ITO 20 (1)(1), MUMBAI vs. M/S ADAMJI & CO., MUMBAI

The brief facts of the case as emanating from records are: The assessee is engaged in trading of cotton waste and cotton rags. The assessment in the case of assessee for AY 2010-11 was reopened on the basis of information received from the DGIT(Investigations), Mumbai. As per the information received, the assessee had obtained accommodation entries aggregating to Rs. 26,09,729/- from following parties:

(1) M/s Arihant Traders Rs. 11,72,262/- (2) M/s Rahul Traders Rs. 10,12,960/- (3) M/s Rohit Traders Rs. 4,24,507/- Total Rs. 26,09,729/- 4. The AO issued notices under section 133(6) to the abovesaid vendors on the addresses furnished by the assessee. However, the notices were received back unserved from the postal authorities with remarks “not known”, “no such address”, “left”. Further, the assessee failed to substantiate physical delivery of goods. No transport receipt, inward register, stock register, etc. was furnished by the assessee. The AO made disallowance by estimating Gross Profit (GP) @ 12.5% on bogus purchases. Thus, an addition of Rs. 3,26,216/- was made on account of bogus purchases. Against the assessment order dated 06.01.2016 passed under section 143(3) read with section 147 of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’], the assessee filed appeal before the CIT(A). The CIT(A) after considering the GP rate declared by the assessee restricted the addition to 5% of the bogus purchases. Hence, the present appeal by the Revenue.

Shri Sanjay J. Sethi representing the Department vehemently defended the assessment order and prayed for reversing the findings of CIT(A). The ld. DR submitted that the AO made a fair and reasonable estimation of profit margin at 12.5% on bogus purchases. The assessee has declared GP of 9.86%, therefore, the GP estimated by CIT(A) at 5% on bogus purchases is very much on the lower side. The ld. DR prayed for restoring the findings of AO.

Submissions made by ld. DR heard, orders of authorities below examined. Undisputedly, the assessee failed to discharge its onus in proving genuineness of the purchases and the dealers. In such like transactions, it is only the profit element embedded in bogus transaction that has to be brought to tax. The AO has estimated GP on bogus purchases at 12.5%. The CIT(A) in first appellate proceedings has restricted the addition to 5%.

I am of considered view that the estimation of GP by AO is on the higher side. The assessee has declared GP of 9.86% on regular purchases. The GP estimated by CIT(A) on bogus purchases is over and above the GP declared by the assessee. I concur with the findings of CIT(A), the same are upheld and the appeal of Revenue is dismissed, sans merit.