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Income Tax Appellate Tribunal, AHMEDABAD “B” BENCH
Before: Ms. Annapurna Gupta & Shri Siddhartha Nautiyal
आदेश/ORDER
PER : ANNAPURNA GUPTA, ACCOUNTANT MEMBER:-
The present appeals have been filed by the Revenue and pertain to the same assessee, but relate to different Assessment Years (A.Y) and are against separate orders passed by the Ld. CIT(A) u/s 250(6) of the Act. The
2 I.T.A No. 1477/Ahd/17 & 1826/Ahd/2016 & Ors. A.Y. 2011-12 & Ors. Page No ACIT vs. Gujarat Terce Laboratories Ltd. appeal in ITA No. 1477 & 1826/Ahd/2017, both pertain to A.Y 2011-12 but are in the context of orders passed by the Ld.CIT(A) against assessment orders in separate proceedings, one in regular assessment proceedings u/s 143(3) in and the other in re-assessment proceedings u/s 147 of the Act for the said year.
It was common ground that identical issue was involved in all the appeals, relating to disallowance of sales promotion expenses incurred by the assessee. It was pointed out that the said disallowances was made in identical set of facts and circumstances finding the expenses to be bogus and the Ld.CIT(A) had granted identical relief to the assessee in all the cases by restricting the disallowance to the extent of 12.5% of the expenditure incurred. Considering the admitted identity of issue involved in all the impugned appeals before us, they were all taken up together for hearing and being adjudicated upon by this common consolidated order.
Both the parties agreed that the appeal of the Revenue for A.Y. 2011- 12 in ITA No. 1477/Ahd/2016 in proceedings relating to regular assessment framed u/s. 143(3) of the Act, be treated as the lead year as the decision of the Ld.CIT(A) in this year was followed in subsequent years also. Therefore we shall be dealing with the facts in the appeal of the Revenue for A.Y 2011-12 in ITA N0. 1477/Ahd/2016 and our decision rendered therein will apply mutatis mundis to the rest of the appeals also..
ITA No. 1477/Ahd/2016 for A.Y. 2011-12 (Revenue’s appeal)
Ld.DR pointed out that in the impugned year the AO had disallowed sales promotion expenses amounting to Rs. 85,78,200/- ,finding them to be
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bogus, out of total sales promotion expenses incurred by the assessee to the tune of Rs. 3,42,62,070/- . He further stated that the said expenses pertained to those incurred in relation to the following two parties.
(i) M/s. Gajanand Traders Rs. 84,99,000/- (ii) Devanand Enterprise Rs. 79,200/-
Ld.DR pointed out thereafter that the Ld.CIT(A) had restricted this disallowance to the extent of 12.5% of the sales promotion expenses to Rs. 10,72,275/- deleting in turn disallowance of Rs.75,05,925/- .And aggrieved by this order of the Ld.CIT(A), the Revenue has come up in appeal before us raising the following grounds:
“1. The Ld.CIT(A) has erred in law and on facts in restricting the addition of Rs. 75,05,925/- made on account of Bogus Sales Promotion Expenses to Rs. 10,72,275/- only. 2. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer.
It is, therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer may be restored to the above extent.”
Making his arguments before us against the restriction of sales promotion expenses by the Ld.CIT(A) to 12.5% of the amount disallowed, Ld. D.R. contended that the order of the Ld. CIT(A) was flawed for the reason that having concurred with the findings of the A.O. that the sales promotion expenses were bogus, he had restricted the disallowance to 12.5% of amount disallowed, holding that only gross profit element thereon could be added back, relying upon various decisions of the Hon’ble High Court’s in this regard.
4 I.T.A No. 1477/Ahd/17 & 1826/Ahd/2016 & Ors. A.Y. 2011-12 & Ors. Page No ACIT vs. Gujarat Terce Laboratories Ltd. He pointed out that the Hon’ble jurisdictional High Court had however held that bogus purchases were to be disallowed in entirety in the case of N.K. Industries Ltd. Vs. DCIT reported in [2017] 292 CTR 354 (Guj.) Our attention was also drawn to the decision of the Hon’ble jurisdictional High Court in the case of CIT, Gandhinagar vs. Aashadeep Industries [2018] 256 taxmann.com 440 (Guj.) pointing out there from that on the issue whether the restriction of bogus purchases to the extent of 25% of their value by the Tribunal was correct as opposed to 100% disallowance, the question was admitted by the Hon’ble High Court for consideration. Reliance was also placed on the decision of the Hon’ble Apex Court in the case of N.K. Proteins Ltd. Vs. DCIT [2017] 250 taxmann.com 22 (SC) and of the ITAT Mumbai Bench in the case of Pratibha Structural Ltd. Vs. DCIT Central Circle-27 & 25 Mumbai in ITA NO. 3874/Mum/2015 and Ors, dated 10-04-2019 in this regard. Copies of all the orders was placed before us.
He further contended that in any case disallowance of bogus expenses was restricted to profits in circumstances where the expenses related to purchases made in the course of trading or manufacturing activity of the assessee and corresponding sale had been booked . He pointed out that courts in such cases had held that where the sale relatable to these purchases is not doubted then it cannot be said that no purchases have been made by the assessee and at best the assessee can be said to have purchased in the grey market at lower prices avoiding payment of taxes and duties thereon and to that extent estimated addition on account of profits so earned can be made only and not entire expenses/purchases disallowed. He contended that in the present case the expenses disallowed was not that of purchases against which sales were booked by the assessee, but were of expenses of sales
5 I.T.A No. 1477/Ahd/17 & 1826/Ahd/2016 & Ors. A.Y. 2011-12 & Ors. Page No ACIT vs. Gujarat Terce Laboratories Ltd. promotion. The theory of only profit having been earned by the assessee by booking such expenses cannot be applied therefore in the present case. He pointed out that all the case laws relied upon by the Ld.CIT(A) were rendered in the context of purchases found bogus and therefore the reliance placed by the Ld.CIT(A) while restricting the disallowance of bogus sales promotion expenses in the present case is incorrect.
He contended therefore that the entire amount needed to be disallowed.
The ld. D.R. thereafter pointed out that the findings of the CIT(A) that the entire purchases of Rs. 85,78,200/- were bogus was based on the detailed enquiries and investigation conducted by the A.O. during assessment as well as appellate proceedings, in remand proceedings, wherein the said parties were not found to exist initially ,that thereafter the parties had owned up giving bogus bills to the assessee and further the assessee himself had admitted to the prevalent practice in the market of taking bogus bills while actually buying from the grey market in cash .
Taking us first to the examination of the issue during assessment proceedings, Ld. D.R. pointed out from the assessment order that with respect to both the parties ,as detailed above, to whom sales promotion expenses paid was disallowed by the AO, initially notices u/s. 133(6) were issued by the A.O. to verify the genuineness of the sales promotion expenses but no reply was received from both these parties. When the assessee was confronted with the same he assured follow up with the said parties for speedy reply to the notices and thereafter confirmations were received from
6 I.T.A No. 1477/Ahd/17 & 1826/Ahd/2016 & Ors. A.Y. 2011-12 & Ors. Page No ACIT vs. Gujarat Terce Laboratories Ltd. the said parties. That the A.O. thereafter asked the assessee to produce the said two parties in person but the assessee failed to produce them, though he contended that the genuineness of the purchases was proved by the confirmations of the said parties and the fact that the amount was paid to them for the purchases through banking channels. The A.O., however to verify the genuineness of the claim of the assessee ,deputed an Inspector for conducting inquiries , who submitted in his report that no firm or party of such name was in existence nor existed in the past. Accordingly, the A.O. held that mere confirmation and the fact of payment through banking channels to the said parties did not prove the genuineness of the purchases of sales promotion expenses made with the said parties, more particularly when enquiries conducted by him repeatedly revealed no such party existing and the assessee had neither produced them before the A.O. nor furnished any copy of bank account ,balance sheet or profit and loss account to prove their genuineness.
Ld. D.R. thereafter pointed out that in appellate proceedings, the assessee filed additional evidences by way of copies of bills issued by the said parties to the assessee and their confirmations, as also copies of receipts issued by recipient of the gifts articles purchased as sales promotion expenses. He pointed out that the same were forwarded by the ld. CIT(A) to the A.O. for verification and investigation, who in turn issued summons to the proprietor of one of the parties , M/s Gajanand Traders ,Shri Shripal Shah u/s. 131 of the Act and recorded his statement on oath u/s. 131 wherein on being asked as to whether he had supplied any gift articles to the assessee ,he categorically denied any such transaction with the assessee and on the contrary stated that these were bogus entries given to the assessee in
7 I.T.A No. 1477/Ahd/17 & 1826/Ahd/2016 & Ors. A.Y. 2011-12 & Ors. Page No ACIT vs. Gujarat Terce Laboratories Ltd. return of commission of 25 paise against each said bill issued. He denied having debited any bills for the supply of gifts articles and further stated that the confirmations letters presented by the assessee was never signed by him and also that the letter head in which confirmation was made was not his..
Ld. D.R. pointed out that Shri Shripal Shah had also disclosed modus operandi of the transaction stating that the cheque received by him from the assessee for the purported purchases was deposited in bank and cash withdrawn subsequently and handed over to one Shri Ankit Patel on whose behalf he had conducted these transactions with the assessee. Ld. D.R. pointed out that Shri Shripal Shah had also informed that he had facilitated such bills from the other party M/s. Devanand Enterprise also.
Ld. D.R. pointed out that this statement of Shri S. Shah was supplied to the assessee who did not respond to the same but only furnished a notarized affidavit signed by Shri S. Shah retracting his earlier statement given on oath stating that he had in fact supplied goods gift articles to the assessee and his earlier statement had been recorded in a state of anger due to personal disputes with Shri Ankit Patel. Ld. D.R. pointed out that the A.O. in his remand report stated that the affidavit was a mere self serving document unsupported by any documentary evidences since other than merely stating that he had supplied gift articles to the assessee, no books of accounts evidencing this transaction was produced by Shri S. Shah who had merely expressed his inability to produce the books of accounts stating they were seized by the Sales tax department/ were untraceable. As for the copies of receipts issued by the recipient gift articles, the A.O. had commented that they were unverifiable since they did not the bear the
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address of the recipient nor did they state the gift articles receipt. The A.O. therefore had commented in his remand report no such receipt could be taken.
Ld. D.R. thereafter pointed out that the assessee submitted a rejoinder to the remand report stating that the quantity stock register in CD Form had been given to the A.O. who had not made any adverse comment with respect to the same and therefore the assessee contended that the assessee had made purchases of the gift articles and requested addition only of the profit element to be made to the same.
The ld. D.R. contended that considering the entire facts and circumstances relating to the investigation conducted at various stages regarding the genuineness of purchase made by the assessee from these two parties and implicit admission by the assessee that purchases with these parties was bogus, the ld. CIT(A) concurred with the findings of the A.O. that the purchases were bogus at para 8.2 of his order as under:
8.2 The reasons for making additions and the contentions of the appellant have been carefully considered. The AO has proved beyond doubt that the appellant could not prove the genuineness of the purchases of sales promotions & material from these two parties, as shown in the appellant's books of accounts. The notice issued to these vendors u/s 133(6) returned unserved, they were not found at the address given during the field enquiries made by the Inspector and statement of the appellant that he merely issued bills by charging some commission and no material was supplied by them are sufficient to establish that purchases shown from these persons are not genuine. 14. The ld. D.R. contended that the assessee has not challenged these findings of the ld. CIT(A) that the impugned purchases were bogus and in
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such circumstances there was no recourse left but to disallow the entire expenses of sales promotion relating to these parties.
The ld. Counsel for the assessee on the other contended that the ld. CIT(A) had rightly held that the distribution of the gift articles to various customers of the assessee being established from the stock register,the ld. CIT(A) taking note of the same had rightly restricted the disallowance only to the extent of profit element embedded in the same. In this regard, he drew our attention to Para 8.3 is as under: 8.3 However, the appellant produced stock register maintained for sales promotion material before the AO. The appellant is manufacturer and trader of pharmaceutical formulation and metal. In the pharma industry, it is normal practice to distribute some items in the form of incentives to Stockiest/ shop keepers. The appellant is following this practice since many years. This year also, out of total expenditure of Rs.3,42,62,070/-, the AO has found purchases of Rs.85,78,2007- from two parties as non-genuine purchases. The appellant also produced receipts of such material issued by the recipient stockiest / shop keepers during the^remand report proceedings. These facts show that although the appellant distributed the sales promotion items but these were not purchased from these two persons, as claimed in the regular books of accounts. The appellant's case is that the vendors who supplied material to the appellant did not issue bills and who issued the bills, did not supply the material. In such cases, it has been decided by the jurisdictional High Court of Gujarat, Ahmadabad in several cases that addition of gross profit should be made and not the total purchase amount should be added. The following case laws are relevant: (a) Commissioner of Income-tax - III v. Sathyanarayan P. Rathi [2013] 38 taxmann.com 402 (Gujarat) "Revenue is in appeal against the judgment and order of the Tribunal dated 10.02.2012. Following question has been raised for our consideration: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in restricting the disallowance to the extent of 12.5% of the addition on account of bogus purchase, without appreciating the factual aspect and by ignoring the manifest evidence relied upon by the Assessing Officer and overlooking the ratio laid down by the Hon'ble High Court in the case of Pawanraj B. Bokadia in Tax Appeal No. 3245 of 2009 dated 29/09/2011."
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Issue pertains to bogus trade made by the respondent-assessee. Assessee is in the business of trading in iron and steel. For the Assessment Year 2003-2004, during the reassessment proceedings, it was found that the purchases worth Rs. 61.40Lacs (rounded off) were not supported by sufficient evidence. The assessee's claim of having purchased such goods from various suppliers was verified, but was not found genuine. It was found that such parties had never supplied the goods as named by the assessee. On such basis, the Assessing Officer made addition of entire amount of purchase of Rs. 61.40 Lacs (rounded off). The assessee carried the matter in appeal and CIT (Appeals) partly allowed the appeal. It was found that though the purchases were not made from the parties from whom the assessee claimed, there was complete quantitative tally of material purchased and sold. In that view of the matter, CIT (Appeals) was of the view that such materials were purchased from the open market incurring cash payment and bills were procured from various sources. Resultantly, Commissioner (Appeals) added only profit element and not the entire amount of the said purchase, for the limited addition to 30% of the total amount and reduced the same to Rs. 18.42 Lacs (rounded off). 3. Assessee carried the issue in further appeal before the Tribunal. The revenue also preferred appeal against the order of Commissioner (Appeals). Both these appeals came to be decided by the Tribunal by the impugned judgment. The Tribunal gave further relief to the assessee and refused addition to the level of I2l/i% in pursuance of the various purchases, Revenue' appeal was dismissed. 4. We are of the opinion that the revenue ought to have preferred two appeals if the revenue was aggrieved by the Tribunal's verdict of not only rejecting its appeal but of allowing assessee. However, when we are not inclined to interfere with the Tribunal's order on merits, we do not insist on the revenue's filing a separate appeal. 5. From the record, we noticed that the Commissioner (Appeals) as well as the Tribunal found that the purchase of raw-material, in which the assessee was trading, were only made, but not from the disclosed sources. In other words, the case against the assessee was that the purchases were made in the grey market through cash payment and some entries were obtained from certain suppliers who had not sold such goods. 6. The present case, thus, being one of only purchase but not from disclosed sources, it would be only profit element embodied in such purchase which could be added in the income of the assessee and thus, rightly so done by the Commissioner (Appeals) and the Tribunal. 7. If this be our conclusion, only question arises whether such profit element should be estimated' at the rate of 30% or 12'/2%. Whenever such a question arises, some reasonable estimation is always permissible. Hardly any question of
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law on such aspect would arise. Merely, it is pointed, out that the assessee was a trader and that the Tribunal retained 121/2% of the purchase towards its possible profit, we do not find any reason to entertain the appeal. In the result, Tax Appeal is dismissed. (b) Commissioner of Income-tax -II v. Gujarat Ambuja Export Ltd. [2014] 43 taxmann.com 244 (Gujarat) I. Section 69 of the Income-tax Act, 1961 - Unexplained investments (Bogus purchases) -Assessment year 2007-08 - Assessee was in business of manufacturing and exports of de-oiled cake, starch, glucose and cotton yarn - Assessing Officer examined various purchases made by assessee and noted that entire purchases made from one 'V were bogus and added entire amount to total income of assessee - Commissioner (Appeals) was of opinion that purchases were not bogus, he however taxed 25 per cent of amount - Tribunal noted that GP rate and net profit rate of year under consideration were better than previous year, stock register was properly maintained and purchases in question were reflected in such stock register - Tribunal thus reduced addition to 5 per cent of amount - Whether when assessee could produce before authorities precise rate at which purchases were made from 'V and other suppliers to demonstrate that purchases made on same day carried same price, it could not be said that purchase price was artificially inflated - Held, yes - Whether since Tribunal's finding were based on parameters such as higher net and gross profit rates of present year compared to earlier years of recent past, Tribunal committed no error so as to give rise to any question of law - Held, yes [Para 12][In favour of assessee] " The assessee was in the business of manufacturing and exports of de-oiled cake, starch, glucose and cotton yam. • The Assessing Officer examined various purchases made by the assessee for purpose of production of edible oil and in particular purchases made from one 'V came up for consideration. The Assessing Officer noted that the payments though were made through cheques, such cheques were deposited and the amount withdrawn shortly thereafter in cash. On the basis of such evidence and other materials on record, he held that the purchases were bogus. He, therefore, added the entire amount to the total income of the assessge. • On appeal, the Commissioner (Appeals) was apparently of the opinion that purchases were not bogus. He however taxed 25 per cent of the amount. On second appeal the Tribunal noted that the GP rate and the net profit rate of the year under consideration were better than the previous year. The stock register was properly maintained and the purchases in question were reflected in such stock register. However since there were internal contradictions in the statements made by the representative of 'V and the person controlling 'V, the Tribunal reduced the addition to 5 per cent of the amount.
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On further appeal: The entire issue is based on materials on record. The Tribunal did not accept the revenue's stand that the purchases were bogus. The Tribunal committed no error so as to give rise to any question of law. The Tribunal looking to the material retained 5 per cent of the purchase by giving cogent reasons.[Paras 10 & 11] In the instant case, though it may appear that the purchases have been shown to have been made through 'V but supplied by some other agency, in absence of other additional facts noted by this Court gross ad hoc addition of 25 per cent may not be justified. In the instant case, the assessee could produce before the authorities the precise rate at which the purchases were made from 'V and other suppliers to demonstrate that the purchases made on the same day carried the same price. This would substantially eliminate the angle of the purchase price being artificially inflated. Additionally, the Tribunal also noted other parameters such as higher net and gross profit rates of the present year compared to the earlier years of the recent past. Under the circumstances, no question of law arises. Tax Appeal was therefore dismissed. (c) Commissioner of Income-tax-1 v. Nangalia Fabrics (P.) Ltd. [2013] 40 taxmann.com 206 (Gujarat) I. Section 68 of the Income-tax Act, 1961 - Cash credit [Unverifiable purchases] - Assessing Officer found that purchases made by assessee could not be verified as parties were untraceable -Accordingly, he made audition to assessee's income - However, Tribunal held that since purchases were supported by bills, entries were made in books of account and payment was made by cheque, addition should have to be deleted - Whether issue being based on facts, required no consideration - Held, yes [Para 4] [In favour of assessee] (d) Mayank Diamonds P. Ltd. vs ITO in TA No.200 of 2003 "1. Being aggrieved and dissatisfied with the impugned judgement and order dated 18.10.2002 passed by the Income Tax Appellate Tribunal, 'B' Bench (Tribunal) in Income Tax Appeal No. 341/Ahd/2002 for the assessment year 1997- 98, the revenue has preferred the present tax appeal with the following substantial question of law: "Whether the Tribunal was right in estimating the gross profit of 12.5% against the gross profit of 1.03% shown by the assessee without recording any cogent and convincing reasons in support thereof 2. The assessee company is engaged in trading of polished diamond. The assessee company showed turnover of Rs. 1,86,36,447/- and gross profit of Rs. 1,93,105/- which comes to 1.03%. During the assessment proceedings, the details of purchase was called for and the list of purchase parties was submitted by the company. During the assessment proceedings the director of the company
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explained that there is no bill issued by purchase parties. The Director of the assessee company was summoned under section 131 and statement was recorded. The Assessment Officer came to the inference that purchases amounting to Rs. 1,68,48,663/- are bogus and he added this amount in the computation of the assessee company's income. • - 2.1 Being aggrieved by the same, the assessee preferred appeal before CIT(Appeals) but the said appeal came to be dismissed. The assessee company thereafter preferred appeal before the Tribunal after hearing the parties, partly allowed the appeal by directing the Assessment Officer to make addition of Rs. 21,36,451/- at the rate of 12.5% of gross profit as against addition of Rs. 1,68,48,663/- made in the assessment order. Being aggrieved by the same, the present appeal is preferred. 3. Mr. J.P. Shah, learned advocate appearing for the appellant company submitted that the Tribunal erred in rejecting 1.03% of gross porfit shown by the appellant on a turnover of Rs. 1,86,36,447/- and further erred in hiking it to 12.5%. He submitted that the Tribunal failed to appreciate that the accounts of the appellant were not only closed and adjusted but also audited. He has relied upon a decision of the Income Tax Appellate Tribunal, Ahmedabad Bench in the case of Pankaj Diamond vs. Assistant Commissioner of Income Tax reported in [2010] 5 ITR (Trib) 469 wherein the Tribunal has observed that as no specific defect in the various expenses claimed by the assessee in the profit and loss account could be pointed out by the Department, the Commissioner (Appeals) was not justified in arbitrarily applying the rate of net profit of three per cent in making the addition. He contended that in the present case the Tribunal has applied 12.5% which is grossly on the higher side. 4. Mr. Mehta, learned advocate appearing for the respondent supported the impugned order and submitted that the Tribunal has rightly observed that addition at the rate of 12.5% is applicable in the present case because the appellant company has siphoned off large amount by snowing bogus and fictitious addresses. He submitted that the present appeal lacks merits and therefore deserves to be dismissed. 5. We have heard learned advocates for both the sides and perused the orders passed by the CIT as well as the Tribunal. As a result of hearing and perusal of records, it is borne out that the average profit which has been considered for this industry is around 3 to 7%. The Tribunal in the instant case has directed addition at the rate of 12.5% which in our opinion is on the higher side. Learned advocate for the appellant has fairly conceded that excess 7% is on higher side and that at the most 3% may be applied. In that view of the matter, going by the peculiar facts of the present case we are of the view that ends of justice will be met by taking mean of maximum and minimum of the profit rate
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which comes to 5%. Therefore, we think it fit to direct the Assessing ^Officer to apply 5% G.P rate as the rate of 12.5 % is drastically higher and 1.03% is drastically lower. Gross profit rate of 5% is the average rate of the industry and we think it fit to make addition on account of 5% gross profit rate. The addition be made accordingly. We therefore answer the question raised in the negative i.e. against the revenue and in favour of the assessee. 6. In the premises aforesaid, appeal is allowed to the aforesaid extent. Gross profit rate of 5% be applied and income of the assessee be estimated accordingly. The impugned judgment passed by the Tribunal is modified accordingly." As held in the above mentioned orders of the Hon'ble jurisdictional High Court of Gujarat, Ahmadabad, in such cases, additions should be made by taking gross profit @ 5% to 12.5% of the total purchase. Keeping in view of the facts of the case, additions are restricted to 12.5% of the total disallowance made. Thus, additions of Rs.10,72,275/- are confirmed and additions of Rs.75,05,925/- are deleted. This ground of appeal is partly allowed.
We have carefully heard the contentions of both the parties and have also gone through the orders of the authorities below. The issue before us is against the restriction of disallowance of sales promotion expenses of Rs.75,05,925/- to 12.5% thereof by applying profit rate to the bogus expenses ,thus amounting to restricting the disallowance to Rs.10,72,275/- and deleting the balance of Rs.75,05,925/-.
Undeniably the Ld. CIT(A) has categorically held the purchases made from these parties as bogus, as is evident from Para 8.2 as reproduced as above and the same have remained unchallenged before us.
The purchases therefore admittedly being bogus, we agree with the Ld.DR that the entire purchases needed to be disallowed as opposed to restriction of the same to 12.5% of the expenditure.
The Ld.CIT(A)’s decision, we find, is based on his finding that the assessee had made purchases for sales promotion items bought, though not
15 I.T.A No. 1477/Ahd/17 & 1826/Ahd/2016 & Ors. A.Y. 2011-12 & Ors. Page No ACIT vs. Gujarat Terce Laboratories Ltd. from the parties as recorded in the books, but from other parties. And therefore only the profit element embedded in the said purchases, having been actually bought at lower prices from the gray market, needed to be added to the income of the assessee. The reliance of the Ld.CIT(A) on various case laws are also with respect to this proposition wherein purchases in relation of traded or manufactured items, found bogus, the addition was restricted to the gross profit element in the said purchases, considering the fact that the corresponding sales made therefrom was not found bogus and therefore finding that purchases must have been made from some other parties ,in the gray market at discounted rates and bills of higher rates only procured from different parties.
In the present case , the said proposition would have applied, only if the purchase of items for sales promotion from the said two parties was established as a fact to have been distributed by the assessee for sales promotion purposes.
We find that the Ld.CIT(A) has very loosely recorded his finding to this effect stating that actual purchases of items for sales promotion purposes “must” have been made by the assessee from some other parties though definitely not from those recorded in the Books of the assessee and accordingly found to be bogus by both the AO and the Ld.CIT(A).He has based his finding on the stock register maintained by the assessee in CD, which he states establishes the factum of gift articles being distributed by the assessee to various persons and on certain receipts issued by recipient of gift items. We do not find any substance in the same.
16 I.T.A No. 1477/Ahd/17 & 1826/Ahd/2016 & Ors. A.Y. 2011-12 & Ors. Page No ACIT vs. Gujarat Terce Laboratories Ltd. 21. Firstly the bills of purchases of gift items are undeniably found to be bogus. Therefore there is no mechanism for establishing what exactly was purchased by the assessee. It therefore is impossible to establish that what was purchased as gifts was distributed also by the assessee.
The stock register, we find, is not a third party document but a document of the assessee itself and is maintained in consonance with the books of accounts prepared by it. The moment a bill for purchases is recorded in the books, its contents also get recorded in the stock register. Therefore even if the bill is bogus the stock register will still show receipt of items when actually none may have been purchased. As for items shown as issued, the stock register generally mentions quantity issued and there is no description as to whom issued or any other detail. We have perused the contents of the copy of stock register of the assessee placed before us at Paper Book-II filed on 22-01-2020.What it reveals is that it is a stock record of various items ranging from Pencil in CD Box,bottle opener, digital diary, Leather folder box and such other several items purportedly used for the purpose of gifting .The items have been recorded as” Ín” on the basis of purchase bills and “Óut”on the basis of delivery challans. Both are internal documents of the assessee itself and have no evidentiary value therefore for the purpose of proving that gift items were actually distributed by the assessee. The “Óut”entry, we have noted, also records the branch of the assessee, i.e Punjab, Indore etc where issued or certain names against it ,which the assessee pleads are those of its MR’s some of whom have confirmed distributing gifts. Again all of these are of no assistance to the assessee being its own internal recordings and documents.
17 I.T.A No. 1477/Ahd/17 & 1826/Ahd/2016 & Ors. A.Y. 2011-12 & Ors. Page No ACIT vs. Gujarat Terce Laboratories Ltd. 22. As for confirmation/ receipts from dealers receiving gift items, the same we have noted, was examined by the AO who had contended that the veracity of the said documents was not verifiable since they did not bear any address of the recipient .He also pointed out that even the nature of the article gifted was not mentioned in the said receipt. The details of MR’s who distributed the gifts also therefore does not establish the fact of gift having been actually distributed by the assessee. These are only self serving documents and no cognizance of the same can be taken for finding whether the assessee had in fact distributed gift articles to its customers/clients.
The bills being found bogus by the Ld.CIT(A) which finding has remained unchallenged before us, the stock record being a self serving document, the receipts from recipients of gifts not mentioning the goods received, there is nothing to even suggest what was actually purchased and distributed by the assessee as gift. There is no way to establish in this case that what was purchased was distributed by the assessee as gift. It is impossible to apply any profit theory in this situation ,to restrict the disallowance to profit earned thereon, which theory ,we have noted from the orders of the Hon’ble High Courts rests on the premise that the sale from the alleged bogus purchases being admitted, the purchases must have been made though from the grey market at comparatively lower rates saving taxes and duties thereon and hence earning extra profits in the process not disclosed in the books.
The reasoning of the ld. CIT(A) therefore for restricting the disallowance to the extent of 12.5% of the total expenses is therefore we hold flawed, illogical and not sustainable. Since the ld. CIT(A) has himself
18 I.T.A No. 1477/Ahd/17 & 1826/Ahd/2016 & Ors. A.Y. 2011-12 & Ors. Page No ACIT vs. Gujarat Terce Laboratories Ltd. found the entire purchases of sales promotion articles from these two parties as bogus, and there is no evidence to prove distribution of these gifts, there is no recourse left but to disallow the entire expenses. We draw support from the findings in this regard, the decision of Hon’ble Gujarat High Court in the case of N.K. Industries Ltd. (supra), where in identical set of facts, the Hon’ble High Court held that there was no case for restricting the disallowance to a particular percentage and the entire expenses need to be disallowed.
In view of the above, we hold that the entire sales promotion expenses amounting to Rs. 85,78,200/- pertaining to these two parties M/s. Gajanand Traders and M/s Devanand Enterprise need to be disallowed and direct the A.O. to do so.
Grounds of the appeal of the Revenue are allowed.
In effect appeal of the Revenue is allowed.
ITA No. 1826/Ahd/2017 for A.Y. 2011-12 (Revenue’s appeal)
This ground has already been decided by us in ITA No. 1477/Ahd/2016 for A.Y. 2011-12 therein. In the absence of any changed circumstances the same shall apply mutatis mutandis.
In effect, appeal of the Revenue is allowed.
ITA No. 1460/Ahd/2016 for A.Y. 2012-13 (Revenue’s appeal)
19 I.T.A No. 1477/Ahd/17 & 1826/Ahd/2016 & Ors. A.Y. 2011-12 & Ors. Page No ACIT vs. Gujarat Terce Laboratories Ltd. 30. This ground has already been decided by us in ITA No. 1477/Ahd/2016 for A.Y. 2011-12 therein. In the absence of any changed circumstances the same shall apply mutatis mutandis.
In effect, appeal of the Revenue is allowed.
ITA No. 2301/Ahd/2016 for A.Y. 2013-14 (Revenue’s appeal)
This ground has already been decided by us in ITA No. 1477/Ahd/2016 for A.Y. 2011-12 therein. In the absence of any changed circumstances the same shall apply mutatis mutandis.
In effect, appeal of the Revenue is allowed.
ITA No. 1827/Ahd/2017 for A.Y. 2014-15 (Revenue’s appeal)
This ground has already been decided by us in ITA No. 1477/Ahd/2016 for A.Y. 2011-12 therein. In the absence of any changed circumstances the same shall apply mutatis mutandis.
In effect, appeal of the Revenue is allowed.
In effect, all the appeals filed by the Revenue are allowed.
Order pronounced in the open court on 22-07-2022
Sd/- Sd/- (SIDDHARTHA NAUTIYAL) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad : Dated 22/07/2022