NAYAN SHUKLA,MUMBAI vs. ITO 22(1)(4), MUMBAI

PER MAHAVIR SINGH, VP: 1. These two appeals by assessee are arising out of the common order of Commissioner of Income Tax (Appeals)-25, Mumbai [for short ‘the ld.

2 In the facts and circumstances of the case and in law, the learned Commissioner of Income Tax(A) erred in a) confirming the disallowance amounting to Rs. 6,84,266/- being 12.5% of total purchases of Rs. 54,74,132/- by way of unexplained expenditure u/s 69C. b) confirming the disallowance amounting to Rs. 6,84,266/- being 12.5% of total purchases of Rs. 54,74,132/- by way of unexplained expenditure u/s 69C, just because notices u/s 133(6) were issued but not served to the suppliers. c) confirming the disallowance amounting to Rs. 6,84,266/- being 12.5% of total purchases of Rs. 54,74,132/- by way of unexplained expenditure u/s 69C, even though the payment for purchases is made from the books and cannot be termed as unexplained expenditure. d) confirming the disallowance amounting to Rs.6,84,266/- being 12.5% of total purchases of Rs. 54,74,132/- by way of unexplained expenditure u/s 69C without allowing cross-examination of the said suppliers. e) confirming the disallowance amounting to Rs. 6,84,266/- being 12.5% of total purchases of Rs. 54,74,132/- by way of unexplained expenditure u/s 69C without rebutting the fact that no sales can be made by trader without purchases. f) confirming the disallowance amounting to Rs. 6,84,266/- being 12.5% of total purchases of Rs. 54,74,132/- by way of unexplained expenditure u/s 69C by wrongly adopting theory of cumulative peak of 3 years' balances in the suppliers' account and thereby assuming and adopting astronomical GP of the Appellant which is highly unrealistic. g) confirming the disallowance amounting to Rs. 6,84,266/- being 12.5% of total purchases of Rs. 54,74,132/- by way of unexplained expenditure u/s 69C only on the basis of the information on the website www.mahavat.gov.in about suspicious dealers whose copy of statement recorded were not furnished to the appellant.

The Assessing Officer disallowed the entire purchases from these parties, as these parties could not respond to the notices issued under section 133(6) of the Act. The Assessing Officer treated the entire purchases from these parties as unexplained amounting to Rs. 54,74,132/-. Aggrieved, the assessee preferred appeal before the CIT(A). & 1630 Mum 2017-Shri Nayan Shukla

11.1 In this regard, in my opinion, only on the basis of information received from the Sales Tax authorities regarding bogus nature of purchases from the above mentioned seven parties, cannot be taken as the basis to treat the peak of the cumulative purchases from these parties as bogus or non-genuine. The information received from the Sales Tax authorities was a piece of evidence to initiate in-depth independent investigation on the issue. However, the AO has primarily relied on the information received from Sales Tax authorities. On the given set of facts and circumstances and without appreciating the evidences submitted by the appellant during assessment proceedings, peak of the cumulative purchases from these parties shown to be made from the seven parties cannot be held to be bogus. It has not been appreciated that the goods shown to be purchased from these parties were used in the business and without which, corresponding turnover would not possible. Thus, there ought to be purchases made and hence, entire disallowance is not justified.

11.2 In this regard, I find the ratio laid down by the Hon'ble High Court of Bombay in the case of CIT v. Nikunj Eximp Enterprises (P.) Ltd., 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 & 1630 Mum 2017-Shri Nayan Shukla 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." 11.3 The facts and circumstances as outlined above, clearly suggest that the purchases of materials by the appellant cannot be doubted but a major lacuna in these transactions is the unverifiable nature of the purchases from the parties in question, as they could not be located at the given addresses. Thus the purchases prices shown on these invoices are not subjected to verification and as such it was difficult to establish the correctness of the purchase prices paid for the materials purchased from them. Such verification of the price shown on the invoices/bills was necessary to ascertain the correctness of the profits shown by the appellant for the period under consideration. This verification was also vital to determine as to whether the purchase prices shown on the bills/invoices, are as per prevailing market prices of the materials purchased and to ascertain that the price paid for the materials purchased from these parties are not over invoiced. In the absence of any such verification of 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 profits, 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 eared on these purchases and not to disallow' peak of the cumulative purchases from these parties. The disallowance of peak of the cumulative purchases from these parties would not be logical and would amount to travesty of justice. In my view either the purchases from these parties are 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.

11.4 As of now the issue of such types of unverifiable purchases have been much discussed and debated by the various courts and tribunals. 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, & 1630 Mum 2017-Shri Nayan Shukla only part of such purchases can be disallowed, particularly in the 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.

11.5 In the case of CIT-1 Vs Simit P. Sheth, of 2012, order dated 16/0112013, while deciding a similar issue, the Hon'ble High Court of Gujarat has 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 being the position, not the entire purchase price but only profit 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.

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11.6 Similarly while dealing with an identical, issue, in the, case of CIT, Vs. Bholanath Poly Fab (P) Ltd., 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 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 goods. In that view of the matter, as natural corollary, not the entire amount 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 [2009J 316 ITR 274 (Guj). Such decision is also followed by this court in a judgment dated August 16, 20 11, in Tax Appeal No.679 of 2010 in the case of CIT v. Kishor Amrutlal Petel. In the result, tax appeal is dismissed.’

11,7 In view of the facts and circumstances and the judicial pronouncements cited above, what can be disallowed or taxed in the instant case, is the exces profit element embedded in such purchases shown to have been made from these parties. In this regard, the yardstick laid down by aforesaid judicial pronouncements by disallowing 12.5% of purchases as the benefit garnered in such unverifiable purchases where sales are not disapproved, is a sound benchmark that is being adopted in the present case too.

11.8 Therefore in the instant case, it is found that all the facts and circumstances outlined above lead to the conclusion that although the purchases made by the appellant from the seven parties mentioned above during the year under consideration cannot be summarily rejected but at the same time it difficult to accept that the purchases shown on the invoices/bills issued by these parties are as per the prevailing market price of those materials or actually been made from such parties and might have been purchased in the grey market. The appellant has not placed any evidence on record that that the goods were purchased from the above parties at arms' length price. The appellant has also not placed on record any comparable bills/invoices for purchases of similar items made from other parties to establish that the purchases from the parties in question were at par with & 1630 Mum 2017-Shri Nayan Shukla the purchases made from other parties during the period under consideration. The possibility of such purchases from unregistered dealers without invoices cannot be ruled out. In view of the above, the correctness of the purchase prices mentioned on such bills/invoices issued by the above parties in question cannot be accepted and some additional profit needs to be estimated on such purchases made from the above parties in question. 11.9. As stated above, following the guidelines laid down in the above judicial decisions, disallowance of 12.5% on such alleged bogus purchases of Rs. 54,74,132/- i.e., Rs.6,84,266/- for A.Y. 2009-10 is confirmed, which needs to be added to the total income of the assessee on account of alleged bogus purchases and the balance addition of Rs. 30,29,960/- is hereby deleted. Thus, grounds of appeal no. 3-9 are partly allowed.

6. Similarly in Assessment Year 2010-11 also the CIT(A) restricted the profit rate at 12.5% of the bogus purchases. Aggrieved, the assessee came in appeal before the Tribunal in both the years.