MUKUNDCHAND M. VAGHELA HUF,MUMBAI vs. ITO 19(2)(3), MUMBAI

Ground no.1, challenging the validity of re–opening of assessment under section 147 of the Income Tax Act, 1961 (for short "the Act") is not pressed, hence, dismissed.

In ground no.2, the assessee has challenged the disallowance of ` 8,04,351, on account of non–genuine purchases.

Brief facts are, the assessee company, a Hindu Undivided Family (HUF), is trading in ferrous and non ferrous metals through its proprietary concern in the name and style of “M/s. Giriraj Steels”. For the assessment year under dispute, the assessee filed its return of income on 30th September 2011, declaring total income of ` 2,05,221. The return of income filed by the assessee was initially processed under section 143(1) of the Act. On the basis of information received from DGIT (Inv.), Mumbai, as well as the Sales Tax Department, Government of Maharashtra, indicating that purchases worth ` 64,34,814, claimed to have been made from eight parties are non– genuine, the Assessing Officer re–opened the assessment under section 147 of the Act. In the course of assessment proceedings, the Assessing Officer called upon the assessee to prove the genuineness of purchases. As alleged by the Assessing Officer, the assessee failed to furnish the required documentary evidence to prove the genuineness of purchases. Thus, the Assessing Officer ultimately held that the purchases made by the assessee are non–genuine. However, considering the fact that the assessee has recorded the purchases in his books of account and not made any out of books sales, he restricted the addition to 12.5% of the non–genuine purchases. The assessee challenged the aforesaid addition before the first appellate authority.

After considering the submissions of the assessee, learned Commissioner (Appeals), however, did not find merit in them and accordingly, sustained the addition made by the Assessing Officer.

The learned Authorised Representative submitted, though, the assessee was unable to prove the genuineness of purchases due to various factors which prevented it from doing so, however, the profit rate adopted @ 12.5% is high and unreasonable considering the nature of business, VAT rate and gross profit shown by the assessee. She submitted, the applicable VAT rate on the goods traded by the assessee is 4%. Whereas, the assessee has shown gross profit rate of 5.2%. Thus, she submitted, the addition should be restricted between 5% to 6% on the non–genuine purchases.

The learned Departmental Representative submitted, the addition made @ 12.5% being reasonable, should not be interfered with.

We have considered rival submissions and perused the material on record. Undisputedly, the assessee was unable to prove the genuineness of purchases made with clinching evidence. Therefore, the expenditure incurred by the assessee on account of such purchases cannot be allowed. However, sales effected by the assessee have not been disputed or doubted. That being the case, the Assessing Officer has restricted the addition to the profit element estimated @ 12.5% on the non–genuine purchases. Before us, the dispute is restricted to the quantum of profit element which can be considered for addition. After considering the nature of business, the gross profit shown by the assessee and applicable VAT rate, we are of the considered opinion that disallowance can be reasonably restricted to 8% of the non–genuine purchases. The Assessing Officer is directed to work out the disallowance accordingly. This ground is partly allowed.

In the result, appeal stands partly allowed. Order pronounced in the open Court on 29.11.2019