M/S-SB PANCHAL &CO.,MUMBAI vs. ITO21(3)(2), MUMBAI

At the outset, Shri Madhur Agarwal, leaned Counsel for the assessee submitted that on the instructions of the assessee, he would not press ground no.3. Accordingly, ground no.3, is dismissed as not pressed.

In ground no.1, the assessee has challenged the validity of re– opening of assessment under section 147 of the Income Tax Act, 1961

Brief facts are, the assessee, a partnership firm, is engaged in manufacture and sale of pharmaceutical machineries. For such manufacturing activities, the assessee purchases steel from various parties. For the assessment year under dispute, the assessee had filed its return of income on 25th September 2009, declaring total income of ` 3,00,018. The return of income filed by the assessee was initially processed under section 143(1) of the Act. Subsequently, the Assessing Officer received information from the Sales Tax Department indicating that steel purchased amounting to ` 14,80,433, from two parties are non–genuine as the concerned parties have been found to be providing accommodation bills. On the basis of such information, the Assessing Officer re–opened the assessment under section 147 of the Act. During the assessment proceedings, the Assessing Officer called upon the assessee to prove the genuineness of purchases. Further, to independently verify the genuineness of such purchases, the Assessing Officer issued notices under section 133(6) of the Act to the selling dealers. However, the notices issued returned back un– served. Therefore, the Assessing Officer was of the view that 3 M/s. S.B. Panchal & Company purchases are non–genuine. However, considering the fact that the assessee has effected sales he concluded that the goods must have been purchased from grey market by suppressed profit. Accordingly, he disallowed 25% out of the purchases of ` 14,80,433, and added back an amount of ` 3,70,108. Though, the assessee contested the aforesaid addition before the first appellate authority, however, he sustained the addition made by the Assessing Officer.

The leaned Counsel for the assessee submitted, the re–opening of assessment is bad–in–law as in the reasons recorded the Assessing Officer has referred to expenditure of ` 7,776, whereas, in the assessment order, he has treated the purchases of ` 14,80,433, as non–genuine. Thus, he submitted, the reasons recorded clearly reveal complete non–application of mind by the Assessing Officer.

As regards the merits of the issue raised in ground no.2, the leaned Counsel for the assessee submitted, the assessee has paid the VAT component on the disputed purchases. Further, he submitted, the profit ratio on the goods (steel) purchased by the assessee varies between 5% to 8%. Therefore, he submitted, disallowance @ 25% is high and excessive and has to be scaled down to a reasonable figure.

The learned Departmental Representative relied upon the observations of the Assessing Officer and learned Commissioner (Appeals).

I have considered the rival submissions and perused the material on record. As regards the issue relating to re–opening of assessment under section 147 of the Act, I find that after processing of return of income under section 143(1) of the Act, the Assessing Officer had received specific information from the Sales Tax Department that certain purchases claimed to have been made by the assessee during the year are non–genuine. Therefore, the Assessing Officer has tangible material in his possession to form a belief regarding escapement of income. Mentioning of a wrong figure in the reasons recorded, therefore, would not invalidate the proceeding. Therefore, I uphold the validity of re–opening of assessment under section 147 of the Act. As regards the merits of the issue, the assessment order itself reveals that the Assessing Officer accepts the fact that as against the purchases made, the assessee has effected corresponding sales. Therefore, he has only doubted the source of purchases, hence, has added back the profit element embedded in such purchases by estimating it @ 25%. Considering the fact that the disputed goods purchased by the assessee is steel, wherein, as per industry norms, the profit rate varies between 5% and 8% and further, the fact that 5 M/s. S.B. Panchal & Company the assessee has paid applicable VAT on such purchases to the Sales Tax Authorities because of the default made by the selling dealers, I am of the considered opinion that disallowance @ 8% of the alleged non–genuine purchases would be fair and reasonable. Accordingly, I direct the Assessing Officer to restrict the disallowance to 8% of the non–genuine purchases. The grounds raised by the assessee are partly allowed.

In the result, appeal is partly allowed. Order pronounced on 28/01/2021