INCOME TAX OFFICER-9(2)(3), MUMBAI vs. SHRI MANISH P. SHAH, MUMBAI

Date of Hearing 10/12/2019 Date of Pronouncement 10/12/2019 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 Ld. Commissioner of Income Tax (Appeals)–30, Mumbai, dated 12/03/2018 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) is justified in confirming the addition @6.5% of total purchases of Rs. 80,51,702/ made by the" assessee from seven parties when during the investigation made by sales tax department of Maharashtra Government, it was conclusively proved - beyond doubt that these parties are only into providing accommodation entries and do not do any real business. ?"

3. Whether on the facts and in the circumstances of the case and in law, the Ld. CTT(A) is justified in not appreciating the fact that during the investigation made by sales tax department of Maharashtra Government, directors/Prop./Partners of such parties have accepted on oath that they are providing only accommodation entries and not doing any real business, the treatment of such purchases as being genuine does not hold ground?"

4. The appellant prays that the order of the Ld. CIT(A) on the above grounds be set-aside and that of the AO be restored

5. The appellant craves leave, to amend or alter any ground or add a new ground which may be necessary

3. The brief facts of the case are that the assessee is a trader engaged in the business of resale of computer hardware parts, components and accessories in the name and style of M/s Microlink Technologies. The assessee has filed his return of income for AY 2009-10 on 30/09/2009 declaring total income of Rs.5,72,828/-. Thereafter, the case has been reopened u/s 147 of the Act, 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 and other places. 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 para 2 of his assessment order amounting to Rs. 80,51,702/-. The case was selected for scrutiny and the assessment has been completed u/s. 143(3).r.w.s. 147 of the I.T.Act, 1961 on 18/03/2015 and determined total income of Rs. 86,24,530/-, after making 100% additions towards alleged bogus purchase from those parties and made additions of Rs. 80,51,702/-.

4. Aggrieved by the assessment order, the assesee preferred an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assesse has filed elaborate written submissions, on the issue, which has been reproduced at Para 4 on pages 4 to 9 of Ld.CIT(A) order. The sum and substance of 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, 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 made by the AO towards alleged bogus purchases to 6.5% gross profit on total purchases from those parties. The ld. CIT(A) had also rejected legal ground taken by the assessee challenging reopening assessment u/s 147 of the Income Tax Act, 1961. The relevant findings of the Ld.CIT(A) are as under:-

5. Carefully considered the rival submissions, perused the material on record and duly considered the factual matrix of the case as well as the applicable legal Position before arriving the following conclusion/decision.

6.2 The contention of the appellant is that the reopening of the assessment u/s 147 was on the basis of information received from DGIT(Inv), Munibal. This argument of the appellant is devoid of any merit. In the present case, on specific information received from the Investigation Wing of the Department that the purchases debited to P& L A/c were bogus, the AO after recording the reasons as stipulated by the Act, issued notice u/s 148 of the Act. In this case, before issuing the notice u/s 148 of the Act, there is no assessment or reassessment passed u/s 143(3) of the Act. It is a settled legal position that in a case where there was an assessment is not made u/s 143(3) of the Act prior to the reopening of assessment, even if all the material facts are disclosed in the return of income already filed, reopening can be initiated if the Assessing Officer has reason to believe' that the income has escaped assessment. The assessee in such cases cannot assail the reopening on the ground that the facts were already placed on record and that the Assessing Officer ought to have considered the facts. The Hon'ble Supreme Court in the case of ACIT vs, Rajesh Jhaveri Stock Brokers (P) Ltd. (291 ITR 500) observed that the word 'reason' in the expression 'reason to believe' would mean cause or justification and if the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reasons to believe that income had escaped assessment. It is further observed by the Supreme Court that the expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. At the initiation stage, what is required is "reason to believe", but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief that income has escaped assessment. In the present case, it is evident from the reasons recorded that the Assessing Officer received specific and credible information from Maharashtra Sales Tax Department that the appellant is one of the beneficiaries of the Hawala bills and by availing these accommodation entries from Hawala operators, expenditure was inflated in the books of account, on account of purchases. Based on this precise information, the AO issued notice u/s, 148 of the l.T. Act as he had prima-facie reasons to believe that income chargeable to tax had escaped assessment within the meaning of sec. 147 of the l.T, Act. Thus, there was cause or justification for the AO to invoke provisions of sec. 147 and issue notice u/s.

7. Ground No. "B" which is again sub-divided in 2 parts- Part Ho, 1 is subdivided in (i) to (vi) parts and Part No.2 is sub-divided in (i) to (ix) parts are against the addition of in respect of purchases from 7 parties by treating them as bogus purchases amounting to Rs, 80,51,703;-. Since both the parts are co-related, decided at one place. In the grounds of appeal it is stated that the copies of information and other material relied upon were not provided by A.O, thus natural justice was denied. The addition is made relying on the list of suspicious dealers placed on the website of sales tax department without providing copies of the material to the appellant. The material of the sales tax department relied upon was not offered for cross examination. A.O, has erred in rejecting books of account by wrongly invoking provisions of section 145(3) of the Act. It is stated that A,O. has disallowed the purchases even though corresponding sales have been fully taxed.

7.1 In making the addition, Ld, AO relied on the deposition and affidavit by the some of the entities before the Sales tax Authorities, as per which they have only given bogus bills without supplying any goods. Apart from that independent inquiries were also conducted by the AO by sending notices u/s 133(6) of the Act. These facts were brought to the notice of the appellant's AR and he was asked to produce the said entities from whom goods were allegedly purchased. As the appellant was unable to produce the said parties, Ld, AO held that as the assessee has not provided the necessary details, addition was made at 100% of unproved purchases of Rs. 80,51,702/-. 7.2 Per contra, Ld. AR has submitted that the copies of information and other material relied upon were not provide by AO thus natural justice was denied to the appellant. The addition is based on the information received from the DGIT (Inv.) based on inquiries carried out by the Sales Tax Department. It is stated that opportunity of cross examination of the alleged parties was not provided to the assessee. It is stated that without any tenable ground, A.O, rejected books of accounts u/s 145(3) of the Act. The relevant evidences were submitted to AO such as purchase invoices, details' of payments made through banking channel etc, which was not accepted by the A.O. It is further submitted that the appellant has offered G.P, ratio @ 14.71%, It is further stated that without giving proper opportunity to present the case. Relying on certain case laws, appellant requested to delete the addition of the total amount of purchases, 7.3 On perusal of the material on record it is noticed that, in the appellant's case, Ld, AO, has not solely relied on the Sales tax department information but also made independent verifications by issuing notices u/s. 133(6) of the Act After weighing the evidence pros and cons, I find that the appellant has not Reconciled the purchases with the items sold and failed to reconcile one to one of the items purchased and sold. Before A.O. assessee has stated that he is not maintaining the stock register. Onus was always on the appellant to prove as to how the material purchased was firstly obtained. I record a finding of fact here that no proof of delivery of purchases, stock register has been filed either before the Ld. AO or before me. Thus, it can be safely presumed that either they are non-existent or even if they did exist, they were not backed by sufficient evidence to undergo the test of scrutiny.

7.4 A The supplier was in fact the appellant's witness and the Ld. AO was not required to force their attendance, ft was for the appellant to produce it as per Civil Procedure Code, which applies on all fours to the income-tax proceedings. It is trite that once a transaction is shown to be of the nature of income, the onus shifts to the assessee to show that the same was not taxable. It can thus be safely assumed that the appellant has grossly failed in its duty to mitigate the burden cast upon it in so far as proving the genuineness of the transaction from the said party is concerned.

7.5 In this regard it is also pertinent to mention that while dealing with the concept of burden of proof, onus of proving is always on the person who makes the claim and not on the Revenue. While dealing with the issue of deciding the burden of proof, Hon'ble Supreme Court in the cases of CIT Vs. Durgaprasad More 82 ITR 540 and Sumati Dayal Vs. CIT 214 ITR 801 has held that the apparent must be considered real until it is shown that there are reasons to believe that the apparent is not real and that Taxing Authorities are entitled to look into surrounding circumstances to find out the reality and the matter has to be considered by applying the test of human probabilities. The Hon'ble court also held that, it is no doubt, true that in all cases in which a receipt is sought to be taxed as Income, the burden lies on the department to prove that it is within the taxing provision and if a receipt is in the nature of income, the burden to prove that it is not taxable because it falls within exemption provided by the Act, lies upon the assessee. In the case of Durgaprasad More (Supra), the Hon’ble Court went on to add that a party who relies on a recital in a Deed has to establish the truth of this recital in a Deed has to establish the truth of this recital, otherwise it will be very easy to make self serving statements in documents either executed or taken by a party who relied on those recitals. If all that an assesses who wants to evade tax has to have some recitals made in a document either executed by him or executed in his favour then the door will be left wide open to evade tax. The Hon'ble Court further held that the Taxing Authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look in to the surrounding circumstances to find out the reality of the recitals made in those documents. 7.6 The onus to prove that apparent, is not the real one, is on the party who claims it to be so, as held by the Hon'ble Supreme Court in the case of CIT v. Dautat Ram Rawatmull [1973] 87 ITR 349 and CIT v. Durga Prasad More supra). In the latter case, it has been held by the Apex Court that though an apparent statement must be considered real until it was shown that there were reasons to believe that apparent was not the real in a case where an authority relied on self serving recitals in documents, it was for the party to establish the proof of those recitals; the taxing authorities were entitled to look into the surrounding circumstances to find out reality of such recitals. 7.7 It is also a settled legal proposition that if no evidence is given by the party on whom the burden is cast, the issue must be found against him. Therefore, onus is always on a person who asserts a proposition or fact, which is not self evident. The onus, as a determining factor of the whole case can only arise if the Tribunal, which is vested with the authority to determine, finally all questions of fact, finds the evidence pro & con, so evenly balanced that it can come to no conclusion, then, that onus as a determining factor comes into play where, either there is no evidence on either side, or where it is equally worthless or where it is equally balanced. It is imperative to mention here that where such is not the case and all available evidence is considered, without reference to the onus and without relying on the circumstances that onus lies on a particular partyr the issue is determined on facts and the onus cannot be said to have influenced the decisions. However, in the instant case, the appellant has miserably failed to lead evidence and hence, onus is a determining factor. 7.8 Having gone through the case laws cited in support of the appellant in his submissions, it is seen that in none of those cases so much of investigation was done including those by another Government authority, viz,, Maharashtra Sales Tax authority before whom affidavit was filed stating that only bogus bills were supplied without delivery of goods. 7.9 Hon'ble Gujarat High Court in the case of CIT vs. Simit Sheth (2013) 38 Taxmann.com 385 (Guj), Hon’ble Court (which was relied by the AO for making the addition) was seized with a similar issue where the A.O. had found that some of the alleged suppliers of steel to the assessee had not supplied any goods but had only provided sale bills and hence, purchases from the said parties were held to be bogus- The A,O. in that case added the entire amount of purchases to gross profit of the assessee. Ld. CIT(A) having found that the assessee had indeed purchased though not from named parties but other parties from grey market, partially sustained the addition as probable profit of the assessee. The Tribunal however, sustained the addition to the extent of 12.5%. Taking into account the above facts, the Hon'ble Gujarat High Court held that since the purchases were not bogus, but were made from parties other than those mentioned in books of accounts, only the profit element embedded in such purchases could be added to the assessee's income and as such no question of law arose in such estimation. While arriving at the above conclusion, the Hon'ble Court also relied on the decision in the case of Vijay M. Mistry Construction Ltd. 355 ITR 498 (Guj) and further approved the decision of Ahmedabad Bench, ITAT in the case of Vijay Proteins 58 ITD 428.

7.10 In the decision of Hon'ble Gujarat High Court in the case of CIT vs.Simit Sheth 356 ITR 451 (Guj) wherein also it is found that some of the alleged suppliers of steel to the assesses had not supplied any goods but had only provided sale bills and hence, purchases from the said parties were held to be bogus. The AO in that case added the entire amount of purchases to gross profit of the assessee. Ld. CIT(A) having found that the assessee had indeed purchased though not from named parties but other parties from grey market, partially sustained the addition ".; as probable profit of the assessee. The Tribunal however, sustained the addition to the extent of 12.5%. Taking into account the above facts, the Hon'ble Gujarat High Court held that since the purchases were not bogus, but were made from parties ' other than those mentioned in books of accounts, only the profit element embedded in such purchases could be added to the assessee's income and as such no question of law arose in such estimation. The tribunal for arriving the profit embedded in the transactions @ 12.5% held as under:

"Having heard the submissions of both sides, we have been informed that the malpractice of bogus purchase is mainly to save 10% sales tax etc, It has also been informed that in this industry about 2-5% is the profit margin. Therefore, respectfully following the decsons of the co-ordinate bnech pronounced on identical circumstances, we hereby direct that the disallowance is required to be sustained at 12.5% of the purchase from those parties. With these directions, we hereby decide the grounds of the rival parties which are partly allowed." 7.11 The appellant made purchases from 7 parties who are said to be hawala operators, who is indulged in providing bogus bills without supply of any material. Independent inquiries conducted revealed that no such parties are existing in the given address. When asked to produce the parties during the assessment proceedings by the AO, appellant expressed his inability to do so. In the present case, A.O. added entire purchases of Rs, 80,51,702/-, The simple issue to be decided is what percentage to be adopted in the line of business Le. dealer in ferrous and non-ferrous metals. As noticed above, in the similar circumstances of bogus purchases, Hon'ble Gujarat High Court estimated the additional advantage towards tax benefit (10% and the profit margin (2.5%) totaling to 12.5%. In the present case on perusal of copies of the invoices furnished by the appellant in the bill the percentage of VAT levied is @ 4%, Applying the same logic, the profit margin should be adopted @ 2.5%. In view of the above, in my considered opinion, applying the logic of the above said case the profit percentage embedded on such purchases is restricted to 6,5% (i.e. 4% of VAT levied + 2.5% towards profit margin), that will meet the ends of the justice. Taking all the facts into consideration and applying the logic of Simit P. Sheth case, the A,O. is directed to sustain the addition @ 6,5% as percentage embedded in non-genuine purchases of Rs..80,51,702/-. Appeal on Part "B" of Grounds is treated as 'Partly Allowed1.

6 Having considered arguments of the Ld. DR and also, material available on record, we find that both the sides have 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 the satisfactions of the Ld.AO. At the same time, the Ld. AO had also failed to take the investigation to a logical conclusion by carrying 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, in a case where purchases are considered to be purchased from suspicious/hawala dealers, 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 of 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 gross 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 made 100% additions, whereas the Ld.CIT(A) has scaled down addition to 6.5% gross profit 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 and estimated 6.5% gross profit on alleged bogus purchases 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 Revenue..

Order pronounced in the open court on this 10 /12/2019