ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE - 3 , PUNE vs. SHRI. PRITAM SUBHASH MAHALE, PUNE

The grounds as raised in the memorandum are; ITAT-Pune Page 1 of 10 Shri Pritam S Mahale “1. On the facts and circumstances of the case and in law, the Ld. CIT(Appeals) erred in restricting the disallowance to 17.96% of the alleged hawala purchases over & above the profit shown by the assessee even through the assessee could not produce primary evidences like octroi receipt, lorry receipt, delivery challans, stock register, weighing slips etc., to prove the genuineness of purchases.

2. On the facts and circumstances of the case and in law, the Ld. CIT(Appeals) erred in arriving at the disallowance by adopting a Gross Profit ration of 17.96% on alleged bogus purchase which is without any basis and justification.

Before we proceed for adjudication, its apt to paraphrase the facts of the case as; 3.1 The respondent assessee is an individual and Govt Civil Contractor, has for AY 2009-10 filed his return of income [for short “ITR”] on 26/09/2009 declaring total income of ₹1,38,98,500/-. 3.2 The sales tax department of Maharashtra conducted several raids on sales tax evader who are ITAT-Pune Page 2 of 10 Shri Pritam S Mahale found to have engaged in hawala transaction extending tax invoices without actual transaction, and the information of such Hawala Operators / Entry Providers were passed on to DGIT (Inv) Pune, which in turn shared the information in respect of the responded assessee who alleged to have involved in hawala transactions with ten hawala operators / entry providers for total amounting to ₹64,33,495/-, for the reason, the case of the assessee was reopened by a service of notice u/s 148 dt. 13/03/2014 and was put to notice to prove genuineness of alleged hawala purchases and the existence of ten hawala operators. In response thereto, the authorised representative [for short “AR”] tendered a written submission annexing copies of tax invoices, details of bank payment and ledger accounts etc.

When the matter called up at physical hearing, none represented the assessee, in the interest of justice we proceeded to adjudicate the matter following rule 25 of the ITAT-Rules, which empowers this Tribunal to decide the appeal ex–parte on merits where the respondent does not appear in person or through an authorised representative and same is done placing no-objection from the revenue. It is needless to mention that, the proviso to the said rule carves out an exception empowering the Tribunal to set-aside the ex–parte order if the respondent appears afterwards and satisfies placing evidential material to the effect that, there was sufficient cause for his non–appearance when the appeal was called for hearing and in the event of failure to substantiate the non-appearance, the setting aside exercise crashes.

During the course of physical hearing, the learned departmental representative [for short “DR”] adverting ITAT-Pune Page 5 of 10 Shri Pritam S Mahale Para 4.2 (Page 03/04) of the assessment order strenuously opposed the action of Ld. FAA in restricting the disallowance to GP Ratio being without justification, baseless and against the law laid by the Hon’ble Apex Court in “N. K. Protein Vs DCIT” (supra). It is further argued that, the action of Ld. CIT(A) merits reversal for the reasons that, the respondent assessee in the present case is not a dealer or trader but a Civil Contractor who has failed to prove the existence of hawala operators and showcase physical movement vis-à-vis consumption of goods by placing on record stock register, goods received note, gate entry register, octroi receipts, lorry receipts etc.

We have heard the rival contentions of both the parties; and subject to the provisions of rule 18 of “ITAT Rules”, perused the material placed on record, case laws relied upon by the appellant as well the respondent and duly considered the facts of the case in the light of settled legal position forewarned to parties present.

On perusal of records, we find that, upon the receipt of information from DGIT(INV), the Ld. AO after identifying ITAT-Pune Page 6 of 10 Shri Pritam S Mahale the list of entry operators with whom the assessee had alleged hawala transactions and quantification of amount of bogus purchases involved, has put the respondent assessee to notice calling evidential documents to prove the existence of parties and genuineness of transactions, and in the event of failure to showcase physical movement of goods & consumption thereof, disallowed the entire amount of bogus. Whereas, the Ld. FAA reverberating the findings of lower authority, restricted the disallowance to the GP ratio in the light of Hon’ble Jurisdictional High Court of Bombay in “Mohammad Haji Adam & Co.” (Supra) for the reason of acceptance of sales/revenue without dispute. Insofar as the bogus purchases are concerned, the ratio laid in “Mohammad Haji Adam & Co.” (Supra) cannot squarely be applied to the present case for three factual variations, firstly the assessee before us is neither a trader nor a dealer but a Govt Civil Contractor and secondly there was complete absentia with regards to quantitative details or consumption of material purchased, and finally the sales or revenue were not exclusively with reference to goods ITAT-Pune Page 7 of 10 Shri Pritam S Mahale purchases/consumed but inclusive of work contract services. However, the Hon’ble Lordship had occasioned to considered similar facts and circumstance in the case of “PCIT Vs Pinaki D Pinani” (Bombay ITA/1543 of 2017), wherein the assessee being civil contractor, with evidential stock records and sales, was able to demonstrate the quantity of material consumed in execution of work contract undertaken and thereby established the nexus.

In the light of aforesaid discussion, we are of the considered view that, the ratio laid down by the Hon’ble Supreme Court in the case of “NK Proteins Ltd vs DCIT” (Supra) is squarely applicable to the facts of assessee case, where the Hon’ble Supreme Court dismissed appeal of assessee and confirmed the findings of Hon’ble Gujarat High Court in respect of bogus or sham purchases, wherein the Hon’ble Lordships, after analysing necessary facts, by para 6 of the order have held that; “6. The Tribunal in the case of Vijay Proteins Ltd. (supra) has observed that it would be just and proper to direct the Assessing Officer to restrict the addition in respect of the undisclosed income relating to the purchases to 25% of the total purchases. The said ITAT-Pune Page 8 of 10 Shri Pritam S Mahale Court as well. On consideration of the matter, we find that the facts of the present case are identical to those of M/s. Indian Woollen Carpet Factory (supra) or Vijay Proteins Ltd. (supra) In the present case the Tribunal has categorically observed that the assessee had shown bogus purchases amounting to Rs.2,92,93,2887- and taxing only 25% of these bogus claim goes against the principles of Sections 68 and 69C of the Income Tax Act. The entire purchases shown on the basis of fictitious invoices have been debited in the trading account since the transaction has been found to be bogus. The Tribunal having once come to a categorical finding that the amount of Rs.2,92,93,2887- represented alleged purchases from bogus suppliers it was not incumbent on it to restrict the disallowance to only Rs. 73,23,3227-.”

In the present case too, when it has been categorically established that, the amount of bogus purchases ₹64,33,495/- is debited to P&L by fictitious tax invoices and the respondent assessee failed to establish the consumption of such goods in the execution of civil contract by adducing such stock movement records to the ITAT-Pune Page 9 of 10 Shri Pritam S Mahale Ld. AO., then taxing such bogus purchases GP rate of goes against the principles of taxation embedded in chapter VI of the Act and against the ratio laid down in “N K Proteins Ltd” and “PCIT Vs Pinaki D Pinani” (Supra), for the reason, we are of the considered view that, the Ld. AO was right in making 100% disallowance towards bogus / hawala purchases, and thus we are inclined to uphold the order of assessment and reverse the order the Ld. FAA.

Resultantly, the appeal of the appellant revenue is allowed in above terms. In terms of rule 34 of ITAT Rules, the order pronounced in the open court on this TUESDAY 15th day of November, 2022.