SHRI. VIKRAM VARDHAN,MUMBAI vs. ITO 20(3)(5), MUMBAI

The grounds of appeal read as under :-

It is noted that there is a delay of 390 days in filing the appeal. The condonation petition refers to following affidavit by the partner of the Chartered Accountant firm that ex-parte order of learned CIT(A) was addressed to old address of the assessee and they became aware of the order only after recovery proceedings started.

Upon hearing both the parties and considering the reasonable cause I condone the delay.

Brief facts of the case are that the assessee is an individual claimed to be engaged in the business of dealers in laptop and its accessories. The return of income for the year under appeal was filed on 29-09-2009 declaring total income of Rs. 9,61,810/- and the return was processed u/s 143(1). Thereafter on the basis of information received in respect of hawala transactions, proceedings were initiated u/s 147 of the Act. The assessment u/s. 143(3) rws 147 was completed by the Assessing Officer on 13.03.2009 determining income at Rs.13,36,270/-. The Assessing Officer observed that the appellant had debited purchases of Rs.29,95,668/- from two parties considered to be hawala dealers. On the basis of information received from the Sales Tax Department (Investigation Wing of Income Tax Department, Mumbai) it was found that the appellant had obtained bogus purchase bills total amounting to Rs. 29,95,668/- from so called hawala operators. The Assessing Officer on going through the submissions and contentions of the assessee concluded that the assessee failed to prove with supporting documentary evidences that the material was actually delivered in its premises and also failed to file evidences of deliveries to establish that the material was consumed for business activities. Also the assessee failed to furnish the confirmation from the party that it had actually sold and delivered material to the appellant company and hence, the sum in respect of investment made out of unaccounted money by the appellant for purchase of materials from the party of Rs. 29,95,668/- was treated as bogus purchases and made an adhoc addition of Rs. 3,74,459/- being 12.5% of the said expenses and added to the total income.

Upon assessee’s appeal learned CIT(A) confirmed the same.

Against above order assessee is in appeal before the ITAT. I have heard both the counsel and perused the records.

Upon careful consideration I find that assessee has provided the documentary evidence for the purchase. Adverse inferences have been drawn due to the inability of the assessee to produce the suppliers. I find that in this case the sales have not been doubted. It is settled law that when sales are not doubted, hundred percent disallowance for bogus purchase cannot be done. The rationale being no sales is possible without actual purchases. This proposition is supported from honourable jurisdictional High Court decision in the case of Nikunj eximp enterprises (in writ petition no 2860, order dated 18.6.2014). In this case the honourable High Court has upheld hundred percent allowance for the purchases said to be bogus when sales are not doubted. However in that case all the supplies were to government agency. In the present case the facts of the case indicate that assessee has made purchase from the grey market. Making purchases through the grey market gives the assessee savings on account of non-payment of tax and others at the expense of the exchequer. As regards the quantification of the profit element embedded in making of such bogus/unsubstantiated purchases by the assessee, learned counsel pleaded that as held by honourable High Court of Bombay in its recent judgement in the case of principle Commissioner of income tax versus M. Haji Adam & Co (ITA number 1004 of 2016 dated 11/2/2019 in paragraph 8 there off) the addition in respect of bogus purchases is to be limited to the extent of bringing the gross profit rate on such purchases at the same rate as of other genuine purchases.

I respectfully following the aforesaid judgement of the honourable High Court set aside the matter to the file of the assessing officer with the direction to restrict the addition as regards the bogus purchases by bringing the gross profit rate on such bogus purchases at the same rate as that of the other genuine purchases. Needless to add the assessee should be granted adequate opportunity of being heard.

In the result assessee's appeal is partly allowed.