ITO 26 (2)(4), MUMBAI vs. PRIME STEEL, MUMBAI

The only issue in this appeal of Revenue is against the order of CIT(A) restricting the addition made of the AO by applying the profit rate at the rate of 12.5% of the bogus purchases. For this Revenue has raised following ground: - “1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in restricting the disallowance to 12.5% of the total amount of bogus purchase transaction instead of 100% of the total amount of bogus purchase made by the AO.”

Briefly stated facts are that the assessee engaged in the business of reseller in M.S. Sheet, Angle, Channels etc. 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 ₹833212/- as admitted by these hawala dealers in their deposition before the authorities. The same reads as under: - 3 | P a g e Prime Steel “Sl Name of party Amount No. 1. Sahara Traders 102014 2. Donnies Trading Pvt. Ltd. 562438 3. Dharam Trades Private Limited 170560 Total 833212 4. During the course of assessment proceedings and during appellate proceedings, the assessee submitted all the documentary evidences such as inward register, stock register, payment received against such sales, receipt of material purchases, account payee cheque. According to the AO, the assessee failed to establish the genuineness of the purchase and accordingly, he made addition of whole amount as unproved purchases at Rs. 833212/- to the return income of the assessee. Aggrieved, assessee preferred the appeal before CIT(A), who restricted the disallowance at 12.5% of the bogus purchases by observing in para 8.3.2 as under: - “8.3.2 The Hon’ble High Courts and Judicial Authorities have adopted estimation of varying percentages to arrive at the profit embedded in such transactions depending upon the nature of business as laid down by the Hon’ble High court of Gujarat in the case of Simit P. Seth reported in 356 ITR 451 and in the case of CIT vs. M/s Bholanath Polyfab Pvt. Ltd (2013) reported in 355 ITR 290. As per the details, submitted by the 4 | P a g e Prime Steel appellant it is observed that the average gross profit % for assessment years, 2009-10 & 2010-11 and 2012-13 & 2013- 14 is 7.4% (7.15+7.25+7.51++7.78) & average net profit ratio for the said assessment year is 4.43% (3.64+4.02+5.19+5.16) wherein the issue of bogus purchase is not there as of now/ till date while the gross profit ratio for the instant assessment year is 6.90% and net profit % is 4.54%. Taking into account of the fact that the gross profit declared in the return filed in the instant assessment year is lesser than the aforesaid average GP% of the two preceding and two subsequent assessment years, the inflation in the purchase price accounted in the books of the appellant as per the inflation in the purchase price accounted in the books of the appellant as per the purchase invoices issued by the alleged suppliers/ parties and the benefit of lower price of purchases made from the grey market due to non-levy of sales tax, excise duty, income-tax and considering the entire material on record, I am of the opinion 5 | P a g e Prime Steel that estimating the profit embedded in the alleged purchase at 12.5% of alleged total bogus purchases of Rs. 8,33,212/- is justifiable and rational, the appellant being a trader in M/S sheet, angle, channels etc. In arriving at the above decision, support is taken from the filings laid down by the afore referred Hon’ble Judicial Authorities in the light of the facts and circumstances of the present case. The AO is directed to restrict the addition to total income of the appellant on account of disallowance of bogus purchases to ₹ 1,04,152/-. Accordingly, this ground of appeal is partly allowed.”