HARSHAD FULCHAND SHETH,MUMBAI vs. ITO 19(1)(5), MUMBAI

Revenue by Shri Ashish Kumar, DR Assessee by Shri Aakash Sanjay Khatiwala & Mrs. Aditi Khatiwala, AR’s Date of Hearing 30/01/2020 Date of Pronouncement 14 /02/2020 आदेश आदेश / O R D E R आदेश आदेश PER G.MANJUNATHA (A.M):

These two appeals filed by the assessee are directed against, separate, but identical orders of the Ld. Commissioner of Income Tax (Appeals)–7, Mumbai, both dated 27/11/2018, for the AY 2009- 10 & 2010-11. Since, facts are identical and issues are common, for the sake of convenience, these appeals were heard together and are disposed-off by this consolidated order.

1. That the Ld.CIT(Appeals) has erred in confirming the purchases as bogus. The addition of presumptive GP of 12.5% is unjustified. It has not been proven that the purchases are in fact bogus in nature. Therefore the alleged addition made by the Learned AO and confirmed by the learned CIT(A) being wrong on facts and bad in law therefore may kindly be deleted.

3. The brief facts of the case are that the assessee is an individual engaged in the business of trader/dealer in iron and steel, filed its return of income for AY 2009-10 on 29/09/2009, declaring total income of Rs. 7,16,270/- and said return was processed u/s 143(1) of the I.T.Act, 1961. The case has been subsequently, reopened u/s 147 of the Act, on the basis of information received from DGIT, investigation, Mumbai, as per which, Sales Tax Authorities of Government of Maharashtra had taken actions against number of Hawala dealers, who had issued bogus purchase bills to various parties in Mumbai and other places. As per list of beneficiaries, the assessee is one of the beneficiary, who had taken accommodation bills of bogus purchases from various parties as listed by the AO in para 2 of his assessment order amounting to Rs. 59,82,406/-. The case was selected for scrutiny and the assessment has been completed u/s. 143(3).r.w.s. 147 of the I.T.Act, 1961 on 27/02/2015 and determined total income of Rs. 14,64,070/-, after making 12.50% additions towards alleged bogus purchase from those parties and made additions of Rs. 7,47,801/-.

4. Aggrieved by the assessment order, the assesee preferred an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assesse has filed elaborate written submissions, on the issue, which has been reproduced at Para 4 on pages 4 to 8 of Ld.CIT(A) order. The sum and substance of arguments of the assessee before the Ld.CIT(A) are that purchase from the above party is genuine, which is supported by necessary evidences. Therefore, no additions could be made on the basis of information received from third party. The Ld.CIT(A), after considering relevant submission of the assessee and also, by following the decision of Hon’ble Gujarat High Court, in the case of CIT vs. Simith P. Sheth (356 ITR 451) has upheld addition made by the AO towards alleged bogus purchases to 12.50% gross profit on total purchases from those parties. The relevant findings of the Ld.CIT(A) are as under:-

6.3.1 In the facts and the circumstances of the case, the total purchases shown to be made from the aforesaid party could not be held to be entirely bogus. It needs to be appreciated that in order to achieve the reported sales/turnover, there must be some corresponding purchases, whether effected from the alleged entry providers or from the grey market without bills. Thus, there ought to be some purchases made and hence, entire disallowance is not justified. In this regard, the ratio laid down by the Hon'ble Bombay High Court in the case of CIT v. NikunJ Eximp Enterprises (P.) Ltd., is quite relevant wherein Hon'ble High Court has held that - "When the assessee have filed letter of confirmations of the suppliers. Bank statements highlighting the payment entries through account payee cheque, copies of invoices, stock reconciliation statements before the AO: and merely because the suppliers did not appear before the AO, one cannot conclude that the purchases were not made fry the assesses. The AO cannot disallow the purchases on the basis of suspicion because the suppliers were not produced before them." 6.3.2 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 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 parties. In my view either the purchases from such party is 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. 6.3.3 In many judicial pronouncements on the issue, the Courts have taken a consistent view that in case of non-existent party 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 be brought to tax. 6.3.3. 1 In the case of OT-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 assesses claimed to have purchased the steel did not own up to such sates. 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, 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 assesses theory that the purchases were not bogus but were made from the parries other than those mentioned in the books of accounts. That being the position, not the entire purchases price but only profit element embedded in such purchases can be added to the income of the assessee.. So much is deaf by decision of this Conn In particular. Court 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. 1090 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 1TD 42B came to be approved." 6.3.4 Similarly, while dealing with an identical issue, in the case of CJT, 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 assesses did purchase the cloth and sell the finished goods, in that view of the matter, as natural corollary, not the entity amount covered under such purchase, but the profit elemnt 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.673 of 2010 in the case of CIT v, KishorAmrutlal Patel. In the result, tax appeal is dismissed," (emphasis supplied) 6.3.5 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 parties. As narrated earlier, the AO in this case has held that the party 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.

6.3.5.1 In a number/series of recent cases involving the scam unearthed by the Sales Tax Dept of Maharashtra whereby the hawala dealers were found to be bogus purchase bills without delivery of goods, the Hon'ble Mumbai Tribunal has estimated the G.P addition on account of such bogus purchases as 12.5%, some of which are listed below: i) Smt KiranNovinDoshi in ITA No, 260l/Mum/2016 dated 18.01.2017. ii) Ashwin Purshotam Bujaj &Anr. Vs /TO &Anr,in dated 14-12-2016 iii) ITO &Anr. Vs. Mamsh Kanji Patel &Anr., in ITA 7299/Mum/2014, 7154/Mum/2012 & 7300/Mum/2014, 7627/Mum/2014t dared: 18-05-2017, iv) Metropolitan Eximchem Ltd., ITA No. 2935/Mum/20l5. dated:29- - 03-2017; v) Rortak Metal Industries vs. ITO, ITA No. 722/Mum.2017 dtd. 04.09.2017; vi) ITO vs. Jugraj R. Jain, ITA No. 2571/Mm/2016 & 2572/M/2016 dtd. 02.08.2017; vii) B. J. Exports vs. Asst, Commissioner of Income Tax, ITA No. 5442- 5444/Mum/2016 dated 13.09.2017; viii) Batliboi Environmental Engineering Lid. 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. &Anr., ITA No. 1723/M/2015, 1817/M/2015 dated

21.03.2017. x) Smt. Usna B. Agarwa! Vs ITO dated 01.09.2017. In view of the above discussed factual matric and precedents, I am of the view that the AO is justified in estimating the profit element calculated ® 12.5% embedded in impugned purchases of Ra. 59,82,406/-, shown from the alleged hawala party and adding the same to the total income returned. The assessment order of the AO is a well-reasoned and a speaking order giving in derail the reasons for his fair estimation and therefore, I do not see any reason to lake a view in the matter different from the one taken by the AO. The action of the AO in estimation of 12.5% GP is sustained. Hence, the ground of appeal

No. is dismissed.

5. We have heard both the parties, perused the material available on record and gone through orders of the authorities below. We find that the Ld. AO has made addition of 12.50% profit on alleged bogus purchases on the ground that the assessee is one of the beneficiary of accommodation entries of bogus purchase bills issued by Hawala dealers. According to the Ld. AO, although assesee has filed certain basic evidences, but failed to file further evidence in the backdrop of clear finding by the Sales Tax Department, Maharashtra that those parties are involved in providing accommodation entries without actual delivery of goods. The Ld. AO had also taken support from the investigation conducted during the course of assessment proceedings, as per which notice issued u/s 133(6) to the parties were returned un-served by the postal authorities. Therefore, he came to the conclusion that purchases from the said parties are bogus in nature. It is the contentions of the assessee before the lower authorities that purchases from the above party are supported by necessary evidences. It has furnished all possible evidences, including books of accounts; stock details and bank statement to prove that payment against said purchases have been made through proper banking channels.

6 Having considered arguments of the Ld. DR and also, material available on record, we find that both the sides have failed to prove the case in their favour with necessary evidences. Although, assessee has filed certain basic evidences, but failed to file further evidences to conclusively prove purchases to the satisfactions of the Ld.AO. Further, mere payment by cheque does not prove the genuineness of purchase, more particularly when other circumstantial evidence says otherwise. At the same time, the Ld. AO had also failed to take the investigation to a logical conclusion by carrying out necessary enquires, but he solely relied upon information received from investigation wing, which was further supported by information received from Maharashtra Sales Tax Department. The AO neither pointed out any descrepanices in books of accounts nor made out a case of sales outside books of accounts. In fact, the AO did not disputed sales declared for the year. Under these circumstances, it is difficult to accept arguments of both the sides. Further, in a case where purchases are considered to be purchased from suspicious/hawala dealers, various High Courts and Tribunals had considered an identical issue in light of investigation carried out by the Sales Tax Department and held that in case of purchases claims to have made from alleged hawala dealers, only profit element embedded in those purchases needs to be taxed, but not total purchase from those parties. The Hon’ble Gujarat High Court, in the case of CIT vs Simith P.Sheth 356 ITR 451 had considered a similar issue and held that at the time of estimation of profit from alleged bogus purchases no uniform yardsticks could be adopted, but it depends upon facts of each case. The ITAT, Mumbai, in number of cases had considered an identical issue and depending upon facts of each case, directed the Ld.AO to estimate gross profit of 10% to 15% on total alleged bogus purchases. In this case, considering the nature of business of the assessee the Ld. AO has made 12.50% profit additions, which has been upheld by the Ld.CIT(A). Although, both authorities have taken 12.50% rate of profit for estimation of income from alleged bogus purchase, but no one could support said rate of gross profit with necessary evidences or any comparable cases. Therefore, considering facts and circumstances of this case and consistent with view taken by the Co- ordinate Bench in number of cases, we are of the considered opinion that the ld. CIT(A) has taken one of the possible view and estimated 12.50% gross profit on alleged bogus purchases to settle dispute between the parties and hence, we are inclined to uphold order of the ld. CIT(A) and dismiss appeal filed by the assessee.

ITA No.688/Mum/2019:-

Order pronounced in the open court on this 14/02/2020