DEVENDRA S. SHAH,DOMBIVALI vs. ACIT CIR 3, KALYAN

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ITA 2812/MUM/2017Status: DisposedITAT Mumbai13 May 2021AY 2012-138 pages
AI SummaryRemanded

What did the Tribunal hold?

The Tribunal noted that the assessee admitted to inflating purchases and sales to avail bank loans and could not substantiate actual business transactions. The AO had disallowed unproved purchases and made additions for unexplained cash deposits and withdrawals. The CIT(A) also found sales to be inflated but sustained additions on such sales at 15% without sufficient justification. The Tribunal observed that tax authorities should determine actual income by evaluating past performance and industry averages, rather than taxing notional or perceived income. Since both the AO and CIT(A) made additions based on unsubstantiated figures and the assessee claimed only about 10% of transactions were genuine, the Tribunal decided to remit the issue back to the AO for a de novo assessment. This would allow the AO to determine actual purchases and sales, and consequently, the actual profit earned by the assessee, after considering additional evidence and providing a proper opportunity of being heard. The Tribunal allowed the appeals for statistical purposes.

What were the facts?

The assessee, Devendra S. Shah, an individual dealing in home appliances, is in appeal against orders of the CIT(A) for assessment years 2011-12 and 2012-13. The Assessing Officer (AO) observed inflated purchases and sales in the assessee's books, totaling ₹25.49 crores in AY 2011-12 and ₹53.45 crores in AY 2012-13. The AO disallowed unproved purchases and made additions for unexplained cash deposits and cash withdrawals for purchases. The assessee admitted to inflating purchases and sales to avail bank loans. The CIT(A) enhanced additions on sales to 15% of total sales declared by the assessee, while deleting other additions made by the AO. The assessee's grounds of appeal include the CIT(A) ignoring material, treating bank charges as non-allowable, passing orders in haste, and the AO/CIT(A) levying gross profit without correlating facts.

What were the issues?

1. Whether the learned CIT(A) erred in enhancing the addition on sales to 15% of total sales declared by the assessee for assessment years 2011-12 and 2012-13, without proper correlation with facts and submissions, and whether this constitutes a violation of natural justice by not providing sufficient opportunity for further submissions (as per grounds 3 & 4 of assessee's appeal). Assessee's Contention: The assessee argued that books of account were reconstructed to avail bank loans, and actual business transactions were significantly less. They submitted additional evidence not considered by lower authorities and prayed for the assessment to be set aside or remitted to the AO to determine actual profit, especially since the AO completed the assessment under section 144. The assessee also contended that if inflated sales were bogus, corresponding purchases must also be bogus. Revenue's Contention: The revenue argued that the assessee failed to prove the genuineness of transactions, how bank loans were utilized or repaid, and supported the CIT(A)'s findings, praying for dismissal of the appeal.

Which sections of the Income-tax Act were involved?

Section 143(1),Section 133(6),Section 143(2),Section 142(1),Section 40A(3),Section 145,Section 144,Section 143(3)

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
ITA no.2812/Mum./2017 (Assessment Year : 2012-13) Devendra S. Shah 12, Shri Ram Krishna Niwas Society Phadke Road, Dombivali (East) Mumbai 421 201 PAN - ACSPS2993L v/s .. Appellant Asstt. Commissioner of Income Tax Circle-3, Kalyan, Dist. Thane A no. 9/Mum./2017 (Assessment Year : BIZ) Devendra S. Shah 12, Shri Ram Krishna Niwas Society Phadke Road, Dombivali (East) Mumbai 421 201 PAN - ACSPS2993L ecdcreaeennes Appellant v/s Asstt. Commissioner of Income Tax Circle-3, Kalyan, Dist. Thane ITA no.3119/Mum./2017 & 4247/Mum./2017 (Assessment Year : 2011-12 & 2012-13) Asstt. Commissioner of Income Tax Circle-3, Kalyan, Dist. Thane TPE Respondent ae ae Appellant v/s Devendra S. Shah 12, Shri Ram Krishna Niwas Society Phadke Road, Dombivali (East) stttttttrtees Mumbai 421 201 PAN - ACSPS2993L Assessee by : Shri Paresh Shah Revenue by : Shri V. Sreekar Respondent | Date of Hearing - 17.03.2021 Date of Order - 13.05.2021 | L 7 Devendra S. Shah

ORDER

PER S. RIFAUR RAHMAN, A.M.

The aforesaid cross appeals are against the order dated on February

2017, for the assessment year 2011-12, and the cross appeals filed are against the order dated 8" March 2017, for the assessment year 2012-13. All the respective appeals have been Passed by the learned Commissioner

(Appeals)-3, Nasik.

2: Brief facts of the case are, assessee is an individual running a Proprietary concern in the name and style of M/s Milan Steel and dealing in home appliances. Assessee filed his return of income on 31.08.2011 declaring income at 2 35,07,445/-. The return was Processed under section 143(1) of the Income Tax Act 1961 (in Shae Act). The case was selected for scrutiny under CASS. The notices under section 143(2) and 142(1) were issued and served on the assessee. During assessment Proceedings, the AO observed that assessee has declared total purchase of # 31.39 crores and corresponding sales at % 32.31 crores out of which sales of = 26.67 crores were in cash. In order to verify the genuineness of the purchases, AO issued show cause notices under section 133(6) to the various parties declared by the assessee, the assessing officer observed that there is huge difference between the balance confirmed

by the parties and the amount declared by the assessee. Accordingly

Devendra S. Shah

assessing officer observed that the total purchases of ? 25.49 crores remained unproved, accordingly he disallowed the same. Further assessing officer observed that assessee has deposited cash in the bank account amounting to % 22.30 crores as reported in the AIR, remained unproved and he observed that there is difference in sales of ® 2.14 crores which remained unexplained. He also observed that assessee has withdrawn in cash on bearer cheques representing cash purchase of % 22.31 crores which required to be disallowed under section 40A(3) of the Act. Since assessee has not produced the books, evidence in support of the return filed, the AO observed that sales and purchases and other results are not reliable within the meaning of section 145 of the Act. Therefore, he completed the assessment under section 144 of the Act by rejecting the books results of the assessee.

Accordingly he made the disallowance of = 25.49 crores as unproved

purchases.

3.

In assessment year 2012-13, the assessing officer observed that total purchase of % 53.45 crores and corresponding sales eariaaee unproved. Accordingly he disallowed GP of 2% on unproved purchases to the extent of 2% 1,06,89,303/- and further he observed that assessee has issued bearer cheques to the extent of 7 16.94 crores towards purchases and assessee has made cash deposits in the bank

account which remained unexplained to the extent of % 3.14 crores.

4a

c Devendra S. Shah

Accordingly he made the above said additions to the extent of 2 21.15

crores.

4.

The assessee in the assessment Proceeding as well as appellate Proceedings submitted before the tax authorities that assessee in order to avail bank loans, assessee started manipulating his books of account and started booking inflated purchases and sales, which are bogus. The A.R. of the assessee submitted before the tax authorities the modus operandi operated by the assessee in order to book inflated purchases and sales in his books of account. In their submissions, it was stated that assessee started booking cash deposits as sales and cash withdrawals as purchases from assessment year 2005-06 onwards. In support of their submissions, assessee has filed detailed submissions and data before tax authorities. It was submitted that the actual business transactions are much less compared to the inflated purchases and sales. The assessing officer rejected the contentions of the assessee and in assessment year 2011-12, he disallowed hundred percent of unsubstantiated purchases and in assessment year 2012- 13, he made an addition of 2% of unsubstantiated purchases. When the assessee filed appeal before first appellate authority, Ld CIT(A) enhanced the addition @ 15% on total sales declared by the assessee.

However, Ld CIT(A) deleted the other additions made by the AO.

Devendra S Shah

Aggrieved with the above order, assessee is in appeal before us raising following grounds of appeal.

“1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in ignoring material available with him.

2.

On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in treating business expenses of bank charges as not eligible for allowable expenses.

3.

On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in passing the order in haste, and thus did not offer reasonable and sufficient opportunity for producing further submissions. This is against natural justice.

4.

On the facts and in the circumstances of the case and in law, the Assessing Officer has erred in levying 2% gross profit on entire purchases and the learned CIT(A) has erred in levying 15%

gross profit on sales without correlating facts with submissions filed and its legal implication.”

5.

Before us Ld AR submitted that proper books of accounts are not available and books were reconstructed in order to substantiate the claim of the assessee. Assessee is in the business of home appliances and in order to avail bank loan, assessee indulged in booking inflated sales and purchases, which are not genuine. However he submitted that assessee has carried the business of home appliances and may be 10% are genuine transactions. In order to prove the above facts, assessee submitted additional evidences before the tax authorities which are not considered by the authorities below. He relied on the rearranged grounds of appeal and prayed that the assessment may be set aside to assessing officer since the assessing officer completed the Devendra S. Shah

assessment under section 144 not under section 143 (3) of the Act. Further he submitted that Ld CIT(A) has given independent finding on bogus sales. Therefore when Ld CIT(A) came to the conclusion that the inflated sales are bogus, the corresponding purchases were also bogus. In order to appreciate the proper facts on record, he prayed that the assessment may be remit it back to AO to determine the actual profit.

6.

On the other hand, learned DR submitted that as per the record, assessee has not proved any genuinity of the transactions recorded in the return of income. The assessee has not brought on record how the bank loans were utilised in the business and how it was repaid. In order to avoid the prosecution proceedings which are pending, assessee has came up with an excuse that assessee has inflated the purchase and sales. He supported the findings of CIT(A) and prayed

that appeal may be dismissed.

7.

Considered the rival submissions and material placed on record. We notice that assessee has not filed any books of accounts, he reconstructed the books and it was submitted through authorised representatives that he has indulged in inflating the purchases and sales in order to avail substantial bank loan. However we notice that the assessee could not substantiate the actual purchases and sales of the business and submitted additional evidences in support of his

Devendra S. Shah

contention that the books figures were inflated. It is fact on record that assessing officer carried out the verification of the total purchases and came to the conclusion that the purchases were bogus. Further, he noticed that assessee has deposited huge cash in its bank account which corresponds to the unproved sales. From the submissions it is noticed that there is certain amount of truth that assessee has indulged in booking inflated purchases and sales. We notice that Ld CIT(A) also gave findings that sales were inflated but sustained the addition on such sales only. The tax authorities should find out the actual business transactions and determine the actual profit earned by the assessee. AO came to conclusion that the purchases were not substantiated and at the same time he accepts the sales declared by the assessee. The tax authorities should tax on the actual income not notional income. In order to determine the actual income earned by the assessee, tax authorities should evaluate the past performance of the assessee and determine the actual percentage of profit or average profit of the particular industry. We notice that Ld CIT(A) sustained addition on unsubstantiated sales at the rate of 15% without there being reasonableness. In our considered view, in order to determine the actual purchase and sales of the assessee and determine the actual profit earned by the assessee in the actual business carried on by him andeliminate both inflated purchases and sales based on the additional evidence filed by the assessee after due verification by the Devendra S. Shah

AO, we are remitting the issue back to the file of the AO to redo the assessment de novo, we are remitting both the assessment year under consideration to the file of assessing officer to redo the assessment de novo after giving proper opportunity of being heard to the assessee. This is based on the principal that actual income alone can be taxed and not on the notional income or based on perceived income. At the same time, we advise the assessee also to cooperate with the tax

authorities to complete the assessment in due course.

8.

In the result, the appeals filed by the assessee and Revenue are allowed for statistical purpose.

Order pronounced in the open court on 13.05.2021 MAHAVIR SINGH S. RIFAUR RAHMAN VICE PRESIDENT ACCOUNTANT MEMBER

MUMBAI, DATED: 13.05.2021

Copy of the order forwarded to:

(1) The Assessee;

(2) The Revenue;

(3) The CIT(A);

(4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai;

(6) Guard file.By Order Pradeep J. Chowdhury Sr. Private Secretary

Assistant Registrar ITAT, Mumbai

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