SHRI DILIP KUMAR SUMERMAL KANUNGO,MUMBAI vs. ITO 19(1)(4), MUMBAI

ORDER PER N.K. PRADHAN, A.M. The captioned appeals filed by the assessee are directed against the order of the order of the Commissioner of Income Tax (Appeals)-5, Mumbai [in short ‘CIT(A)’] and arise out of the assessment completed u/s 143(3) r.w.s. 147 of the Income Tax Act 1961, (the ‘Act’). For the sake of convenience, as Shri Dilip Kumar Sumermal 2 & 5195/M/2019 common issues are involved, we are proceeding to dispose off these appeals by a consolidated order. Facts being identical, we begin with the AY 2009-10.

Shri Dilip Kumar Sumermal 3 & 5195/M/2019 failed to do so. Having examined the details filed by the assessee, the AO noted that the assessee could not file important documents such as delivery challans, transport receipts, goods-inward register maintained in the godown. Considering the above facts, the AO estimated the profit @ 12.5% of the disputed purchases of Rs.1,24,10,733/- and accordingly brought to tax Rs.15,51,341/-.

“8.4.8. From the facts available on records, it is observed that in the present case also the AO has neither disbelieved the purchases nor the corresponding sales/works 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. Since, the action of the AO is in conformity with above referred decisions, no fault can be found with the action of the AO in disallowing 12.5% of such purchases. Hence, the impugned disallowance of Rs.15,51,341/- is confirmed.”

On the other hand, the Ld. Departmental Representative (DR) supports the estimation of 12.5% done by the AO and then confirmed by the Ld. CIT(A). Further, it is stated by him that considering the facts of the present case, the Ld.

Shri Dilip Kumar Sumermal 4 & 5195/M/2019 CIT(A) has rightly distinguished the decision in Mohommad Haji Adam & Co & Ors (supra).

The Ld. CIT(A) has distinguished the present case of the assessee from Mohommad Haji Adam & Co & Ors (supra) (hereafter “that case”) on the ground that (i) in that case, the assessee was a trader in cotton and man-made fabrics on retails as well as semi wholesale basis and mainly dealt in suiting and shirting materials, whereas in the present case, the appellant is engaged in trading of ferrous and non-ferrous metals, (ii) in that case, it is observed that though during the course of survey operations u/s 133A of the Act, bogus/hawala/suspicious parties concerned therein in their statement had admitted that they are engaged in issuing bogus/hawala bills, but subsequently, all the three parties concerned therein had filed affidavits stating that as far as assessee is concerned they had actually made sales ; whereas in the present case, the AO in the assessment order has given a factual finding that in order to verify the genuineness of the transaction, notices u/s 133(6) were issued to the said parties at the address provided by the assessee, however, said notices could not be served and returned back un-served by the postal authorities with the remarks “left”, “not traceable” “not known” etc. and (iii) in that case, the Bombay High Court while dismissing all appeals has held that “in these circumstances, no question of law, therefore arises”; hence, the order of the Tribunal, in the facts and circumstances of that case has been confirmed and no question of law arises.

Shri Dilip Kumar Sumermal 5 & 5195/M/2019 6.1 At this moment, let us narrate at length the decision in Mohommad Haji Adam & Co & Ors (supra). In that case, during the course of survey operations in the case of entities from whom the assessee had claimed to have made purchases, the Department collected information suggesting that such purchases were not genuine. The AO noticed that the assessee had shown purchases of fabrics worth Rs.29.41 lakhs from three group concerns, namely M/s Manoj Mills, M/s Astha Silk Industries and M/s Shri Ram Sales and Synthetics. On the basis of statement recorded during such survey operations, the AO concluded that the selling parties were engaged only in supplying the bogus bills, that the goods in question were never supplied to the assessee, and therefore, the purchases were bogus. He, therefore, added the entire sum in the hands of the assessee as its additional income. The assessee carried the matter in appeal before the CIT(A), who accepted the factum of purchases being bogus. However, he compared the purchases and sales statements of the assessee and observed that the Department had accepted the sale, and therefore, there was no reason to reject the purchases, because without purchases there cannot be sales. He, therefore, held that under these circumstances the AO was not correct in adding the entire amount of purchases as the assessee’s income. He, therefore, deleted the addition refreshing it to 10% of the purchase amount. He also directed the AO to make addition to the extent of difference between the gross profit rate as per the books of accounts on undisputed purchases and gross profit on sales relating to the purchases made from the said three parties. The assessee carried the matter before the Tribunal. The Revenue also carried the issue before the Tribunal. The Tribunal allowed the appeal of the assessee partly and dismissed that of the Revenue. The Tribunal noted that the CIT(A) had not given any reasons for retaining 10% of the purchases by way of ad-hoc

Shri Dilip Kumar Sumermal 6 & 5195/M/2019 additions. The Tribunal, therefore, deleted such additions, but retained the portion of the order of the CIT(A) to that extent he permitted the AO to tax the assessee on the basis of difference in the GP rates. In further appeal before the Hon’ble Bombay High Court, the Revenue referred to the decision of the Division Bench of the Hon’ble Gujarat High Court in the case of N.K. Industries Ltd. v. DCIT in Tax Appeal No. 240 of 2003 and connected appeals decided on 20.06.2016 and also pointed out that the SLP against such decision was dismissed by the Hon’ble Supreme Court. The Hon’ble Bombay High Court held :

“8. In the present case, as noted above, the assessee was a trader of fabrics. The A.O. found three entities who were indulging in bogus billing activities. A.O. found that the purchases made by the assessee from these entities were bogus. This being a finding of fact, we have proceeded on such basis. Despite this, the question arises whether the Revenue is correct in contending that the entire purchase amount should be added by way of assessee's additional income or the assessee is correct in contending that such logic cannot be applied. The finding of the CIT(A) and the Tribunal would suggest that the department had not disputed the assessee's sales. There was no discrepancy between the purchases shown by the assessee and the sales declared. That being the position, the Tribunal was correct in coming to the conclusion that the purchases cannot be rejected without disturbing the sales in case of a trader. The Tribunal, therefore, correctly restricted the additions limited to the extent of bringing the G.P. rate on purchases at the same rate of other genuine purchases. The decision of the Gujarat High Court in the case of N.K. Industries (supra) cannot be applied without reference to the facts. In fact in paragraph 8 of the same Judgment the Court held and observed as under-

“ So far as the question regarding addition of Rs.3,70,78,125/- as gross profit on sales of Rs.37.08 Crores made by the Assessing Officer despite the fact that the said sales had admittedly been recorded in the regular books during

Shri Dilip Kumar Sumermal 7 & 5195/M/2019 Financial Year 1997-98 is concerned, we are of the view that the assessee cannot be punished since sale price is accepted by the revenue. Therefore, even if 6 % gross profit is taken into account, the corresponding cost price is required to be deducted and tax cannot be levied on the same price. We have to reduce the selling price accordingly as a result of which profit comes to 5.66 %. Therefore, considering 5.66 % of Rs.3,70,78,125/- which comes to Rs.20,98,621.88 we think it fit to direct the revenue to add Rs.20,98,621.88 as gross profit and make necessary deductions accordingly. Accordingly, the said question is answered partially in favour of the assessee and partially in favour of the revenue.”

6.2 In Mohommad Haji Adam & Co & Ors (supra), to put it simply, the AO found three entities who were indulging in bogus billing activities, the AO found that the purchases made by the assessee from these entities were bogus. The finding of the CIT(A) and the Tribunal would suggest that the Department had not disputed the assessee's sales. There was no discrepancy between the purchases shown by the assessee and the sales declared. That being the position, the Tribunal was correct in coming to the conclusion that the purchases cannot be rejected without disturbing the sales in case of a trader. The Tribunal, therefore, correctly restricted the additions limited to the extent of bringing the GP rate on purchases at the same rate of other genuine purchases. The Hon’ble Bombay High Court held that “no purchases can be rejected without disturbing the sales in case of a trader thus, additions limited to the extent of brining the GP rate on purchases at the same rate of other genuine purchases”.

We find that the facts in the instant case are similar to the above decision. Following the same, we set aside the order of the Ld. CIT(A) and Shri Dilip Kumar Sumermal 8 & 5195/M/2019 direct the AO to restrict the additions limited to the extent of bringing the G.P. rate on disputed purchases at the same rate of other genuine purchases.

Facts being identical, our decision for the AY 2009-10 applies mutatis mutandis to AY 2011-12.

Order pronounced in the open Court on 16/03/2021.