NAVDEEP METALS,MUMBAI vs. ITO - 19 (2)(4), MUMBAI

Briefly stated facts are that the assessee engaged in the business of Ferrous & Ferrous Metals. The AO received information from DGIT (Investigation), who in turn received information from Sales Tax Department, Mumbai that the assessee has made purchases from hawala parties, as listed in hawala dealers by the Maharashtra Sales Tax Department who are providing bogus bills of purchase amounting to Rs.41,72,736/- as admitted by these hawala dealers in their deposition before the authorities. The same reads as under: - S.No. Name of the seller Amount 1. Triveni Metal India 355,680 2. Siddhivinayak Steel 1,179,797 3. Surat Tube Corporation 891,224 4. Asian Steel 1,160,307 5. Metalex Tube Industries 585,728 Total 41,72,736 4. According to information received the name of this party was appearing in the list of hawala entry operators as supplied by sales Tax Department of Maharashtra. The hawala traders admitting before the sales tax authorities in their deposition that they were providing only accommodation purchase bills on commission basis without being actual purchase/ sale of goods. The AO during the course of scrutiny assessment proceedings required the assessee to file the details of purchase. The assessee filed copies of purchase bills from the above said parties, copies of ledger extract and copies of bank statements to prove the payments by cheque. The AO 3 | P a g e Navdeep Metals required the assessee to produce these parties for verification but assessee expressed his inability to do so. According to the AO, the assessee failed to establish the genuineness of the purchase and accordingly, he made addition of profit rate @ 12.5% of unproved purchase at Rs.11,14,560/- to the return income of the assessee. Aggrieved, assessee preferred the appeal before CIT(A), who sustained the disallowance at 12.5% of the bogus purchases by observing in para 6.2.13 & 6.3 and by following the decision of Hon’ble Gujarat High court in the case of CIT vs. Smith P. Seth (2013) 356 ITR 451 (Guj) by observing as under: - “6.213 Further, the courts have taken a view that in case of non-existent parties from whom the purchase are shown to have been made, the most logical approach would be that only part of such purchases can be disallowed, in the cases where the corresponding sales are treated as genuine, or alternatively the profit embedded in such cases can only be brought to tax. Therefore, what can be taxed in such transactions in profit element embedded on such alleged non genuine purchases and the entire or peak amount of such purchases cannot be treated as bogus.

We have considered the issue and gone through the facts and circumstances of the case. We find from the facts of the case and argument of both the sides, that the CIT(A) has applied the profit rate at the rate of 12.5%, which according to us is on higher side going by the nature of business of the assessee i.e. ferrous and non-ferrous. We are in full agreement with the argument of the learned Counsel for the assessee and according to us a profit rate of 12.5% will meet the end of justice in view of the decision of Hon’ble Gujarat High Court in the case of CIT vs. Smith P. Seth (2013) 356 ITR 451 (Guj) but assessee has also paid the VAT element on these bogus purchases and also assessee has made purchases from grey market at a lower price, a further deduction in estimation of profit to the extent of 7.5% can be allowed. Hence, we direct the AO to recompute the income after applying profit rate at the rate of 5% and compute the income accordingly. The appeal of the assessee is partly allowed.

In the result, the appeal of assessee is partly allowed.