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Income Tax Appellate Tribunal, “B” BENCH, PUNE
Before: SHRI S.S.GODARA, JM & SHRI DR. DIPAK P. RIPOTE, AM
आदेश / ORDER
PER S. S. GODARA, JM :
The instant batch of eight appeals pertains to a single assessee herein M/s. Size Control Gauges & Tools Pvt. Ltd. This assessee’s five appeals ITA NO. 1778 to 1782 /PUN/19 for Assessment year 2007-08 to 2011-12 with Revenue’s cross appeals ITA Nos. 06 to 08 /PUN/2020 (for latter three assessment years) arise against the CIT(A)’s -2 Pune’s common order dated 9.10.2019 passed in case nos. PN/CIT(A)-2/DCIT Cir-6/PN/325 to 329/2014-15 ; respectively, in proceeding u/s 143(3) r.w.s. 147 of the Income Tax Act, 1961; in short the “Act”. Heard both the parties. Case files perused.
We first of all advert Revenue’s cross three appeals ITA Nos. 6 to 8/PUN/2020 for assessment year 2009-10 to 2011-12. A perusal of these case files indicates that the tax effect involved therein is Rs.13,65,776/-, Rs.38,42,781/- and Rs.31,70,815/-; assessment year wise, respectively as it is evident from the relevant column in form 36 thereof. That being the case, we quote the CBDT’s latest circular dated 08/08/2019 prescribing minimum tax effect of Rs.50,00,000/- in all of its appeals pending as well as to be filed, before the tribunal with retrospective effect. We thus decline the Revenue’s instant three appeals for this precise reason. These ITA Nos. 06 to 08/PUN/2020 stand dismissed in very terms.
3 ITA No.1778 to 1782/PUN/2019 & ITA No.06 to 08/PUN/2019 M/s. Size Control Gauges & Tools Pvt. Ltd.,
Next come assessee’s five appeals 1778 to 1782/PUN/19 raising the following identical grounds –
“1. The Ld CIT(A) erred in not appreciating that the Ld AO- had passed the Assessment Order in haste without following the principles of natural justice and the impugned Assessment Order was to be cancelled.
The Ld CIT(A) erred in not appreciating that the Assessment Order was passed without issuing and serving a notice under section 143(2) after filing the return of income which had rendered the Assessment Order bad in law liable to be set aside.
The CIT(A) erred in not deleting the disallowance of Rs.20,31,158/- out of purchases though the purchases were fully verifiable and the payments were made through bank.
Without prejudice to Ground No. 3, the Ld CIT(A) erred in sustaining the disallowance out of purchases to the extent of 10% of the total purchases of Rs.64,82,935/- and not 10% of the alleged bogus purchases of Rs.20,31,158/-.
The appellant craves leave to amend or alter any of the above Grounds of Appeal or to add new Grounds of Appeal during the course of appeal proceedings.”
Learned counsel is fair enough in not pressing for the assessee’s former twin substantive grounds. His only case is that the CIT(A)’s findings have erred in law and on facts in disallowing 10% of the total purchases ; in respective assessment years, as bogus as follows:-
4 ITA No.1778 to 1782/PUN/2019 & ITA No.06 to 08/PUN/2019 M/s. Size Control Gauges & Tools Pvt. Ltd.,
“15.8 It is seen that the AO made additions by treating following amounts of purchases as bogus purchases.
Amount Disallowance Amount of Total A.Y. Percent of Total Disallowed Purchases Purchases
2007-08 64,82,935/- 20,31,158/- 31.33% 2008-09 77,82,735/- 26,51,333/- 34.06% 2009-10 1,10,59,023/- 51,34,740/- 46.43% 90.04% 2010-11 1,40,98,029/- 1,27,45,439/- 2011-12 1,49,26,200/- 1,10,57,673/- 74.08%
From the above it is seen that purchases to the extent of even 90% have been disallowed. AO has stated that the appellant furnished documents like as purchase invoices, party-wise ledger, copy of bank account statement, copy of stock registers etc. From the records of the appellant it is seen that sales, purchases, raw material consumed etc by the appellant are as given below:
Sr. Particulars Assessment Years No. 2007-08 2008-09 2009-10 2010-11 2011-12 1 Sales 34,462,843 40,358,331 53,384,982 53,543,042 57,628,427 2 Sales returns (1,170,298) (1,686,290) (2,080,315) (908,371) (1,488,930) 3 Net sale 33,292,545 38,672,041 51,304,667 52,634,671 56,139,497 4 Purchases 6,482,935 7,782,735 11,059,023 14,098,029 14,926,200 5 Consumption(OS + 6,337,575 7,876,494 10,972,414 14,164,829 14,645,227 Purchase- Clo.Stock) 6 Consumption /Sales 18.39% 19.52% 20.55% 26.46% 25.41% 7 Purchase RM(KG) 75,278 61,332 80,522 95,538 86,181 Current Year 8 Sales Qty (KG) 6,830 6,642 7,664 7,773 7,937 Current Year 9 Wastage Qty(KG) 68,448 54,690 72,858 87,765 78,244 10 Wastage % 91% 89% 90% 92% 91% 11 Production % 9% 11% 10% 8% 9% 12 Addition by A.O. 2,031,158 2,651,333 5,134,740 12,745,439 11,057,673
5 ITA No.1778 to 1782/PUN/2019 & ITA No.06 to 08/PUN/2019 M/s. Size Control Gauges & Tools Pvt. Ltd.,
From the above it is observed that the value of purchases as against sales is in the range of 20% in AY 2007-08, 2008-09 & 2009-10 whereas this ratio is around 25% in the Ay 2010-11 & AY 2011-12. Thus, the main expenses is on account of processing of raw material. Raw material is in form of solid cylinders of metal and out of such raw material. The appellant manufactures precision tools and it involves a lot of wastes. The waste is in form of fine particles and hardly of any use any more. In other words, there is not much scope of manipulation of purchases by debiting bogus purchase as main cost is processing cost and not purchase of raw material. Further, most of the clients of the appellant are reputed parties and the appellant is also involved in export of precision tools. The AO has not doubted the purchases as well. Moreover, it is seen that the AO has disallowed purchases upto 90% and 74% as seen in AY 2010-11 and AY 2011-12 which does not appear feasible. The appellant may manipulate purchases by 5-10% but not upto the extent of 90%.
15.9 In the above chart, it is. seen that there is wastage of around 90% of raw material. The appellant was asked to substantiate this claim. The appellant produced various tool manufactured by him like TRG Long Casting 8”, TRG NC 50, TPG M24, TPG M39. In all these items scrap is calculated at 80%. Thus, the appellant could not show any item which involves 90% scrap.
15.10 It is also seen that the stock register was also furnished before the AO during the assessment proceedings and also during the remand report proceedings. The AO did not point out any defect in stock register. However, it is also a fact that the appellant has not been able to counter the following discrepancies pointed out by the AO
"(i) In the case of transaction with alleged parties, the purchase orders given by the assessee are not available with the assessee.
6 ITA No.1778 to 1782/PUN/2019 & ITA No.06 to 08/PUN/2019 M/s. Size Control Gauges & Tools Pvt. Ltd.,
(ii) Secondly, the assessee has not submitted the details as required by him like the addresses of the alleged parties, their confirmations to prove the purchases.
(iii) The G.R.N., delivery challans are found absent in the record file.
Further, the appellant did not furnish any manufactured item which involves wastage of 90%. The appellant before the Assessing Officer had argued that entire purchases cannot be disallowed as there are corresponding sales as well. The A.O. doubted the purchases from these alleged accommodation entry providers being hawala dealers relying on the statements on oath of the accountant Shri Sahoo to be bogus purchases, that these parties only provided accommodation bills and the goods were never supplied by these parties.
15.11 On the other hand, during the appeal proceedings, the appellant argued that the entire purchases made are supported with documentary evidences and the corresponding payments are duly made through account payee cheques/DDs and submitted bank statements evidencing the payments made in this regards. Also, the appellant produced purchase invoices, stock registers for raw materials purchased/procured. The AR of the appellant also stated that with these raw materials, it produced/manufactured products in its factory which are sold/supplied to the Govt, agencies such as Bhel, HAL, ECU etc. and Public sector undertakings as well such as L&T, Hero Honda Motors, Maruti Suzuki, Mars Forge, Kirloskar Brothers Ltd etc.. The AR of the appellant also argued that the Assessing Officer neither rejected its duly audited books of accounts nor did he found any discrepancies in the various books/registers, also the
7 ITA No.1778 to 1782/PUN/2019 & ITA No.06 to 08/PUN/2019 M/s. Size Control Gauges & Tools Pvt. Ltd.,
Assessing Officer did not find/confiscate any excess cash in the appellant’s office compound or in factory premises.
15.12 It is also evident from the material evidences on record that the appellant is an engineering company which manufactures certain products in the shape of rings. The appellant first purchases the raw materials in the form of steel rods of different thicknesses as per the requirement in the received order, then it cuts the rods as per requirement followed by blanking processes for which the pieces of rods are sent to the blanking specialists which are happened to be third parties who removes the internal metal part of the rods as wastages. Thus, it is a clear fact that without consuming the raw materials, appellant’s business i.e. the manufacturing of products is not possible. The Assessing Officer made following disallowances against the purchases as under
AY, Disallowance Amount of Total Amount Purchases Percent of Disallowed 31.33% Total 2007-08 Rs. 64,82,935/- Rs. 20,31,158/- 34.06% Purchases. 2008-09 Rs. 77,82,735/- Rs. 26,51,333/- 46.43% 2009-10 Rs.1,10,59,023/- Rs. 51,34,740/- Rs. 1,40,98,029/- Rs.1,27,45,439/- 90.04% 2010-11 Rs.1,49,26,200/- Rs.1,10,57,673/- 74.08% 2011-12
15.13 However, considering all the above circumstances, it appears that the appellant purchased raw material from some parties but obtained bills from other parties. Hon'ble ITAT Pune in the case of Chhabi Electrical Pvt Ltd Vs DCIT ITA No 795/Pun/2014 dated 28-04-2017 in Para 40(IV) held as under:
"IV. The next instance is the case of goods which have been admittedly sold by the hawala dealer and has been received by the assessee, who in turn had maintained
8 ITA No.1778 to 1782/PUN/2019 & ITA No.06 to 08/PUN/2019 M/s. Size Control Gauges & Tools Pvt. Ltd.,
quantitative details and also evidence of its movement, i.e. transportation details and quality control details of consumption of the said material or exact details of sale of the same consignment through same transporter directly to the party, then the total purchases cannot be added to the hands of assessee. However, since the purchases are made from the grey market, some estimation needs to be in the hands of assessee. The Tribunal in M/s Chetan Enterprises Vs. ACIT (supra) has already held that the addition be made by estimating the same @ 10% of the alleged hawala purchases, over and above the GP shown by the respective assessee."
15.14 Hon'ble Gujarat High Court in the case of CIT vs. Bholanath Poly Fab P.Ltd. (355 ITR 290) has held the opinion that where the purchases were made from the bogus party, in such a scenario only profit margin embedded in such purchases would be subjected to tax and not the entire purchases. The relevant portion of the decision of the Hon'ble Court is as under:
"4. The issue was carried in appeal by the assessee before the Commissioner. The Commissioner rejected the appeal, upon which the assessee went in further appeal before the Tribunal. The Tribunal, substantially allowed the assessee's appeal. In so far as the question of bogus purchase is concerned, the Tribunal concurred with the Revenue's views that such purchases were made from bogus parties. The Tribunal noted that the Assessing Officer had issued notice to all parties from whom such purchases were allegedly made. Such notices were returned unserved by the postal authorities with the remark that the address was incomplete. The inspector deputed by the Income-tax Department also could not
9 ITA No.1778 to 1782/PUN/2019 & ITA No.06 to 08/PUN/2019 M/s. Size Control Gauges & Tools Pvt. Ltd.,
find any of the parties available at the given addresses. The assessee was unable to produce any confirmation from any of the parties. Though the assessee had claimed to have made payment by account payee cheques, upon verification, it was found that the cheques were encashed by some other parties and not by the supposed sellers.
Having come to such a conclusion, however, the Tribunal was of the opinion that the purchases may have been made from bogus parties, nevertheless, the purchases themselves were not bogus. The Tribunal adverted to the facts and data on record and came to 'he conclusion that the entire quantity of opening stock, purchases and the quantity manufactured during the year under consideration were sold by the assessee. Therefore, the purchases of the entire 1,02,514 metres of cloth were sold during the year under consideration. The Tribunal, therefore, accepted the assessee's contention that the finished goods were purchased by the assessee, may be not from the parties shown in the accounts, but from other sources. In that view of the matter, the Tribunal was of the opinion that not the entire amount, but the profit margin embedded in such amount would be subjected to tax. The Tribunal relied on its earlier decision in the case of Sanket Steel Traders v. ITO [IT Appeal Nos. 2801 & 2937 (Ahd.) of 2008, dated 20-5-2011] and also made reference to the Tribunal's decision in the case of Vijay Proteins Ltd. v. Asstt. CIT [1996] 58 ITD 428 (Ahd).
10 ITA No.1778 to 1782/PUN/2019 & ITA No.06 to 08/PUN/2019 M/s. Size Control Gauges & Tools Pvt. Ltd.,
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 [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 v. Kishor Amrutlal Patel. In the result , tax appeal is dismissed.”
15.15 Following the ratio of these decisions, it cannot be said that purchases ranging from 30% to 90% are disallowable. Considering the facts of the case, it is fair and reasonable to disallow 10% of the total purchases instead of what Assessing Officer has disallowed in all the five A.Ys. Thus, the confirmed disallowances for all the five A.Ys. are computed as under:-
A.Y. Amount of Total Amount Disallowed Confirmed Purchases by AO disallowance @10% 2007-08 Rs. 64,82,935/- Rs. 20,31,158/- Rs. 6,48,294/- 2008-09 Rs. 77,82,735/- Rs. 26,51,333/- Rs. 7,78,274/- 2009-10 Rs.1,10,59,023/- Rs. 51,34,740/- Rs.11,05,902/- Rs.1,40,98,029/- Rs.1,27,45,439/- Rs.14,09,803/- 2010-11 Rs.1,49,26,200/- Rs.1,10,57,673/- Rs.14,92,620/- 2011-12
11 ITA No.1778 to 1782/PUN/2019 & ITA No.06 to 08/PUN/2019 M/s. Size Control Gauges & Tools Pvt. Ltd.,
Therefore, the addition to the extent of Rs.6,48,294/- Rs.7,78,274/-, Rs.11,05,902/-, Rs.14,09,803/- and Rs. 14,92,620/- for A.Ys. 2007-08 to 2011- 12 respectively are accordingly confirmed as disallowance on account of bogus purchases. Thus the appellant gets reliefs of Rs. 13,82,864/-, Rs.18,73,059/-, Rs.40,28,838/-, Rs.1,13,35,636/-and Rs.95,65,053/-for A.Ys. 2007-08 to 2011-12 respectively. Accordingly, these grounds are PARTLY ALLLOWED.”
The Revenue has drawn strong support from the assessment findings disallowing the bogus purchases.
We have given our thoughtful consideration to the foregoing rival submissions regarding the assessee’s bogus purchases. We make it clear that the assessee is itself fair enough in not disputing the bogus purchases in principle. We thus affirm the learned lower authorities action on this count. Coming to the impugned quantification issue, we hardly see any justification in learned CIT(A)’s above extracted directions adopting 10% disallowance of the assessee’s entire purchases (as tabulated in para 15.8) once the Assessing Officer had partly accepted genuineness thereof. We invited Revenue’s attention to the fact that the Assessing Officer had disallowed only 31.33%, 34.06%, 46.43%, 90.4% and 74.08% of the purchases; assessment year wise, respectively. Faced with this situation, we modify the learned CIT(A)’s directions of 10% disallowance of assessee’s entire purchases to the extent of bogus purchases only and restore the issue to the assessing authority for it’s afresh computation in very terms. Ordered
12 ITA No.1778 to 1782/PUN/2019 & ITA No.06 to 08/PUN/2019 M/s. Size Control Gauges & Tools Pvt. Ltd.,
accordingly. The assessee’s corresponding substantive grounds are partly accepted to this limited extent in all these five assessment years.
No other argument or ground has been raised before us.
To sum up, the assessee’s five appeals ITA no 1778 to 1782/PUN/2019 are partly allowed and Revenue’s cross appeals ITA NO. 06 to 08/PUN/2020 are dismissed in above terms. A copy of this common order be placed in the respective case files.
Order pronounced in the Open Court on this 27th day of July, 2022.
Sd/- Sd/- SDSS (DR.DIPAK P.RIPOTE) (S.S. GODARA) लेखध सदस्य/ ACCOUNTANT MEMBER न्यधनयक सदस्य/JUDICIAL MEMBER पपणे / Pune; ददनधांक / Dated : 27th July, 2022. Ashwini
आदेश की प्रनतनलनप अग्रेनषत / Copy of the Order forwarded to : अपऩलधथी / The Appellant. 1. प्रत्यथी / The Respondent. 2. 3. The CIT(A)-2, Pune. 4. The Pr.CIT-3, Pune. 5. नवभधगऩय प्रनतनननध, आयकर अपऩलऩय अनधकरण, “बऩ” बेंच, पपणे / DR, ITAT, “B” Bench, Pune. गधर्ा फ़धइल / Guard File. 6. आदेशधनपसधर / BY ORDER,
// True Copy // Senior Private Secretary आयकर अपऩलऩय अनधकरण, पपणे / ITAT, Pune.
13 ITA No.1778 to 1782/PUN/2019 & ITA No.06 to 08/PUN/2019 M/s. Size Control Gauges & Tools Pvt. Ltd.,
S.No. Details Date Initials 1 Draft dictated on 20.07.2022 2 Draft placed before author 25.07.2022 Draft proposed & placed before the Second 3 Member 4 Draft discussed/approved by Second Member 5 Approved Draft comes to the Sr. PS/PS 6 Kept for pronouncement on 7 Date of uploading of Order 8 File sent to Bench Clerk 9 Date on which the file goes to the Head Clerk 10 Date on which file goes to the A.R. 11 Date of Dispatch of order