INCOME TAX OFFICER-20(1)(5), MUMBAI vs. HABIBULLAH M. H. MULLAJIWALA(PROP.M/S.LUCKY SUPPLY AGENCY), MUMBAI

O R D E R

PER AMARJIT SINGH, JM:

2. "On the facts and in the circumstances of the case and in law, the Ld. CIT (A) has failed to appreciate the fact that the onus is on the assesse to explain and substantiate the genuineness and true nature of the purchases transaction."

3. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) has failed to appreciate that the hawala dealers have admitted on oath before the Sale Tax Authorities that they have not sold an' material to anybody."

4, "On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in concluding that assessee had made cash purchases from other parties which were not recorded in the books without mentioning how this and with what evidence before him such finding was arrived at. If such evidence of cash purchases was given the same should have been remanded to the A.O. for his examination and comments." A.Y.2011-12 5. "On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in appreciating that the assessment order passed in the case of the assesses was u/s 144 of the I.T. Act, 1961 and the Ld. CIT(A) should have remanded back the matter to the A.O. to re-verily the facts before concluding that the addition be restricted to gross profit ratio declared by the assessee."

ISSUE Nos. 1 to 6

and written submissions made before me. After a careful consideration of the same as well as the assessment order. The main objection of the appellant is against the 100% addition on the bogus purchases and other ground are in general nature there are no need for adjudication. I proceed to rule as under. 5.1 On perusal of the assessment as well as submission file before me, I found that the A.O. made passed order u/s. 144 and made addition by disallowing entire bogus purchases. The appellant is alleged to have made bogus purchases from 3 parties viz Sheetal Trading Co. Rs.55,026/-, Mehul Traders Rs.19,13,060/-, and Ascent Enterprises Rs.36,44,143/- totaling to Rs.56,12,229/-. The AO required the appellant to produce the parties before him along with detail for earlier by him through notice u/s 142(1) detailed above. A.Y.2011-12 5.2. The appellant would have me believe that the findings of the Sales Tax Dept should be brushed aside and that the purchases should be believed as genuine simply because she has made payment in cheques to these 4 suppliers. I find that there are a number of judicial pronouncements where has been held that records maintained as per Excise laws are important piece of evidence as held in Motipur Sugar Factory (P) Ltd. V CIT (1974)

95. ITR 401 (Pat.)(High Court)(409); Seetarama Mining Co-V. CIT ()1968) 68. ITR 1. (AP)(High Court) and in Shanker Rice Co. V. ITO (2000) 72. (ITD) 139 (Asr.) (SB)(Trib) (158)

-In above cases, the courts have taken the view that, records maintained by Central Excise Authorities: Various State Got authorities are important piece of evidence. Applying the same principle if the Sales tax authorities have taken a view that the 4 suppliers in the case of the appellant are bogus, then the order of Sales Tax authorities can be relied on by the AO to doubt the genuineness of the purchase transactions. In such situation the burden is on the assessee to prove that though the sales tax authorities have taken the view that purchases are genuine. Therefore. I hold that the appellant is wrong when she states that the information from the Sales Tax Dept should not be given weight. That information coupled with the inability of the appellant to produce anything more than the fact of payment and purchase invoice clearly casts a doubt on the transaction.

5.3 The ITAT Mumbai Benches in the following cases have also held that in cases of bogus purchases. the entire purchase A.Y.2011-12 cannot be disallowed. but only the profit embedded in the doubtful transactions has the taxed.

Shri Madhukant II. Gandhi v. ITO) /M/2009 Bench "B" dt.23/2/2010 (AY. 2005-06)

The A.O. treated parties as bogus and made total disallowances. ITAT restricted the disallowance to 5% only in respect of the disputed purchase.

DCIT v. Shri Jitendra S. Motani, to 3028 Bench "J" dt 4-08-2009 (AYs 2000-01 to 2005-06) and ITA no 6178/M/ 2007 dl. 30-11- 2011 Bench J (AY. 2004-05) (Mum)(Trib.)

The AO made disallowance of entire purchases. Only few parties filed confirmations. CIT (A) applied 3% to GP to all the purchases. The payments were made by A/c payee cheque. The ITAT held that addition restricted to 3% on tainted purchases only (i.e. where no confirmation was obtained or doubtful in nature)

5.4 An identical issue came up before the Hon'ble High Court of Gujarat in the case of Commissioner of Income-tax V. Bholanath Polv Fab Pvt. Ltd. reported in 355 ITR 290 GuJ. The assessee was engaged in the business of trading in finished fabrics. The AO disallowed purchase as bogus unexplained. The CIT(A) confirmed the action of the AO. The issue was carried in appeal before the Hon'ble tribunal which concurred with the finding of the revenue authorities below that such purchase was made from bogus parties. After, adverting to the facts and data placed before A.Y.2011-12 it. The Hon' ble Tribunal noted that the entire of noted sold during the year and therefore accepted the assessee’s contention that finished goods purchased by the appellant may not be from the parties shown in the accounts but other parties. In view of this the Hon'ble ITAT was of the view that only profit margin embedded in such purchases would be subjected to tax. The Hon'ble Tribunal relied its earlier decision in the case of M/s. Saket Steel Traders Vs. ITO (ITA No.2801/Ahd/2008 dt.20/5/2008) and also made reference to the decision in the case of Vijay Protein Vs. CIT 58 1TD 428 (Ahd.). On appeal by the Department, the Hon'ble HC of Gujarat. dismissed the appeal. The head note is as under:

" Income from undisclosed sources-assessment-assessee trading in finished fabrics whether purchases themselves bogus whether parties from whom such purchases were made bogus question of facts Tribunal finding assessee did purchase cloth purchases and sell finished fabrics—Not entire purchase price but profit element embedded in purchases liable to tax—Income-tax Act, 1961. The assessee, for the assessment year 2005-06, was engaged in the business of trading in finished fabrics The Assessing Officer held that purchases worth Rs.10,69.546 were unexplained and disallowed the expenditure chained by the assessee and computed eta, total income o[ Rs. 41.10,187. In so for as the question of bogus purchase's was concerned. The Tribunal concurred with the Revenue's views that such purchases were made from bogus parties. The Tribunal noted that the Assessing Officer had issued notices to all the parties from whom such purchases were allegedly made. Such notices were returned unserved by the postal A.Y.2011-12 authorities with the remark that the addresses were incomplete. The inspector deputed by the Income-tax Department also could not find any of the parties available at the given addresses. The assessee was unable to produce any confirmation from any of the parties. Though the assessee had claimed to have made payment by account payee cheques. Upon verification, it was that the cheques were encashed by some other parties and not by the supposed sellers. However the Tribunal was of the opinion that though the purchases might have been made from bogus parties, the purchases themselves were not bogus. The Tribunal adverted to the facts and data on record and came to the conclusion that the entire quantity of opening stock purchases and quantity manufacturing during these 2005-06 were sold by the assessee Therefore the purchases of the entire, of cloth were sold during 2005-06. Therefore, accepted the assessee contention that the finished goods were purchased by the assessee though not from the parties shown in the accounts, but front other sources. The Tribunal was of conclusion that not the entire amount but the profit margin embedded in such amount would be subjected to tax. On appeal. Held, dismissing the appeal. that whether the purchases themselves were bogus or whether the parties from Idiom such purchases were allegedly made were bogus essentially a question of fact. The Tribunal having examined the evidence on record came to the conclusion that the assessee did purchase the cloth and sell the finished fabrics. Therefore, as a natural corollary, not the entire amount covered under such purchases, but the profit element embedded therein would be subject to tax. A.Y.2011-12 5.5 In the case of Sanjay Oilcake Industries v. Commissioner of Income-tax reported in 316 ITR 274(Guj). the Hon’ble court had upheld the action of the CIT(A) and ITAT in determining estimated addition of 25% of the purchases in cases involving boons purchases.

Held, that the finding of the Assessing Officer had been accepted by the Commissioner (Appeals) and the Tribunal that the apparent sellers who had issued sale bills were not traceable. The goods were received from the parties other than the persons who had issued sale bills were not traceable. Though the purchases were shown to have been made by making payment thereof by account payee cheques and the cheques had been deposited in the bank accounts ostensibly in the name of the apparent sellers, thereafter the entire amounts had been withdrawn by bearer cheques and there was no trace or identity of person withdrawing the amount from the bank accounts. Both the Commissioner (Appeals) and the Tribunal had come to the conclusion that in such circumstance, the likelihood of the purchase price being inflated could not be ruled out and there was no material to dislodge such finding. The assessee had, by evidence available on record, made it possible for the recipients not being traceable for the purpose of inquires as to whether the payments made by the assessee had been actually received by the apparent sellers. Hence the estimate made by the appellate authorities did not warrant interference.

5.6 Again in the case of Commissioner of Income-tax v. Simit P. Sheth 356 ITR 451 (Guj) the Hon’ble court finding that estimation of rate of profit return must necessarily vary with the A.Y.2011-12 nature of business and no uniform yardstick could he adopted and finally confirmed the action of the ITAT in determining 12.5% of the bogus purchases as the profit embedded in such transaction. The head note is as under:

Held, dismissing the appeal, that the Commissioner (Appeal) believed that the purchases were not bogus but were made from the parties other than those mentioned in the books of account. That being the position, not the entire purchase price but on the profit element embedded in such Purchases could be added to the income of the assessee. In essence, the Tribunal only estimated the possible profit out of purchases made through non-genuine parties. The estimation of rate of profit return must necessarily vary with the nature of business and no uniform yardstick could he adopted.

5.7 In the instant ease, the appellant is not in a position to prove the existence of the suppliers. 'There is enough circumstantial evidence casting a doubt on the nature of the transaction. I am of the firm belief that the appellant had made cash purchases from other parties which were not recorded in the books. The appellant took only bills from these 3 parties as accommodation to explain the purchases. The AO has disallowed entire bogus purchases. Before me the appellant furnished a copy of audited books of account, on perusal of the same I found that the appellant have shown the G.P. 14.06% for the year under consideration. The appellant has already recorded a GP of 14.06 % in his books. I am of the opinion that the disallowance on the issue of bogus purchase be restricted at recorded average GP in his books of accounts for the year tinder consideration is 14.06%. Therefore, I direct the AO to estimate A.Y.2011-12 profit of 14.06% on total alleged bogus purchase of Rs. 56,16,229/- which works out to Rs 7,89,079/-. The amount of Rs 7,89,079/- is sustained out of the addition of Rs 56,16,229/- made by the AO. The appellant gets a relief of the balance Rs. 48,27,150/-. The ground of appeal is partly allowed.”

6. Upon perusal, we find that CIT(A) has decided the matter of controversy on the basis of decision of Hon’ble Gujarat High Court in the case of CIT vs. Simit P. Sheth 356 ITR 451 and CIT Vs. Bholanath Poly Fab Pvt. Ltd. reported in 355 ITR 290 and Sanjay Oilcake Industries Vs. CIT reported in 316 ITR 274 (Guj). After considering the said decisions and other decisions which have been relied upon by CIT(A) in his decisions mentioned above, the CIT(A) has estimate GP addition of 14.06% against bogus purchases. The said estimation, in our opinion, is quite fair and reasonable on the facts and circumstances of the case. We are of the view that CIT(A) has decided the matter of controversy judiciously and correctly which do not require any interference on our part. Accordingly, the revenue’s appeal stand dismissed.