ITO 31(3)(1), MUMBAI vs. SH. RAMAVADH RAMDHARI YADAV, MUMBAI

This appeal is filed by the Revenue against the order of the Learned Commissioner of Income Tax (Appeals)–42, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 25.01.2019 for the Assessment Year 2011-12. The only grievance of the Revenue in its appeal is Ld.CIT(A) erred in restricting (A.Y: 2011-12) Shri Ramavadh Ramdhari Yadav the disallowance of purchases to 12.5% as against 15% of purchases disallowed as non-genuine/bogus by the Assessing Officer.

Briefly stated the facts are that, the assessee an individual engaged in the business of manufacturing and trading in pens and ball pens, filed return of income on 28.09.2011 for the A.Y.2011-12 declaring income of ₹.4,22,440/- and the return was processed u/s. 143(1) of the Act. Subsequently, Assessing Officer received information from the DGIT (Inv.,), Mumbai about the accommodation entries provided by various dealers and assessee was also one of the beneficiary from those dealers. The assessments were reopened U/s. 147 of the Act based on the information received from DGIT(Inv.) Mumbai, that the assessee has availed accommodation entries from M/s. Royal Enterprises which is said to be providing accommodation entries without there being transportation of any goods. In the reassessment proceedings, the assessee was required to prove the genuineness of the purchases made from the above party and produce the party before the Assessing Officer. In response, assessee vide letter dated 18.02.2016 submitted that the purchases made are genuine and M/s. Royal Enterprises had closed his domestic business and settled abroad. Assessee further submitted that the payments are (A.Y: 2011-12) Shri Ramavadh Ramdhari Yadav made through account payee cheques as such contended that all the purchases are genuine. However, parties were not produced before the Assessing Officer.

Not convinced with the submissions of the assessee the Assessing Officer treated the purchases as non-genuine and he was of the opinion that assessee had obtained only accommodation entries without there being any transportation of materials and the assessee might have made purchases in the gray market. It is the finding of the Assessing Officer that notice issued u/s. 133(6) of the Act to the party was returned unserved with a remark “left/not Known” and the assessee did not produced the parties before the Assessing Officer. Therefore, Assessing Officer treated 15% of the purchases of ₹.40,33,800/- as non-genuine and added to the income of the assessee. On appeal the Ld.CIT(A) considering the evidences and various submissions of the assessee restricted the disallowance to an extent of 12.5% of the non-genuine purchases.

Inspite of issue of notice none appeared on behalf of the assessee nor any adjournment was sought by the assessee. Therefore, I proceed to dispose off this appeal on hearing Ld. DR on merits.

Heard Ld. DR, perused the orders of the authorities below. On a perusal of the order of the Ld.CIT(A), I find that the Ld.CIT(A) considered this aspect of the matter elaborately with reference to the submissions of the assessee and the averments in the Assessment Order and following various decisions including the decision of Hon'ble Gujarat High Court in the case of CIT v. Simit P. Sheth [356 ITR 451] restricted the disallowance to 12.5% of the non-genuine purchases. While holding so, the Ld.CIT(A) observed as under: - “7.12 I have considered the submission of the appellant. It is noticed that the AO has not relied on any statement given by the vendor and the AR has not brought on record any document to demonstrate that the appellant requested the AO to provide the documents or statements received from the Sales Tax Department or requested the AO cross examination of any witness. Further, the AO has clearly intimated the details of accommodation entries received by the appellant while issuing statutory notices as well as during assessment proceedings and the appellant has also submitted explanation before the AO to substantiate the genuineness of the purchases. Under similar circumstances the Hon'ble High Court of Madras, in the case of T. Devasahaya Nadar vs. CIT (1964) 51 ITR 20 (Mad), has held that: "It cannot be laid down as a general proposition of law that the IT Department rely upon any evidence which has not been subjected to cross-examination. An ITO occupies the position of a quasi-judicial Tribunal and is not bound by the rules of the Evidence Act, but he must act in consonance with natural justice, and one such rule is that he should not use any material against an assessee without (A.Y: 2011-12) Shri Ramavadh Ramdhari Yadav giving the assessee an opportunity to meet it He is not bound to divulge the source of his information. There is no denial of natural justice if the ITO refuses to produce an information for cross-examination though if a witness is examined in the presence of the assessee, the assessee must be allowed to cross-examine him. 7.13 In the light of above decision, a conclusion can be drawn that adverse evidence and material, relied upon in the order, to reach the finality, should be disclosed to the assessee and if a witness has given directly incriminating statement and the addition in the assessment is based solely or mainly on the basis of such statement, in that eventuality it is incumbent on the AO to allow cross- examination. But this rule is not applicable where the material or evidence used is of collateral nature. In the present case, the AO has not made the addition solely on the basis of material gathered by the STA, GOM. The material gathered by the STA, GOM passed on to the IT Department has given a clue to the AO, they were not primary evidence. The AO has clearly intimated the details of accommodation entries received by the appellant while issuing statutory notices as well as during assessment proceedings, thus the appellant had ample opportunity to rebut the objections raised by the AO. However, the appellant failed to produce any evidence before the AO. Hence, it is not the case where any material was used against the appellant without giving the appellant an opportunity to meet the objection. Further, Mr. Ramrup Yadav Prop. M/s Royal Enterprises is a relative of the appellant and admittedly the appellant has ventured into business of supplying corporate gifts items with the assistance of Mr. Ramrup S. Yadav, proprietor of M/s Royal Enterprises and it is the claim of the appellant that Mr. Ramrup S. Yadav has settled abroad and to prove the claim he has submitted copy of passport of Mr. Ramrup S. Yadav. However, it is seenthat there is nothing to suggest from the passport that Mr. Ramrup S. Yadav has settled abroad since the passport is merely stamped with single journey visas.Had the transactions been genuine, the appellant would not have any problem in producing the party before the learned AO for verification and examination on record. 7.14 Therefore, in my view there is no violation of principles of natural justice and the plea of the appellant that the AO has not shared with the appellant any details received from Sales Tax Department and statement given by the suppliers, cannot be considered bonafide. 7.15 Another argument of the appellant in support of the genuineness of the purchase transaction is that all the payments are (A.Y: 2011-12) Shri Ramavadh Ramdhari Yadav made through account payee cheques and payment transactions can be verified from copy of bank statement as submitted before the AO. In my such an argument is fallacious. There are judicial precedents on this issue wherein it is held that the transaction cannot be held to be genuine merely because the payment is made by cheques. The Hon'ble High Court of Karnataka in the case of CIT & Ors. vs. Saravana Constructions (P.) Ltd. (2012) 72 DTR 0258, has held that "there is no presumption that merely because the payment is made by cheque, it is a genuine transaction. First it has to be found out whether the transaction in question is genuine and only thereafter, the assessee would be entitled to the benefit of disallowance" The Hon'ble jurisdictional High Court of Bombay in the case of Naresh K. Pahuja vs. Income Tax Appellate Tribunal: (2015) 375 ITR 0526 (Bom) has held that "mere routing of a gift through a banking channel would not by itself establish that the gift is genuine and the genuineness or non-genuineness of the gift would have to be established by other evidence." And the Hon'ble Supreme Court of India in the case of CIT vs. P. Mohanakala & Ors. (2007) 291 ITR 0278 has held that "The transactions though apparent were held to be not real one. May be the money came by way of bank cheques and paid through the process of banking transaction but that itself is of no consequence." 7.16 It emerges from the above decisions that it is mandatory for the appellant to establish the genuineness of transaction by independent supporting evidences and the payment by way of bank cheques or payment through the process of banking transaction in itself is of no consequence. Therefore, in my view, purchase transaction in the present case cannot be considered genuine merely because the payments were made through account payee cheques. 7.1 The Hon'ble Supreme Court of India in the case of Commissioner of Income Tax vs. Durga Prasad More (1971): 82 ITR 0540 (SC) has held that "It is true that an apparent must be considered real until it is shown that there are reasons to believe that the apparent is not the real. In a case of the present kind a party who relies on a recital in a deed has to establish the truth of those recitals, other-wise it will be very easy to make self-serving statements in documents either executed or taken by a party and rely on those recitals. If all that an assessee who wants to evade tax is to have some recitals made in a document either executed by him or executed in his favour then the door will be left wide open to evade tax. A little probing was sufficient in the present case to show that the apparent was (A.Y: 2011-12) Shri Ramavadh Ramdhari Yadav not the real. The taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look into the surrounding circumstances to find out the reality of the recitals made in those documents." 7.18 In the present case, the adverse evidence and material, relied upon in the order, to reach the finality, were disclosed to the assessee. However, the appellant could not establish the genuineness of the transaction either on the basis evidence in support of delivery of goods, or by producing the parties from whom the purchase were made. Hence the purchase transaction cannot be considered as genuine. 7.19 Nonetheless, from the facts recorded above in this case, it has emerged that the material in question was really received because without receiving such material the corresponding sales would not have been possible. However, the material was not received from the parties from whom it is shown to have been purchased as -there is no independent third-party evidence on record which can support the transaction. Thus, an inference can be drawn that such material were purchased from different sources which were exclusively within the knowledge of appellant and none else. It is well known that if purchases are made from open market without insisting from the genuine bills, the suppliers may be willing to sell those products at a much lower rate compared to the rate which they may charge in case the dealer has to give a genuine sale invoice in respect of that sale and supply the goods. There may be various factors due to which there is bound to be a substantial difference between the purchase price of unaccounted material and rate of purchase of accounted for goods. There may be a saving on account of sales-tax and other taxes and duties which may be leviable in respect of manufacture of sale of goods in question. The suppliers or the manufacturers make a substantial saving in the income-tax in respect of income from sale of unaccounted goods produced and sold by them. This may also be one of the factors due to which the seller may be willing to charge lower rates for unaccounted goods as compared to accounted for goods. 7.20 Apparently, the motive behind obtaining bogus bills is inflation of purchase price so as to suppress the profits Therefore, in light of the above discussion, taking in to account the totality of the facts, it will be reasonable to estimate the profit embedded in the (A.Y: 2011-12) Shri Ramavadh Ramdhari Yadav accommodation entries of bogus purchases as undisclosed profit of the appellant. 7.21 The profit from such transactions varies with nature of business and no uniform yardstick can be adopted for estimation of such profit and the estimations of profit embedded in accommodation entries of bogus purchases transactions @ 12.5% out of purchase price accounted through bogus invoices have been upheld as the fair profit rate out of the bogus purchases by the Hon'ble Courts and Tribunals. In the case of CIT v. Simit P Sheth (2013) 356 ITR 451 (Guj)(HC), the Hon'ble High Court has upheld disallowance @12.5% of such purchases. 7.22 The appellant is a dealer and under identical facts, the Hon'ble ITAT, Bombay Tribunal (H) has upheld disallowance @12.5% of such purchases in the decision date 4th April, 2017 in the case of Ratnagiri Stainless Pvt. Ltd. vs. Income Tax Officer in as well as in Income Tax Officer 5(3)(1) vs. M/s RBS Copper Products Pvt. Ltd. in ITA Nos. 1057 & 1058 dated 04/07/2017. Therefore, in light of the above decisions, taking in to account the totality of the facts, it will be reasonable to estimate the profit embedded in the accommodation entries of bogus purchases @ 12.5 % of the purchase amount. As it is an estimate of the profit embedded in purchase, it can not be subject to any adjustment on account of any subsequent profit arising from the sale of the materials as held by the Hon'ble ITAT, Mumbai Bench in the decision in ITA No. 6555/Mum/2017 for AY 2009-10 in the case of M/s Muhta Markfin (P) Limited Vs. ITO-5(2)(3), has held as under: "We are of the considered view that as the profit element accounted for by the assessee in its regular books of accounts pertains to the profit which it would have made from selling the goods under consideration, therefore, the same would have no bearing on the qualification of the monetary benefit involved in making of purchases by the assessee at a lower price from the open/grey market, as in comparison to purchases made from registered dealer". 7.23 In view of the above, the profit embedded in the accommodation entries of bogus amounting to Rs. 40,33,800/- is estimated @ 12.5% on such purchases and accordingly an amount of Rs. 5,04,225/- is held to be the profit embedded in the accommodation entries of bogus purchases and sustained as addition to the total income as undisposed income of the appellant. The appellant gets relief of Rs. 1,00,845/- (Rs. 6,05,070/- minus 5,04,225/-).”

In the result, appeal of the Revenue is dismissed.