ITO 8(1)(3), MUMBAI vs. M/S.SAI SAMARTHA CASMETICS PRIVATE LIMITED, MUMBAI

O R D E R PER C.N. PRASAD (JM) 1. This appeal is filed by the revenue against the order of the Learned Commissioner of Income Tax (Appeals) – 14, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 13.07.2018 for the A.Y. 2010-11 in restricting the disallowance to 12.5% of purchases of ₹.5,59,125/- as against the entire purchases disallowed as non-genuine/bogus by the Assessing Officer.

(A.Y: 2010-11) M/s. Sai Samartha Cosmetics Pvt. Ltd., 2. Briefly stated the facts are that, the assessee is engaged in the business of Manufacture, distributors, importers & exporter of all kinds of cosmetic products, filed return of income for the A.Y.2010-11 on 30.09.2010 declaring income of ₹.27,39,269/- and the return was processed u/s. 143(1) of the Act. Subsequently, Assessing Officer received information from the Sales Tax Department, Mumbai about the accommodation entries provided by various dealers and assessee was also one of the beneficiary from those dealers. The assessment was reopened U/s. 147 of the Act based on the information received from Sales Tax Department, Mumbai, that the assessee has availed accommodation entries from M/s. Shape Corporation who is said to be providing accommodation entries without there being transportation of any goods. In the re-assessment proceedings, the assessee was required to prove the genuineness of the purchases made from M/s. Shape Corporation which is referred in the Assessment Order. The assessee produced invoices, bank statements delivery challans, stock register etc., and submitted that the purchases made are genuine.

(A.Y: 2010-11) M/s. Sai Samartha Cosmetics Pvt. Ltd., 5. Heard both the parties, perused the orders of the authorities below. On a perusal of the order of the Ld.CIT(A), we find that the Ld.CIT(A) considered this aspect of the matter elaborately with reference to the submissions of the assessee and the averments in the Assessment Order, referring to various decisions of the Coordinate Benches and also the decision of the Hon'ble Gujarat High Court in the case of the CIT v. Simit P. Sheth [356 ITR 451] restricted the disallowance to 12.5% of the non- genuine purchases while estimating the profit element @12.5%, while holding so, the Ld.CIT(A) observed as under: - “Reliance is also placed on the decision of ITAT, Mumbai in the case of Ratnagiri Stainless (P.) Ltd. Vs. Income-tax Officer, 5(3)(1), Mumbai [2017] 80 taxmann.com 265 (Mumbai - Trib.)/[2017] 164 ITD 136 (Mumbai - Trib.), head note of which reads as under :- Section 69C, read with section 147, of the Income-tax Act, 1961 - Unexplained expenditure (Reassessment) - Information was received by Assessing Officer from DGIT (Inv.), Mumbai that there were some parties who were engaged in hawala transactions and were involved in issuing bogus bills for sale of material without delivery of goods, and that assessee was beneficiary of hawala/accommodation entries from 28 entry providers - Assessing Officer reopened assessment and assessee was asked to produce parties and also file documents to substantiate its claim of purchase etc. - Assessee did not submit documentary evidence to show that there was movement of goods and notices issued to 28 parties were returned unserved – Thus, he concluded purchases were not genuine purchases and further, Assessing Officer "made gross profit additions at rate of 12.5 per cent over total purchases - Whether, on facts, there was tangible material which clearly indicated assessee to be beneficiary, of bogus purchase entries from 28 bogus entry providers and, thus, reopening was justified - Held, yes - Whether further since directors of 28 entities had admitted of (A.Y: 2010-11) M/s. Sai Samartha Cosmetics Pvt. Ltd., issuing only invoices for sake of entry without delivery of goods Assessing Officer was justified in treating it as bogus purchases - Held, yes – whether ends of justice will be met if GP ratio of 12.5 per cent on alleged bogus purchases was added to income of assessee against which credit for declared GP ratio on alleged bogus purchases be granted by Assessing Officer after verification - Held, yes [Paras 10 and 11] [Partly in favour of assessee] In the body of the order, honourable tribunal has observed as under: “It was observed by the Assessing Officer that these parties just issue bogus bills in lieu for earning commission without actual supply of goods. In an sworn Affidavit Cum Declaration filed before Sales Tax Investigation Branch, Mumbai, and in deposition before the Assistant Commissioner of Sales tax, Investigation Branch, Mumbai ,the directors of the said 28 entities have admitted of issuing only invoices for sake of entry without delivery of goods. Notices under section 133(6) were issued by the Assessing Officer to all the above 28 parties. All these notices except one notice were either returned un-served or were not replied to. Only one party, categorically stated that they have not supplied any material to the assessee concern. The Assessing Officer asked the assessee to produce the parties but the assessee failed to produce the parties. The parties were not produced even before Commissioner (Appeals). The assessee also failed to produce suppliers, transporters or brokers before the Assessing Officer for verification and enquiry. The assessee was not able to discharge burden cast under section 106 of 1872 Act as the assessee did not produce the original documents before the Assessing Officer and file documents for showing movement of goods from supplier to assessee and from assessee to customer as evidence although it stated in its reply that said documents are. being filed. The assessee filed delivery challan in one case only and that too there was no mention of transportation details. The assessee did not file confirmations from these parties nor transportation details of the material purported to be purchased from these suppliers were furnished. The parties were also not produced before the authorities below. The only (A.Y: 2010-11) M/s. Sai Samartha Cosmetics Pvt. Ltd., party who responded to notice under section 133(6) issued by the Assessing Officer namely Ranakpur deposed against the assessee. The assessee did not ask for cross examination of Ranakpur. The assessee has to first discharge its primary onus cast under law and if the same stood duly discharged which is not rebutted by authorities , but despite that then also the authorities proceed to put assessee to prejudice solely relying on the basis of incriminating statement recorded of third party at the back of the assessee, then certainly the right to cross examination the said third party whose incriminating statement recorded at the back of the assessee is relied upon by authorities to prejudice the assessee will become absolute. But in the instant case, primary onus cast on the assessee itself did not stand discharged by the assessee. The Assessing Officer made gross profit additions at the rate of 12.5% over the total bogus purchases of Rs.2,39,83,261/- which were held to be non-genuine by the authorities below, which addition came to Rs. 29,97908/- addition was confirmed by the learned Commissioner (Appeals). In such circumstances, GP ratio needs to be estimated which definitely involved some estimation/guesswork but the said estimation/guesswork should be fair, honest and rational keeping in view factual matrix of the case and cannot be arbitrarily applied at the discretion of authorities. The authorities below in the instant case did not make any industry comparisons to arrive at fair, honest and rational estimation of GP ratio, rather applied GP ratio of 12.5 per cent on alleged bogus purchases which estimation was in addition to the normal GP ratio declared by the assessee in return of income filed with revenue. The revenue made aforesaid additions on the presumption that the material was in-fact purchased from grey market at a lower rate and to cover deficiencies in record, the invoices were procured from these entry operators to reduce the profit. It was also considered that there will be savings on account of taxes while procuring material from grey market. The books of account were not rejected under section 145(3) by the revenue. In the immediately preceding year i.e. assessment year 2008-09, the assessee earned GP ratio of 4.3 per cent on total turnover, while for the year under consideration GP ratio earned was 5.45 per cent. Based on (A.Y: 2010-11) M/s. Sai Samartha Cosmetics Pvt. Ltd., facts and circumstances of the case, end of justice will be met if GP ratio of 12.5 per cent on alleged bogus purchases was added to income of the assessee against which credit for the declared GP ratio on the alleged bogus purchases will be granted by the Assessing Officer after verification by the Assessing Officer because of failure of the assessee to come forward to discharge primary onus cast upon him for which assessee is to be blamed and in the midst of afore-stated un- rebutted allegation against the assessee and non-discharge of primary onus, the declared lower GP ratio of 5.45 per cent in the instant previous year under appeal cannot be accepted. [Para 11] Since the facts of the assessee's case are similar, respectfully following the above decisions, the AO is directed to tax 12.5% of such purchases towards element of profit embedded in such purchases from M/s Shape Corporation. I am not in agreement with the action of the AO in taxing entire amount 6 hawala purchases u/s. 69C of the I.T. Act because*'the AO has not brought anything on record to show that purchases from grey market were made out of undisclosed funds and payments made by the appellant to M/s Shape Corporation were not available for making purchases from grey market. In Fact, the AO himself has accepted in para 5.9 of the assessment order that payment made by the appellant to bogus party comes back in cash and is available for making purchases from undisclosed parties in cash. Secondly there is no exact quantification of purchases made from grey market which has been taken by the AO equal to the amount of hawala bills In view of these reasons, I am of the opinion that/in absence of any evidence to the effect that grey market purchases were made out of undisclosed sources, it will be justified to presume that payments made for hawala purchases were available for making purchases from grey market and the best course of action would be estimation of additional profit from hawala purchases, as has been held in the decisions quoted above. Thus estimation of element of profit embedded in such purchases from the hawala parties will be the best course of action and the AO is directed to tax 12.5% of such purchases towards element of profit embedded in such purchases from M/s Shape Corporation”