ITO 14(1)(1), MUMBAI vs. M/S APEX FURNACES PVT LTD., MUMBAI

This appeal is filed by the Revenue against the order of the Learned Commissioner of Income Tax (Appeals)–21, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 28.01.2019 for the Assessment Year 2009-10. The only grievance of the Revenue in its appeal is Ld.CIT(A) erred in restricting

Briefly stated the facts are that, the assessee engaged in the business of manufacturer of Industrial furnaces, filed return of income on 30.09.2009 for the A.Y.2009-10 declaring income of ₹.9,76,710/- 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 various dealers who are 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 various parties referred in Assessment Order. In response, assessee submitted that the goods purchased are used in manufacturing of furnaces and thus become part of final product. Assessee vide letter dated 02.09.2016 furnished copies of details of purchases & corresponding sales, copy of ledger account of the said

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 though assessee claims that the purchases of goods from the parties were genuine and were used in manufacturing process the claim of the assessee that the said goods were purchased and that tools from the parties is not established. Therefore, Assessing Officer treated entire purchases of ₹.2,45,696/- 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.

Ld. DR vehemently supported the orders of the Assessing Officer.

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 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: - “I have considered the facts of the case and submissions made by the appellant. It is seen from the facts available on record that the assessee is a Private Limited Company and engaged in the business of bakery products particularly cakes and confectionary items. The assessee filed return of income on 30.09.2009 declaring total income of Rs 9,76,710/-. Subsequently, the case was re-opened after obtaining necessary approval from higher authorities on receipt of information from State Government Sales tax authorities that the assessee is engaged in bogus purchase of an amount of Rs 2,45,696/- from various Traders who was proclaimed as a Hawala dealer issuing bogus purchase bills without actually delivering the products. The assessee was one of its beneficiaries. The A.O. issued various statutory notices which were duly served on the assessee. The assessee responded twice but did not submit any documents in support of its contention. Therefore, the A.O. had a finding that the assessee could not provide substantial documents to prove the (A.Y: 2009-10) M/s. Apex Furnaces Pvt. Ltd., transaction genuine, on the facts and circumstances of the case and analysing the material available on record, re-assessment proceedings were completed u/s 143(3) r.w.s. 147 of Income-tax Act, 1961 by adding Rs 2,45,6967- @ 100% of the purchase amount u/s 69C of Income-tax Act, 1961. Aggrieved by the addition, the Appellant filed appeal against the said addition relying on various case laws. 9.2 During the course of appellate proceedings, the Appellant submitted a photocopy of one of its franchisee whom it received bakery products, ledger accounts of the parties it sold its products made out of the alleged purchase and ledger account of the supplier. The Appellant submitted that it had purchased nails, screws, fevicols and other hardware material from the supplier and paid carpentry charges which were debited to purchase account and the supplier deducted sales tax on the alleged transaction but did not file sales tax return and therefore state government authorities have declared the party as bogus. The party is not traceable now. The Appellant narrated its business model and relied on various case laws for deleting the entire addition. The Appellant also requested to consider net purchase amount of Rs 2,45,696/- (Gross purchases-sales tax deducted) while deciding the case. However, it is observed that the Appellant has not submitted any proof of the sales tax receipts received from the supplier and the Appellant himself has submitted that the sales tax has not been paid by the suppliers. 9.3. The A.O. analysed the information received from the Sales Tax department. Various concerns were found to be engaged in issuing false bills without actual purchase/sale of goods and the information was the point of genesis for enquiry related to possible bogus purchases in a number of cases. The assessee stated that it submitted name, address of the supplier, the ledger account, cheque payment details, copies of purchase bills, sales details etc to the A.O. during the course of assessment proceedings and thus the A.O. has not disputed the sales transaction of the goods. The assessing officer has not brought anything on record to prove that the sales are bogus. When the sales are recognised, the corresponding purchases cannot be considered as bogus and it will be a case of purchases from bogus parties. Therefore, purchases are not in dispute but the parties from whom purchases are shown to have been made are disputed and suspicious. Thus, it is considered that purchases have (A.Y: 2009-10) M/s. Apex Furnaces Pvt. Ltd., been made but from bogus parties. However, at the same time it is difficult to accept that the purchases shown on the invoices/bills issued by these parties are as per the prevailing market price of those materials or have actually been made from such parties and might have been purchased in the grey market. As the Appellant has not placed any evidence on record that the goods were purchased from the above parties at arms' length price, this would indicate that the purchases were made from the open market without insisting for genuine bills and in such cases the suppliers would be willing to sell at a much less rate as compared to the rate that they would have charged otherwise, certainly goods must have been purchased from the grey market therefore the profit made by the assessee would be equal to the difference in price of bogus purchases and the rate at which goods are obtained from the grey markets. It is pertinent to visit the decisions of Hon'ble ITAT, Ahmedabad on the issue. Hon'ble ITAT held the following in the referred case: - "Having heard the submissions of both sides, we have been informed that the malpractice of bogus purchase is mainly to save 10% sales tax etc. It has also been informed that in this industry about 2.5% is the profit margin. Therefore, respectfully following the decisions of the co-ordinate bench pronounced on identical circumstances, we hereby direct that the the & 3293/Ahd/2009 A.Y. 2006-07 Sh. Simit P Sheth V ITO WD -2(2), brd Page 6 disallowance is required to be sustained at 12.5% of the purchases from those parties. With these directions, we hereby decide the grounds of the rival parties which are partly allowed." Hon'ble Gujarat High Court upheld the above decision of the Tribunal. In the light of the aforesaid discussion and judicial pronouncements available on the issue and materials produced on record, I consider that addition @100% of the alleged bogus purchase amount is excessive and addition @12.5% of the alleged bogus purchase amount will meet the ends of justice. The A.O. is therefore directed to recalculate the disallowance accordingly. The ground of appeal is therefore partly allowed.”

In the result, appeal of the Revenue is dismissed.