has made purchases from bogus dealers. The AO made 15% addition of the bogus purchase.

The necessary of facts are as under:- Harshad Vinodrai Sheth(HUF) (hereafter referred to as the assessee or the appellant) is a HUF engaged in trading of Iron and Steel in the proprietary concern by name M/s. N J Corporation. Return of income for A.Y. 2011-12 was filed on 29.09.2011 declaring total income at Rs.7,87,040. The AO received information from DGIT(inv), Mumbai/Sales Tax Department that some of the dealers under Modvat Act 2002 indulging in the practice of providing accommodation entries by issuing bogus sales

Upon assessee’s appeal Ld.CIT(A) has noted that the sales have not been doubted. Accordingly placing reliance upon several case laws and upon the facts of the case, he sustained 12.5% disallowance out of the bogus purchases. Ld.CIT(A)’s concluding order is as under:- In the present case from the facts available on records, it is observed that the AO has neither disbelieved the purchases nor the corresponding sales made. The AO has held that the impugned purchases were not made from above referred dealers/parties but from somewhere else/open market. The facts and circumstances of the present case are similar to that of facts adjudicated by the Hon’ble Gujarat High Court and Hon'ble ITAT, Mumbai in above referred cases. However the estimation made by the AO at 15% is on higher side and more than the percentage determined by the courts in the above referred cases. Therefore, the profit is restricted to 12.5% of the bogus alleged purchases. The AO is directed add 12.5% of Rs.64,17,972 working out to Rs.8,02,247 and modify the addition accordingly. Appellant gets part relief. These grounds are partly allowed.

Against the above order, revenue is in appeal before the ITAT. We have heard the Ld. DR and perused the record.

We find that in this case, the sales have not been doubted it is settled law that when sales are not doubted, 100% disallowance for bogus purchase cannot be done. The rationale being no sales is possible without actual purchases. This proposition is supported from Hon’ble jurisdictional High Court decision in the case of Nikunj Eximp Enterprises( in Writ Petition No.2860, order dated 18.06.2014). In this case, the Hon’ble High Court has upheld 100% disallowance for the purchases said to be bogus, when sales are not doubted. However, the facts of the present case indicate that assessee has made purchase from the grey market. Making purchases through the grey market gives the assessee savings on account of non-payment of tax and others at the expense of the exchequer. In such situation, in our considered opinion on the facts and circumstances of the case the 12.5% disallowance out of the bogus purchases done by the Ld.CIT(A) meets the end of justice. Accordingly, we uphold the order of Ld.CIT(A).

The decision of N.K.Protiens relied by the revenue was a dismissal of SLP by the Hon’ble Supreme Court and has already been explained and distinguished by Hon’ble Bombay High Court in the case of Mohammad Hazi Adam & Co in of 2006, dated 11.02.2019.

In the result, this appeal filed by the revenue stands dismissed.

Before parting, we may add that if the assessee has filed a cross-appeal or cross-objection, and the same has remained unheard, either party may apply for recall of this order so that the appeals can be heard together.