ITO 27 (2)(4), MUMBAI vs. NIKET RAJESH SHAH, MUMBAI

O R D E R

PER AMARJIT SINGH, JM:

1 On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in deleting the addition of Rs.3,02,193/- u/s 69C made by Assessing Officer on account of bogus purchases, without appreciating the fact that the assessee had failed to produce bills, vouchers and other documentary evidences in support of his claim and without considering the latest Apex Court decision in the case of N. K. Proteins Ltd. wherein it is held that once it is proved that the purchases are bogus then A.Y.2009-10 addition should be made on entire purchases and not on profit element embedded in such purchases.

2. On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in estimating the profit from Hawala Purchases by disallowing only Rs.43,170/-, being 12.5% of the bogus purchases as even the basic onus of producing delivery challans, transport bills etc were not fulfilled by the assessee.

3. The appellant craves leave to amend, modify and alter any grounds of appeal during the course of hearing of this case."

3. The brief facts of the case are that the assessee filed his return of income on 18-09-2009 declaring a total income to the tune of Rs.4,20,820/- for the A.Y.2009-10. The case of the assessee was reopened u/s 148 by issuance of notice dated 30.03.2014 which was served upon the assessee. Notices u/s 143(2) & 142(1) of the Act dated 21.07.2014 were issued and served upon the assessee. Thereafter, again notice u/s 142(1) of the Act was issued and served upon the assessee on 02.01.2015. The assessee is carrying on business activity as trader in ayurvedic medicines under his proprietary concern M/s. Pooja Herbs. The case of the assessee was reopened on the basis of the information received from the Office of Investigation Wing of the Department which revealed that the assessee had taken accommodation bill for purchase through parties declared as hawala operators by Maharashtra Sales Tax Department. During the year under consideration, it was conveyed that the assessee has claimed the total bogus purchases of Rs.76,72,356/- and out of this purchase amounting to Rs.3,45,363/- has been effected from the following party which is hereby mentioned as under: - S. No. Name of the party Amounts 1 M/s. P K Trading 3,45,363/- ITA No. 6288/M/2018 A.Y.2009-10 After the reply of the assessee, the AO raised the addition of the total bogus purchase of Rs.3,45,363/- u/s 69C of the I. T. Act. and was added to the income of the assessee. The total income of the assessee was assessed in a sum of Rs.7,66,190/-. Feeling aggrieved, the assessee filed an appeal before the CIT(Appeals) who restricted the addition to the extent of 12.5%. The Revenue was not satisfied, therefore, filed the present appeal before us.

ISSUE Nos. 1 & 2 4. We have heard the argument advanced by the Ld. Representative of the Department and has gone through the case carefully. The Ld. Representative of the revenue has argued that the assessee has failed to produce the bills, vouchers, delivery challan and other documentary evidences in support of his claim and the CIT(A) has ought to confirm the finding of the AO by confirming the addition of peak purchase in sum of Rs.3,45,363/- which has been wrongly restricted to the extent of 12.5%, therefore, in the said circumstances, the finding of the CIT(A) is wrong against law and facts and is liable to be set aside. However, on the other hand, the Ld. Representative of the assessee has strongly relied upon the order passed by the CIT(A) in question. Before going further, we deem it necessary to advert the finding of the CIT(A) on record.: - “5.4 In view of the discussion as above, it is clear that materials purchased and sold by the appellant cannot be doubted though it is not possible for the assessee to establish one to one nexus/link between purchases and sales. However, the fact of the matter remains that these transactions are not verifiable from the party in question as it could not be established that purchases had been effected from the party in question. Thus the purchase prices shown on the invoices produced could not be subjected to verification and as such it was difficult to establish the correctness ITA No. 6288/M/2018 A.Y.2009-10 of the purchase prices paid for the materials purchased. In the absence of any such verification as to 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 profit 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 earned on these purchases and not to disallow the entire purchases from the aforesaid party. In my view either the purchases from such parties over invoiced or the purchases were actually made but not from the party from which it was claimed to have been made and instead may have been purchased from grey market without proper billing or documentation. 5.4.1 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, only a part of such purchases can be disallowed, particularly in such cases where the corresponding sales are not doubted. Alternatively, the profit embedded in such sales against the alleged bogus purchases should he brought to tax. 5.4.2 In the case of CIT-1 Vs Simit P. Sheth, of 2012, order dated 16/01/2013, 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, ITA No. 6288/M/2018 A.Y.2009-10 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. logo 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. The view taken by the Tribunal in case of Vijay Proteins Pvt. Ltd. Vs. CIT reported in 58 ITD 428 came to be approved." 5.4.3 Similarly, while dealing with an identical issue, in the case of UT, 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 tux. This was the view of this court in the case of Sanjay Oilcake Industries v. CIT (2009) 316 ITR 274 (Guj) Such decision is also followed by this court in a judgment dated August 16,2011, in Tax Appeal No.679 of 2010 in the case of CIT Vs. Kishor Amrutlal Patel. In the result, tax appeal is dismissed." (emphasis supplied) 5.4-4 In view of the facts and circumstances of the case and the judicial pronouncements cited above, what can be disallowed or taxed in the instant case, is the excess profit element embedded in such purchases shown to have been made from aforesaid party. As ITA No. 6288/M/2018 A.Y.2009-10 narrated earlier, the AO in this case has held that the parties from whom the purchases were made by the appellant were found to be bogus, estimations ranging from 12.5% to 25% have been upheld by the Hon’ble Gujarat High Court, depending upon the nature of the business. 5.4.4.1 In a number/series of recent cases, involving the. issue of bogus purchases carried out in a organized manner through some hawala operators and the modus operandi unearthed by the Maharashtra Sales tax department, the Hon'ble Mumbai Tribunal has estimated the G.P addition in the hands of the purchasers on account of such bogus purchases as 12.5%. Some of which are listed below: i) Smt. Kiran Navin Doshi in dated 18.01.2017. ii) Ashwin Purshotam Bajaj & Anr. Vs ITO & Anr., in ITA No.4736/Mum/2014,5207/Mum/2014, dated:14-12-2016. iii) ITO & Anr. Vs. Manish Kanji Patel & Anr., in ITA No. 7299/Mum/2014, 7154/Mum/2012 & 7300/Mum/2014, 7627/Mum/2014, dated: 18.05.2017. iv) Metropolitan Eximchem Ltd., ITA No. 2935/Mum/2015, dated:29-03- 2017.; v) Ronak Metal Industries vs. ITO, ITA No. 722/Mum/2017 dtd. 04.09.2017; vi) ITO vs. Jugraj R. Jain, ITA No. 2571/Mum/2016 & 2572/M/2016 dated 02.08.2017; vii) B. J. Exports vs. Asstt. Commissioner of Income tax, ITA No. 5442- 5444/Mum /2016 dated 13.09.2017; viii) Batliboi Environmental Engineering Ltd. vs. Deputy Commissioner of Income-tax, ITA No. 2840 & 3482/M/2015 dated 15.03.2017; ix) Deputy Commissioner of Income-tax & Anr. Vs. Remi Process Plant & Machinery Ltd. & Ann, ITA No. 1723/M/2015, 1817/M/2015 dated 21.03.2017. x) Smt. Usha B. Agarwal vs. ITO, ITA No. 7034/Mum/2016, dated 01.09.2017. A.Y.2009-10 6. In view of the above discussed factual matric and precedents, I am of the view that estimation of 12.5% as profit embedded in impugned purchases shown from the alleged hawala party and adding the same to the total income returned, would meet the ends of justice. Therefore, I direct the AO to estimate profit @ 12.5% of the alleged bogus purchases, which works out to Rs. 43,170/- (@12.5% of Rs. 3,45,363/-) and restrict the addition to Rs.43,170/- . The appellant gets a relief for the balance amount of Rs.3,02,193/- (Rs.3,45,363/- - Rs.43,170). Hence, ground of appeal

No. 1 is partly allowed.”

5. On appraisal of the above mentioned finding, we find that the CIT(Appeals) has decided the matter of controversy on the basis of the decision of Gujarat High Court in the case of CIT vs. Simit P. Sheth 355 ITR 290 (Guj.) and the other decision of Hon’ble Gujarat High Court in the case of CIT Vs. Bholanath Poly Fab Pvt. Ltd. reported in 355 ITR 290 (Guj), Vijaya Protein Vs. CIT 58 ITD 428 (Ahd). In the said mentioned law, it is well-settled that the profit ratio embedded to the bogus purchase transaction is required to be added to the income of the assessee. In the instant case, sale is not doubted, therefore, the CIT(A) has restricted the addition to the extent of 12.5% of the total bogus purchase in sum of Rs.3,45,363/-. Taking into account, all the facts and circumstances, we are of the view that the finding of the CIT(A) has decided the matter of controversy judiciously and correctly which is not liable to be interfere with at this appellate stage. Accordingly, we upheld the finding of the CIT(A) on this issue and decide these issues in favour of the assessee against the revenue.

ITA No. 6288/M/2018 A.Y.2009-10