ITO.26(1)(1), MUMBAI vs. SHRI. AKBARALI JIVABHAI MOMOIN, MUMBAI

O R D E R PER R.C. SHARMA, ACCOUNTANT MEMBER

This appeal filed by the revenue is against the order of CIT(A) for the A.Y.2011-12 in the matter of addition upheld on account of bogus purchases, order passed u/s.143(3) r.w.s. 147 of the Income Tax Act, 1961.

“7.2 I have carefully considered the facts of the case and submissions of the Id.AR. I have also gone through the decisions relied on by the Ld.AR. As seen from the facts of the case the AO has reopened the assessment based on the information received from the Sales Tax Department through DIT(Inv.), Mumbai with regard to non-payment of VAT by some of the sellers whose registration was cancelled later, having observed that those are non-existent sellers and they have not made any sales except the bogus invoices issued in their names. When the Sales Tax Department has made enquiries some of the sellers have admitted before them that they have not made any sales but given the invoices for which they were paid commission. However, assessees have argued before the Income Tax Authorities that they have made the payments through Bank cheques to the sellers and received the material. Their argument was that unless the AO proves positively that the material was not delivered to the assessee and the payment made through the bank channels have been bogus or the amounts paid in the names of the suppliers have come back to the purchaser-assessee, the AO cannot make any addition on account of bogus purchase. It is seen in the instant case that even though the AO has made efforts to reach the suppliers by issuing notice u/s. 133(6), the said notices have come back unserved due to non-availability of the so-called suppliers at the given address, or served but not responded in some cases. The appellant has not conclusively proved that the appellant has received the material and the amounts paid through cheques have not come back to the appellant. Further, as the AO has not doubted the sales disclosed by the appellant he has to allow the purchases since there cannot be any sales without purchase of the material. The only possibility is that the appellant might have inflated its purchases by taking into account the higher price mentioned in the Invoices in the names of the bogus suppliers. The presumption is that the material might have been purchased from grey market at a lower rate and made good the entries with bogus bills to reduce the profits. Under similar Hon'ble High Court of Gujarat in the case of Simit P Seth, 2013 (356 ITR 451) had an occasion to deliver its judgment by confirming the decision of the ITAT which has estimated the disallowance at 12.5% of the disputed bogus purchases to meet the ends of justice. The head- note of the decision is reproduced as under-"Section 145 of the Income-tax Act, 1961 - Method of accounting - Estimation of Profits [Bogus purchases] - Assessment year 2006-07 - Assessee was engaged in business of trading in steel on wholesale basis - Assessing Officer having found that some of alleged suppliers of steel to assessee had not supplied steel to assessee but had only provided sale bills, held that purchases made from said parties were bogus - He, accordingly, added entire amount of purchases to gross profit of assessee -Commissioner (Appeals) having found that assessee had indeed made purchases, though not from named parties but other parties from grey market, sustained addition to extent of 30 per cent of purchase cost as probable profit of assessee - Tribunal however, sustained addition to extent of 12.5 per cent - Whether since purchases were not bogus but were made from parties other than those mentioned in books of account, only profit element embedded in such purchases could be added to assessee's income -Held, yes - Whether hence, order of Tribunal needed no interference - Held, yes [Paras 6, 7 & 9] /In favour of assessee]". (emphasis supplied). 7.3 In the instant case, no doubt, the AO has made efforts to examine the so- called suppliers by issuing notices u/s. 133(6) but could not succeed since such parties were not available at the given/revised address. Therefore, the AO was prevented by a reasonable cause from giving an opportunity to the appellant to cross-examine the said parties with the outcome of his enquiry. With regard to the information received from DITflnv.), Mumbai the summary of the communication was already passed on to the appellant while communicating reasons for reopening. Even though the AO could not prove substantively that the amounts given to the sellers in cheques have come back to the appellant, such activities of accommodation entries in the trading community are not ruled out. Further, the investigations carried out by the Sales Tax Department, another Government Agency, with regard to VAT violation cannot be lost sight of. Even though there are catena of cases adjudicated by the jurisdictional ITAT, Mumbai wherein the decision on the issue is in the favour of the assessee. However, they are not uniform in all the cases as they were decided as per the facts arm circumstances of that particular case before them. I am of the opinion that the facts and circumstances of the present case are more akin to the case decided by the Hon'ble Gujrat High Court in the case of Simit P Seth (supra,). 7.4. In both the cases of disallowance of profit rate of 28% based on GP declared by the appellant and 100% in the case of M/s Riddhi Siddhi Sales, the AO is directed to adopt 12.5% uniformly in the light of above case. It is to be noted that what the Hon'ble Gujarat High Court has directed to adopt as notional profit since it is only net profits which the appellant could have made from the bogus purchases made from grey market clear of all other expenses. In the case of M/s Riddhi Siddhi Sales also, even though the party has denied any sale made to the appellant, the Ld.AR has submitted that there is a change of name into M/s Viraj Trading Co. Even if M/s Riddhi Siddhi Sales has existed, what has to be taken is the notional profit clear of all other expenses arising out of such bogus purchases since the sales declared by the appellant was not questioned. Therefore what matters to the 'Revenue is the profit which has escaped assessment. Thus, respectfully following the decision in the case of Simit P Seth (supra.), I hereby direct the AO to work out 12.5% of the so- called bogus purchases from all the 8 parties, and add back the same to the taxable income. The ground is partly allowed.”

Order pronounced in the open court on this 28/01/2020