M/S KARTEEK FERROMET PVT LTD,MUMBAI vs. ITO- 5(2)(2), MUMBAI

Date of Hearing 06/02/2020 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, order of the Ld. Commissioner of Income Tax (Appeals)–10, Mumbai, both dated 28/12/2018, for the AY 2009-10 & 2011-12. 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. On the facts and in the circumstances of the case and in law, the Id. AO erred in re-opening the assessment u/s.147 of the Income Tax Act, 1961 since the prescribed conditions therein are not satisfied. The re-opening of the assessment is incorrect and invalid. 2.a) On the facts and in the circumstances of the case and in law, the Id.ClT(A) erred in confirming the addition to the extent of Rs. 4,49,435/-( @ 12.5% of the impugned purchases) made by the AO to the income of the Appellant on account of possible profit element of Rs. 7,47,860/- being @ 25% embedded in purchases made through alleged non- genuine parties on the basis of information of the Sales Tax Department about auspicious dealers after allowing set off @4.20% in respect of gross profit shown in the books of account. b) The Ld, C1T(A) failed to appreciate that :- i] all the purchases are genuine beyond doubt and supported by sufficient materials; ii) all the goods purchased from these parties have been backed by corresponding sales which are accepted to be genuine; iii) the gross profit ratio shown by the Appellant is quite reasonable; iv} nothing has been brought on record by the AO that money has exchanged the hands in lieu of payment made for these purchases by account payee cheque; and vi) the AO had neither provided copy of materials and statements relied upon by him nor allowed any opportunity to the Appellant to cross examine those parties who have been alleged to have provided the accommodation entries of such purchases. c) In reaching to the conclusion and confirming such addition made by the AO, the Id. CIT(A) omitted to consider relevant factors, considerations, principles and evidences while he was overwhelmed, influenced and prejudiced by irrelevant considerations and factors. d) Without prejudice, the rate or percentage of profit element embedded in such purchases as and confirmed by the CIT(A) is excessive and unreasonable on the facts of the case. 3. The Id. AO erred in charging interest U/S.234B and 234C of the Tax Act, 1961, 4. The Id. AO erred in initiating the penalty proceedings u/s,271(1)(c) of the Income Tax Act, 1961, 5. That the ground Nos. 1, 3 and 4 are not raised before the CIT(A) and your Appellant prays that these grounds be admitted in the fairness of law.

3. The brief facts of the case are that the assessee is engaged in the business of trading in all types of ferrous and non ferrous metals, filed its return of income for AY 2009-10 on 30/09/2009, declaring total income at Rs. 1,37,330/- and the same was processed u/s 143(1) of the I.T.Act, 1961. Subsequently, the case has been 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 5 of his assessment order amounting to Rs. 35,95,479/-. 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. 8,90,290/-, after making 25% profit additions towards alleged bogus purchase from those parties. However, the ld. AO has allowed further deductions towards gross profit declared by the assessee and made additions of Rs. 7,47,860/-.

4. Aggrieved by the assessment order, the assesee preferred an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assesse has reitrated its arguments made before the ld. AO. 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 scaled down 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:-

8.13 In The present case, The adverse evidence and material, relied upon in the order. To reach [he finality, were disclosed to the assessee. However, the appellant could not establish [he genuineness of the Transaction either and 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.

8. 14 Nonetheless, from the farts recorded above in this case. A has emerged that the material in question was realty received because without receiving such material the corresponding sales would not have been possible/e 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 a/e made from open market without insuring 'rein the genuine biffs, the suppliers may be willing to sell those products at a much lower rate as compared lo the rate at 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 m 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 priced 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

8.15 Apparently, the motive behind obtaining bogus bills is inflation of purchase price so as to suppress the profits and the profit from such transactions varies with nature of business and no uniform yardstick can be adopted for estimation of such profit Therefore, in light of the above decisions, lading in to account The totality of the facts, it will be reasonable to estimate the profit embedded in the accommodation entries of bogus purchases as undisclosed profit of the appellant

8.16 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. 8.17 In the case of CIT v Si/nil P Sheth |30T3) 356 ITR 451 (Guj){HC), the Hon'ble High has upheld disallowance @12. 5% of such purchases. 8.18 the appellant is a dealer and under identical facts, the Hon’ble ITAT, Bombay Tribunal 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 into 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 cannot 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 purchase made from registered dealer”. 8.19 In view of the above, the profit embedded in the accommodation entries of bogus purchases amounting t Rs. 35,95,479/- is estimated @12.5% on such purchases and an addition of Rs. 4,49,435/- is sustained for AY 2010-11. The appellant gets relief of Rs. 2,98,425/- ( Rs. 7,47,860/-) minus 4,49,435/-). 8.20. For AY 2011-12, the profit embedded in the accommodation entries of bogus purchases amounting to Rs. 1,20,70,170/- is estimated !12.5% on such purchases and an addition of Rs. 15,08,771/- is sustained for AY 2011-12. The appellant gets relief of Rs. 290,892/- (Rs. 17,99,663/- minus 15,08,771/-). 8.21 Accordingly, all the above grounds of appeal are partly allowed.

5. None appeared for the assessee. We have heard the ld. DR, perused the material available on record and gone through orders of the authorities below. In sofar as legal ground challenging reopening of assessment, we find that the AO has reopened assessment on the basis of fresh materials in form of information from DGIT(Inv) which was further supported by report of MVAT, Department, Govt. of Maharastrha which constitutes fresh material to form reasonable belief of escapment of income. We, therefore are of the view that there is no merit in legal ground taken by the assessee challenging reopening assessment and hnce, the same is rejected.

6. As regards additions towards alleged bogus purchasee, we find that the Ld. AO has made addition of 25% profit less gross profit declared 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.

7. 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 addition of 25% gross profit less GP declared by the assessee, whereas the ld. CIT(A) has scaled down additions to 12.50% profit on alleged bogus purchases. Although, both authorities have taken different 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 a fair 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.968/Mum/2019:-

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