INCOME TAX OFFICER-19(1)(3), MUMBAI vs. GANPAT METAL INDUSTRIES, MUMBAI

The revenue has filed the present appeal against the order dated 03.05.2019 passed by the Commissioner of Income Tax (Appeals)-07, Mumbai [hereinafter referred to as the “CIT(A)”] relevant to the A.Y.2009- 10.

The revenue has raised the following grounds: - “1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in restricting the addition @ 12.5% as against @ 19.5% made by the AO on bogus purchases despite the fact that the addition was made on basis of credible information received from DGIT(Inv.) based on information supplied from sales tax authorities.

We have heard the argument advanced by the Ld. Representative of the revenue and has gone through the case carefully. The Ld. Representative of the revenue has argued that the CIT(A) has wrongly reduced the addition to the extent of 12.5% of the alleged bogus purchase, therefore, the finding of the CIT(A) is not justifiable, hence, is liable to be set aside. Before going further, we deem it necessary to advert the finding of the CIT(A) on record: - “5.3 Having considered the assessment order of the AO and the submissions of the assessee, it is seen that the main plank of assessee‟s arguments regarding the genuineness of the purchases was that the payment has been made by cheque/banking channels and which has not found favour with court‟s Tribunal‟ s pronouncements like in the case of M/s. Kanchwala Gems vs. JCIT [ITA No. '134/JP/2002 dated 10.12.2003 by the Hon‟ble ITAT, Jaipur wherein it is held that payment by account payee cheque {is not sufficient to establish the genuineness of purchases. The said decision of the ITAT, Jaipur has been affirmed by the Hon‟ble Supreme Court in the case of M/s Kachwala Gems vs. JCIT (2006) 206 CTR (SC) 585: 288 ITR 10 (SC). Thus, the main contention of the appellant does not hold much water. The AO has formed his views about the „bogus nature of the purchases made by the appellant from the above parties on the basis of statements recorded by the Sales Tax Authorities as well as further inquiries carried out by him independently. The information received from the Sales Tax authorities was only a piece of evidence to initiate in-depth independent investigation on the „issue. It is not the case of the appellant that he has maintained a proper stock register. The appellant has not been able to. establish. one to one relationship/nexus between the purchases and sales. The assessee has not been able to produce the parties from whom purchases have been alleged to have been made. The appellant has also failed to produce corroborative evidence in the form of transportation bills etc. to establish that the alleged purchases were actually transported to its premises and entered in the stock register. It is also a fact that the AO has not confronted the assessee „with all the information in his possession like statements of the alleged hawala operators. He did not go ahead with money trail of cheques debited in the appellant s bank account towards the alleged purchases though such investigation do not lead to concrete results in the case of hawala dealers and investigators of the dead end in such cases. It is not the case of the AO that. the impugned purchases have conclusively been established as not having been effected at all. The AO has only found the impugned supplier as bogus parties and he has not disputed the corresponding sales. The AO has only estimated the profit element embedded in the impugned purchases. 5.3.1 In the facts and the circumstances of the case, the total purchases shown to be made from the aforesaid parties could not be held to be entirely bogus. It needs to be appreciated that in order to achieve the reported sales/turnover, there must be some corresponding purchases, whether effected from the alleged entry providers or from the grey market without bills. Thus, there ought to. be some purchase. Tire AO has not disputed corresponding sales. In this regard, the ratio laid down by the Hon‟ble Bombay High Court in the case of CIT v. Nikunj Eximp Enterprises (P.) Ltd., is quite relevant wherein Hon‟ble High Court has held that:- “When the assessee have filed letter of confirmations of the suppliers, Bank Statements highlighting the payment entries through account payee cheque, copies of invoices, stock reconciliation statements before the AO and merely because the suppliers did not appear before the AO, one cannot conclude that the purchases were not made by the assessee. The AO cannot disallow the purchases on the basis of suspicion because the suppliers were not produced before them.” 5.3.2 In view of the discussion as above, it is clear that materials purchased and sold by the appellant cannot be doubted „though it is not possible for the assessee to establish one to one nexus/link between purchases and sales. However, the fact of the matter remains that these transactions are not verifiable from the parties in question as it could not be established that purchases had been effected from the parties in question. Thus the purchase prices shown on the invoices produced could not be subjected to verification and as such it was difficult to establish the correctness of the purchase prices paid for the materials purchased. In the absence of any such verification as to the correctness of the price paid for the materials purchased by the appellant, the purchase price paid as mentioned on the invoices/bills cannot be accepted as the correct price paid for the goods purchased from such parties. In view of the same, the possibility of over-invoicing of the materials purchased to reduce the profit cannot be ruled out. Therefore, the gross profit rate shown by the appellant for the year under „consideration cannot be relied upon. In the circumstances, the correct approach in such transactions would be to estimate the additional benefit or profit earned on these purchases and not to disallow the entire purchases from „the aforesaid parties. In my view either the purchases from such parties „is over invoiced or the purchases were actually made but not from the parties from which it was claimed to have been made and instead may have been purchased from: grey market without proper billing or documentation. 5.3.3 In many judicial pronouncements on the issue, the Courts have taken a consistent view that in „case of non-existent parties from which the purchases are shown to have been made, only a part of such purchases can be disallowed, particularly in such cases where the corresponding sales are not doubted. Alternatively, the profit embedded in such sales against the alleged bogus purchases should be brought to tax. 5.3.3.1 In the case of CIT-1 Vs Simit P. Sheth, of 2012, order dated 15/01/2013, while deciding a similar issue, the Hon'ble High. Court of Gujarat bas held that: "We are broadly in agreement with the reasoning adopted by the Commissioner (Appeals) with respect to the nature of disputed purchases of steel. It may be that the three suppliers, from whom the assessee claimed to have purchased the steel did not own up to such Sales. However, vital question while considering whether the entire ° amount of purchases should be added back to the income of the assessee or only the profit element embedded therein was to ascertain whether the purchases themselves were completely bogus and non-existent or that the purchases were actually made but not from the parties from whom it was claimed to have been made and instead may have been purchased from grey market without proper billing or documentation. In the present case, CIT believed that when as a trader in steel the assessee sold certain quantity of steel, he would have purchased the same quantity from some source. When the total sale is accepted by the Assessing Officer, he could not have questioned the very basis of the purchases. In essence therefore, the Commissioner (Appeals) believed assessees theory that the purchases were not bogus but were made from the parties other than those mentioned in the books of accounts. That be in the position not entire purchase price but on it element embedded in such purchases can be added to the income of the assessee. So much is clear by decision of this Court. In particular, Court has also taken a similar view in case of Commissioner of Income Tax-IV vs. Vijay M Mistry: Construction Ltd. vide order dated 10.01.2011 passed in Tax Appeal No. 1090 of 2009 and in case of Commissioner of Income Tax-I vs. Bholanath Poly Fab Pvt. Ltd. vide order dated 23.10.2012 passed in Tax Appeal No. 63 of 2012. The view taken by the Tribunal in case of Vijay Proteins Pvt. Ltd. Vs. CIT reported in 58 ITD 428 came to be approved.” 5.3.4 Similarly, while dealing with an identical issue, in the case of CIT, Vs. Bholanath Poly. Fab (P) Ltd., LT.A. No. 63 of 2012, in the order dated 23/10/2012, the Hon'ble High Court of Gujarat has held as under: “We are of the opinion that the Tribunal-committed no error. Whether the purchases themselves were bogus or whether the parties from whom such purchases were allegedly made were bogus is essentially a question or fact. The Tribunal having examined the evidence on record the finished go on that the assessee did purchase the cloth and sell. In the entire covered under such purchase, but the profit element embedded therein would be subject to tax, This was the view of this court in the case of Sanjay Oilcake Industries v. CIT [2009] 316 ITR 274 (Guj). Such decision is also followed by this court in a judgment dated August 16, 2011, in Tax Appeal No. 679 of 2010-in the case of CIT v. KishorAmrutlal Patel. In the result, tax appeal is dismissed.” (emphasis supplied) 5.3.5 In view of the facts and circumstances of the case and the judicial pronouncements cited above, what can be disallowed or taxed in the instant case, is the excess profit element embedded in. such purchases shown to have been made from aforesaid parties. As narrated earlier, the AO in this case has held that various parties from whom the purchases were made by the appellant were found to be bogus, estimations ranging from 12.5% to 25% have been upheld by the Hon'ble Gujarat High Court, depending upon the nature of the business. 5.3.5.1 In a number/series of recent cases involving the scam unearthed by the Sales Tax Dept of Maharashtra whereby the hawala dealers were found to be issuing bogus purchase bills without delivery of goods, the. Hon'ble Mumbai Tribunal has estimated the G.P addition on account of such bogus purchases as 12.5%, some of which are listed below: Smt. KiranNavinDoshi in dated 18.01.2017. ii) Ashwin Purshotam Bajaj @ & Anr. Vs ITO & Anr, in ITA No.4736/Mum/2014, 5207/Mum/2014, dated:14-12-2016.

On appraisal of the above mentioned finding, we noticed that the CIT(A) has decided the matter of controversy on the basis of the decision of the Hon’ble High Court of Gujarat in the case of CIT Vs. Bholanath Poly Fab Pvt. Ltd. ITA. No.63 of 2012, in the order dated 23.10.2012 & CIT Vs. Simit P. Sheth, ITA. No.553 of 2012, order dated 16.01.2013 and the other judgments which have been reproduced in the order. In the instant case, sale is not doubted, therefore, the CIT(A) has restricted the addition to the extent of 12.5% of the bogus purchase which works out to the tune of Rs.5,63,203/- (12.5% of Rs.45,05,620/-). The facts are not distinguishable at this stage. Taking into account, all the facts and circumstances, we are of the view that CIT(A) has decided the matter of controversy judiciously and correctly which is not liable to be interfere with at this appellate stage. Accordingly, we upheld the finding of the CIT(A) on this issue and decide this issue in favour of the assessee against the revenue.

In the result, appeal filed by the revenue is hereby dismissed.