ITO, 28(1)(5), MUMBAI vs. M/S HI-TECH INTERNATIONAL, MUMBAI

This is an appeal filed by the Revenue against the order of the CIT(A) for A.Y. 2009-10 in the matter of order passed under Sections 143(3)/147 of the Income Tax Act, 1961 (hereinafter "the Act").

M/s. Hi-Tech International 6.1. Grounds No. 1 & 2 of the appeal are against addition of Rs. 22,25,542/- as unexplained expenditure u/s. 69C of the Act. As per the investigations carried out by the Sales Tax Authorities, the aforementioned parties were found to be involved in giving accommodation entries only without actually supplying the goods. The logical inference is that the purchases made by the appellant would also be in the nature of accommodation entries only. To verify the same, the AO had made enquiries by issuing notices u/s 133(6) which were returned unserved by the postal authorities, This party was found to be nonexistent at the address given by the appellant. The appellant also failed to provide the latest address of the party. During the scrutiny assessment the appellant furnished details of purchases and corresponding sales. However, the appellant could not produce the party before the AO inspite of opportunity being given. The appellant also failed to produce delivery challans or transportation details. The onus of proving the genuineness of such purchases is on the appellant which the appellant had not been able to discharge fully. When the hawala party had admitted on oath that it had given accommodation entries only without actually supplying the goods, the genuineness of purchases made from these parties will have to be considered taking this into consideration while examining the documentation submitted by the appellant in support of its claim. The documentary evidences such as purchase bills, payments by cheques, etc. would all have been orchestrated to present a facade of genuineness and does not necessarily mean that the purchases from these parties are genuine. The Courts have held that payment by cheque by itself is not sacrosanct so as to prove genuineness of purchases when the surrounding circumstances are suspect. However, the appellant has shown onward sales which has not been doubted by the Assessing Officer. Since there can be no sales without corresponding purchases, the only logical explanation is that the appellant would have made purchases from undisclosed parties in the grey market at lower rates and purchases were shown as being made from the impugned parties to suppress its profits. In such a situation, the various Courts including the Hon'ble Gujarat High Court in the case of CIT vs Simit P. Sheth, 356 ITR 451 have held that not the entire purchases but only the profit element embedded in these purchases was to be disallowed. The Hon'ble Gujarat High Court in this case has held that profit margin of 12.5% of the bogus purchases will be reasonable. Respectfully following the Order in the case of Simit P. Sheth the addition is restricted to 12.5% of the bogus purchases of Rs. 22,25,542/-. This ground of appeal is 'Partly Allowed'.

7. Ground No. 3 is regarding Ad-hoc disallowance and expenses of Rs.1,72,445/-. During the Appellate Proceedings, it was stated that appellant has already added back Rs. 1,50,000/- on account of personal expenses which is 17.40% of the expenses as against further disallowance of 20% by A.O. in view of the facts of the case, no further disallowance is warranted and the disallowance of Rs.

M/s. Hi-Tech International 1,72,445/- made by A.O is deleted and the grounds of appeal is 'Allowed'. Against the above order of the CIT(A) the Revenue is in further appeal before the Tribunal.

4. I have considered the contentions of the learned D.R. and gone through the orders of the authorities below. I found that the assessee is in the business of manufacturing the trading of thermal insulation and allied products. During the course of reassessment the AO added the entire purchases in assessee’s income. By the impugned order the CIT(A) after recording detailed findings, directed the AO to restrict the addition to the extent of 12.5% after applying the proposition laid down by the Hon'ble Gujarat High Court in the case of CIT vs. Simit P. Sheth, 356 ITR 451. The detailed finding recorded by the CIT(A) Has not been controverted by the learned D.R. by bringing any positive material on record. Accordingly I do not find any reason to interfere with the order of the CIT(A).