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Income Tax Appellate Tribunal, “SMC”, BENCH MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI G. MANJUNATHA
Date of Hearing 20/01/2020 Date of Pronouncement 29/01/2020 आदेश आदेश / O R D E R आदेश आदेश PER G.MANJUNATHA (A.M):
This appeal filed by the assessee is directed against, the order of the Ld. Commissioner of Income Tax (Appeals)–30, Mumbai, dated 28/08/2019 and it pertains to Assessment Year 2011-12.
The assessee has raised the following grounds of appeal:-
1. On the facts and circumstances of the case and in law, the learned CIT (A) erred in disallowing and enhancing the purchase of Rs. 74,52,992/- (Ld AO has made addition of Rs. 9,31,624 being 12.5% of Rs. 74,52,992/-) u/s 37(1) of the Income tax Act 1961, Without considering the facts of the case.
2. The Appellant craves, leaves to add, alters, amends or deletes any grounds of Appeal at die lime of hearing.
Amrat B Prajapati.
The brief facts of the case are that the assessee is an individual has filed his return of income for AY 2011-12 on 26/09/2011, declaring total income of Rs. 7,91,520/-. Thereafter, 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 2 of his assessment order amounting to Rs. 74,52,992/-. 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 22/02/2016 and determined total income of Rs. 17,23,140/-, after making 12.50% additions towards alleged bogus purchase from those parties and made additions of Rs. 9,31,624/-.
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 4.4 on pages 3 to 6 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 various decisions enhanced assessment and made 100% addition towards alleged bogus purchases. The relevant findings of the Ld.CIT(A) are as under:-
During appellate proceedings, a notice for enhancement was issued wherein the assessee appellant was asked to show cause why the income should not be enhanced to 100% of the bogus purchases as against the addition made by the AO of 12.5% of the bogus purchases. It was pointed out that notice u/s 133(6) issued by the AO to the parties from whom purchases have been made had been returned unserved, (para Bfjiij of the assessment order), that there was failure to produce parties from whom purchases were made (Para 8(iv) of the assessment order), that vital documents like delivery challans, transport receipt, goods inward register maintained at the godown etc. were not furnished (para 8(v) of the assessment order). There was no compliance to this notice of enhancement u/s 251[l)(a). 6.1 The impugned purchases are to the extent of Rs. 7/l,52,992/- and these purchases arc from 6 parties. These purchases of Rs. 74,52,992/- have been claimed by the assessee appellant as expenditure, in the P & L account. This claim of expenditure has to be substantiated by the claimant i.e. the assessee appellant. As pointed out above, the burden of proof lies with the person making the claim. !n the case of a trader, purchase of goods would normally have to be substantiated with proof of purchase through purchase invoice, delivery challan, transportation receipt, proof of payment, proof of sale of the- said goods purchased , stock register, confirmation from supplier etc. 6.2 The assessee appellant has not been able to produce the suppliers, who incidentally have been held to be accommodation entry providers by the Sales Tax Authorities of the Government of Maharashtra. The Ld AO has pointed out that the appellant could no: file vital documents such as delivery challans, transport receipts, goods inward register maintained at godown and held that whatever was filed by appellant was not sufficient to prove that the goods were actually delivered to the appellant and that the primary onus to establish the genuineness of purchases which lay on the appellant was not discharged (cf para 8 (v) and 6.3 When the assessee appellant has failed to substantiate the claim against impugned purchases, the entire bogus purchases are to be disallowed. There is no basis for an addition of 12.5% of such bogus purchases and consequent allowance of 87.5% of such unsubstantiated purchases. 6.4 The Hon'ble High Court of Bombay in [(2018) 98 taxmann.com 234 (Mumbai)l the case of Shoreline Hotel (P) Ltd. held that the disallowance to the extent of 100% in the case of bogus purchases was to be upheld. The facts of the case were that the AO relied upon information received from the Sales Tax Department of the Government of Maharashtra in relation to certain parties who had been issuing bills and accommodation entries so as to facilitate evasion of taxes. The AO called for supporting documentary evidence, such as copies of purchase orders and mode of dispatch of goods, copy of the ledger of the party with invoices raised, details of payment made with copy of the bank account from where the payment was made and such other and further relevant details. The AO also issued notice u/s 133(6) of the I.T. Act, 1961 and these notices were returned back by the postal authorities. The AO recorded that assessee failed to furnish relevant information with respect to non-genuine purchases and also failed to disclose true and fair affairs of its business and proceeded to estimate the gross profit at 15%. The CIT in action u/s 263 held that once the assesesee could not produce any material nor could he ensure the presence of the supplier, before the AO, it would mean that the AO was expected to complete the exercise in accordance with the law. The action of the CIT u/s 263 to estimate the entire unsubstantiated purchases as bogus purchases was upheld.
6.5 The Hon'ble ITAT, Pune, in Kolte Patil, in to 1415/PN/2013 for A- Ys 2003-04, 2005-06 & 2007-08 to 2009-10 and ITA Nos.1478 to 1483/PN/2013 for AY 2004-05 to 2009-10 held that, where suppliers have been unable to produce even the primary evidence to show movement of goods from supplier to assessee or any other form of evidence of delivery, even though payment was made through cheques and purchases are evidenced by suppliers bills, the purchases are liable to be disallowed in toto. 6.6 Reliance is also placed on Sumati Dayal (214 ITR 801 SC) and Durga Prasad More ((1971) 82 ITR 540 SC) to state that the apparent must be considered real until it is shown that there are reasons to believe that the apparent is not the real and that the taxing authorities are entitled to look into the surrounding circumstances to find out the reality and the matter has to be considered by applying the test of human probabilities, it is not probable that a purchaser could be unable to furnish requisite information with respect to purchases made by it.
6.7 Initial burden to prove genuineness of purchases is on the appellant. The Hon'ble HC of Calcutta has held so in CIT v. Korlay Trading Co. Ltd. [1998] 232 ITR 820 (Cal.) (HC). Sec.37 deals with the question relating to the allowability of the expenditure incurred for the purposes of business. The onus of proof is upon the assessee to prove each of the following ingredients - (a) the m of expenditure must not be of the nature described under sections 30 to 36 of the Act; (b) the item of expenditure must not be in the nature of capital or personal expenses of the assessee ; (c) the expenditure must be laid out wholly and exclusively for the purpose of business or profession. If the assessee fails to satisfy any of these tests, the expenditure claimed is not allowable. The Hon'ble Bombay HC held so in the case of Ramanand Sagar( 256 ITR 134). Thus, it is settled law that the onus of proof is on the assessee-appellant to establish that the purchases claimed as expense were genuine. This has not been discharged by assessee and hence the Ld AO has rightly disallowed the same.
6.8 Sec.37 deals with the question relating to the allowability of the expenditure incurred for the purposes of business. Sec 37(1) is as under : "Any expenditure (not being expenditure of [he nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". 6.9 As per Sec. 101 and Sec. 103 of the Indian Evidence Act, 1872, whoever desires any Court to give judgment as to any legal right or liability, dependent on the existence of facts which he asserts, must prove that those facts exists. Accordingly, when a claim for deduction towards expenditure, arising from purchase of goods, is made by the assessee appellant, the burden of proving that claim lies with the assessee appellant. This has not been discharged to the satisfaction of the AO.
6.10 The onus of proof is upon the assessee to prove each of the following ingredients -(a) the item of expenditure must not be of the nature described under sections 30 to 36 of the Act; (b) the item of expenditure must not be in the nature of capital or personal expenses of the assessee ; (c) the expenditure must be laid out wholly and exclusively for the purpose of business or profession. If the assessee fails to satisfy any of these tests, the expenditure claimed is not allowable. The Hon'ble Bombay HC held so in the case of Rama nand Sagar (256 ITR 134). 6.11 The argument that the sales could not have been made without purchases is addressed below. The onus is on the appellant to establish the purchases. When this onus is not discharged, the purchases are disallowed to the extent these are not substantiated. It is not for the Department to doubt sales.
The premise as per the IT Act in Sec 37(1) read with the Indian Evidence Act, Sec 101 and 103 is that the burden of proof with respect to claim of expenditure, in this case towards purchases, is on the assessee- appellant. When the burden is not discharged, the claim is liable to be disallowed. It is reiterated that it is not for the Department to reconcile the Sales claimed by the appellant.
Every argument in logic has a structure that is premises and conclusion. Premises are statements which give evidence for, or reasons for accepting the conclusion and conclusion is a statement which is purported to be established or affirmed on the basis of other statements, that is the premises. In this case, the conclusion is chat bogus purchases arc lo be disallowed as per the provisions of Sec 37(1). This conclusion is based on the premises drawn by the ld. AO that the expenditure is not proven as per Sec 37(1) of the IT Act. The appellant can demolish this afore cited conclusion only by attacking the premises i.e. the basis for holding the purchases as bogus. If the argument is that the premises, that is finding of Ld. AO of bogus purchases, is incorrect because the sales are not doubted, it is a case of logical fallacy. Again, it is reiterated that it is not for the Department/Revenue to establish the sales or otherwise.
If the appellant claims that it did indeed have the sales as claimed, then it is for the appellant to establish how the purchases were made; if these purchases were from the grey market it is for the appellant to establish from whom these purchases were made, how payments were made and how the corresponding sales took place. The Hon'ble Delhi High Court in the case of La Medica (250 1TR 575] held that when the assessee's stand was that it had not effected purchases from anybody else, then it was not open to the Tribunal to make out a third case, which was not even the case of the assessee, to hold that the transactions were real and not fictitious, as claimed by revenue. Similarly, in the case of the assessee appellant for AY 2010-11, no claim has ever been made by the assessee, either during assessment proceedings or appellate proceedings that these purchases were genuine and made from a third party in the grey market that is without bills. When such a claim has never been made by the asseseee himself, it is not for the AO to surmise that this would have been the case. Even if such a claim of grey market purchases were to be made., the onus is on the assessee to establish how these grey market purchases were made, from whom these were made and how these are reflected in the books of accounts, stock register and also as to how the payments were made for these said grey market purchases. In the absence of the appellant establishing this, the bogus purchases have to upheld in toto to the extent not substantiated as per Sec 37(1).
Again, if the appellant claims that in the event of disallowance of purchases as bogus, his sales too should be reduced, the onus is on the assessee to establish which of the sales are bogus, A bald claim that the sales have not been doubted by Department cannot be advanced as an argument to hold unsubstantiated purchases per Sec. 37(1) as an expenditure. It is pertinentto note that the oft cited Hon'ble Gujarat High Court decision in the case of Simit P Sheth ((2013) 356ITR451) is based on the fact that where purchases were made from grey market, only profit element embedded in such purchase could be added to assessee's income and accordingly upheld ITAT's estimation of profit @ 12.5% of bogus purchases.
The facts in the recent decision of the Hon'ble Bombay High Court in the case of M/s Mohommad Haji Adam & Co. dt. 11.02.2019, were that the Ld. AO added the entire sum on account of goods never being supplied to the assessee; the CIT(A) compared the purchases and sales statement of the assessee and observed that the department had accepted the sale and therefore there was no reason to reject the purchases, because without purchases there could not be sales and restricted the addition to 10% of the purchase amount and directed the AO to make an addition to the extent of difference between the GP rate
Amrat B Prajapati. as per the books of accounts on undisputed purchases and GP on sales relating to purchases made from disputed parties. The ITAT noted that the CIT(A) had not given any reasons for retaining 10% of the purchases by way of ad hoc additions. The ITAT permitted the AO to tax the assessee on the basis of difference in the GP rates. The Hon'ble Bombay High Court concluded that, there being no discrepancy between the purchases and sales declared by assessee, the finding of the ITAT was correct in restricting the addition to the extent of bringing the GP rate on purchases at the same rate of other genuine purchases. This decision of the Hon'ble Bombay High Court was not based on an argument with respect to Sec. 37(1) or the Indian Evidence Act, as discussed above. Hence, with utmost respect, this decision, though not cited by the appellant, cannot be relied upon. 6.12 The assessee appellant has not complied with the various notices issued during the appellate proceedings, as detailed in para 8 supra, and thereby did not avail the opportunity provided of being heard. The findings of the Ld AO with respect to purchases have not been rebutted; no further material was brought on record during appellate proceedings to substantiate the purchases held to be bogus by the Ld AO. in the light of the above facts, there is no merit in the appeal. The ground of appeal 1, being the only ground of appeal, with respect to the addition by the Ld AO estimating the income to be 12.5 percent of the bogus purchases is dismissed. The income is enhanced to Rs. 74,52, 992/- being 100% of such purchases claimed as expenses in the Profit & loss account, disallowed u/s 37(1] as it does not satisfy the conditions specified therein. Consequently, the income assessed by the AO, being 12 5% of the bogus purchases of Rs. 9,31,624/- is enhanced to Rs. 74,52,992/-.
We have heard the Ld. Counsel for 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 12.50% additions towards 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 Amrat B Prajapati. course of assessment proceedings, as per which notice issued u/s 133(6) to the party were returned un-served by the postal authorities. Therefore, he came to the conclusion that purchase from the said party is bogus in nature. It is the contentions of the assessee before the lower authorities that purchase 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 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 satisfactions of the Ld.AO. 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. Under these circumstances, it is difficult to accept arguments of both the sides. Further, in a situation where purchase is made from alleged 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 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 Amrat B Prajapati. 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 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 estimated 12.50% profit, which was enhanced to 100% by the ld. CIT (A). Although, both authorities have considered different rate of profit for addition towards alleged bogus purchase, but no one could support said addition 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, and also by following the decision of Hon’ble Bombay High Court in the case of The PCIT vs Mohammed Haji Adam & Co (Supra), we are of the considered view that a reasonable profit on alleged bogus purchases would meet ends of justice. Hence, we direct the ld. AO to estimate 12.50% profit on alleged bogus purchases and further allow deductions towards GP already declared for the year in regular books of accounts.
In the result, appeal filed by the assesse is partly allowed.
Order pronounced in the open court on this 29/01/2020