ITO , WARD- 3 (5), KALYAN vs. LABCO FINE CHEMICALS, MUMBAI

Date of Hearing 14/10/2019 Date of Pronouncement 14/10/2019 आदेश आदेश / O R D E R आदेश आदेश PER G.MANJUNATHA (A.M):

This appeal filed by the revenue is directed against, the order of the Commissioner of Income Tax (Appeals)–3 Nasik, dated 05/07/2018 and it pertains to Assessment Year 2009-10.

2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in law by not appreciating the fact that the assessee could not establish the genuineness of the purchases from the non-existent vendors?

3. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred, in law by not appreciating the fact that the onus to justify the claim of expenses is on the assessee and the same has failed to discharge it in relation to the purchases made from the non- existent vendors?.

7. The order of the CIT(A) may be vacated and that of the assessing officer may be restored.

3. The brief facts of the case are that the assessee is engaged in the business of trading in Chemicals, filed its return of income for AY 2009-10 on 29/09/2009, declaring total income at ‘Nil’. Thereafter, the case has been reopened u/s 147, 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 to reduce or suppres profits. 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 his assessment order amounting to Rs. 3,06,779/-. The case was selected for scrutiny and the assessment has been completed u/s. 144.r.w.s. 147 of the I.T.Act, 1961 on 10/02/2015 and determined total income of Rs. 3,06,779/-, after making 100% additions towards alleged bogus purchase from those parties and made additions of Rs. 3,06,779/-.

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 submission made before the AO. The sum and substance of the 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, on analysis of information collected during the course of search and also by following the decision of Hon’ble Gujarat High Court, in the case of CIT vs. Simith P. Sheth (356 ITR 451) scaled down addition to 25% profit on alleged bogus purchases. The relevant findings of the Ld.CIT(A) are as under:-

7. I have carefully considered the appellant's submissions, observations of the AO in the assessment order and the facts of the case. The appellant had shown purchases amounting to Rs 3,06.779 from Sandesh Sales Pvt. Ltd which appeared in the list of Sales-tax Department who had indulged in Hawala transactions i.e. providing only bills without there is being any actual purchase or sale transaction. 7.1 Before the case is discussed, it is important to know the background in which the case of the appellant was selected for scrutiny. As per Section 3 of the MVAT Act, 2002, every registered dealer, is liable to pay tax on a sale transaction with a purchasing dealer whose turnover of sales or purchases has exceeded rupees five lakh. The selling dealer issues a tax invoice, which shows the amount of tax recovered from the purchasing dealer The sale made by the selling dealer needs to be accounted in his turnover of sales while filing the tax return and pay the due taxes. Further, the purchasing dealer is also entitled to claim by way of a set off under Section 48 the tax paid on his purchases as ITC (Input Tax Credit). The Sale Tax Authorities found that a large number of selling dealers had_ neither filed their returns nor paid the taxes

collected by them front purchasing dealers. The Sales Tax Authorities denied the benefit of set-off of Input Tax Credit to purchasing dealers, who went into appeal before Hon'ble Bombay High Court against the said orders. The same was rejected by the Bombay High Court in WRIT PETITION 2012 In case of M/S. Mahalaxmi Cotton Ginning vs. The State of Maharashtra & Ors on 11 May, 2012 and other similar cases in the said appeals, the purchasing dealers took a plea before the High Court that as he has paid the tax-to the selling dealer, he should not be denied the benefit of a set off of taxes paid, which is arbitrary. However the State government in an affidavit before the court submitted that investigations revealed that there was a existence of large-scale Hawala racket, wherein the selling dealers merely issued tax invoices to the purchasing deafer without any sale of goods. The court did not accept the plea of the purchasing dealer and held that if the set off is allowed to the purchasing dealer though the tax has not been paid actually, it would defeat the legitimate interests of the Revenue. The Sales Tax Department recovered the Tax from such purchasing dealers The Sales Tax Department accordingly passed on the information of such purchasing dealers to the Income Tax Department to verify the purchases made by them 7.2. In this background, the case of the assessee needs to be examined. The AO was required to examine the veracity of such purchases and to see a) whether the purchases have actually been made or not, b) the end use of such purchases and c) the genuineness of the parties from whom the purchases are made. The assessee submitted copies of the purchase bills and copy of the bank statement showing that he had made the purchases and payments are made by cheques. The assessee has also submitted that the items were consumed in manufacturing. It is seen that the only ground for making the addition is that the parties who have made the sales are not traceable and assessee could not produce the parties, who have issued bills. Hence, this is not a case of Bogus purchases but purchases from bogus parties, wherein the bills are taken from hawala dealers and purchases from other parties. The facts of the case are also differentiable from NK Proteins as stated by the assessee. In N K Proteins, It was established that the assessee had inflated the purchases as during search at the office premises, blank signed cheque books, vouchers, blank bill books, letter heads of various concerns were found and it was established that these concerns were floated by the assessee. Relying upon the judgment of Vijay Proteins 53 ITD 428 Ahmadabad, the ITAT restricted the addition to 25%, whereas Hon'ble Gujarat High Court held that once the purchases are bogus and suppliers are fictitious having given only bill entries, the entire purchases should be added, which by confirmed by the Hon'ble Supreme Court by dismissing the SLP of NKPL on 16 01.2017. On going through the remand report, it is seen that the AO has not examined various aspects pertaining to such purchases When the AO has accepted the sales, he has not given any comment of how the material which was used in such sales came from These issues need to be taken into account before deciding the issue in the light of various case laws.

7.3 From above it is apparent that the ratio of decision of N.K. Protein cannot be in appellant's case as it is distinguishable on facts. It is held by Hon’ble Supreme Court that the appellate authorities while applying the decision of the Higher Court should examine the facts of each case. i. The decision of the Hon'ble Supreme Court in Padmasundara Rao (Decd.) and Ors v. State of Tamil Nadu, Civil Appeal No. 2226 of 1997r order dated 13.03.2002. ii. The Hon'ble Supreme Court in the case of GIT Vs. Sun Engineering Works (P) Ltd. reported in 198 ITR 297. iii. The Hon'ble ITAT, Mumbai Bench 'G’ [Third Member] in the case of M/s. Grindwell Norton Ltd. vs. DCIT [2004] 91 ITD 412 [MUM] [TM]. iv.. Hon'ble ITAT Mumbai in the case of Kanchan FerroMet order dated 05.06.2017 has discussed judgment of Hon’ble Supreme Court in NK Proteins and held as under

applicable on the facts of the present case. In the facts of Nikunj Exim Enterprises, the substantial sales were made to government agencies, books were not rejected and stock reconciliation was given. In the present case teamed Counsel of the assessee has himself agreed for 12 5% disallowance out of the bogus purchases. It is further noted that dismissal of SLP by a non- speaking order does not merge the decision of Hon'ble Gujarat High Court in the case of N.K. Industries with that of Hon'ble Apex Court. 7.4. With regard to the appellant's reliance on various decisions, there are large numbers of cases, wherein the appellate authorities have held that it would not be appropriate to consider that purchases were genuine only because the assesses made the payment by cheque and the assessee received bills. It is held by various courts that where the assessee could show that he has made the purchases and there are corresponding safes against these purchases, it would be appropriate to tax the possible profit out of purchases made through non-genuine parties. In view of facts slated above, I am of the considered opinion that the appellant has made purchases of Rs. 3,06.779/- in the open market which were used in manufacturing and the bill was taken from The Hawala operators. Further the verification in respect of these parties could not be made and assessee has also paid Sales Tax in respect of These tainted purchases. It is not known at what price the appellant actually made the purchases from third parties Under such circumstances the likelihood of the purchases being inflated cannot be ruled out and there is no material to dislodge such findings. In this process the appellant saved on the safes-tax / VAT and enhanced his profit by manipulating the purchases. On similar facts Hon'ble Gujarat High court in the case of CIT vs. Sanjay Oil Cake (2009) 316 ITR 274 and Bhole Nath 355 ITR 290 (Guj) who were manufacturer upheld disallowance of 25%. As the facts of the assessee’s case are similar therefore it would be appropriate if 25% of the amount of unproved purchases of Rs 306779/-. amounting to Rs. 76,695/- is disallowed. This addition will be over and above the profits shown by the appellant in his return of income.

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 carry 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, 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 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 100% profit, whereas the Ld.CIT(A) has scaled down estimation of profit to 25% on total alleged bogus purchase. 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 one of the possible method for estimation of profit 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 Reveune..

Order pronounced in the open court on this 14 /10/2019