M/S.RIDDHI SIDDHI IMPEX,MUMBAI vs. INCOME TAX OFFICER-19(3)(1), MUMBAI

O R D E R

PER AMARJIT SINGH, JM:

On the facts and in the circumstances of the ease and in law the learned Commissioner of Income Tax (Appeal) erred in (a) arriving at the conclusion that purchases made of Rs.58,11,747/- from parties mentioned in assessment order are not genuine and not made from them but from other sources. A.Y.2010-11 (b) Confirming estimation of profit element @ 12.5% on alleged non genuine purchases of Rs.58,11,747/- which is over and above the gross profit declared @3.44% in books of accounts. (c) Confirming addition of Rs.7,26,469/- made by the Assessing Officer to the total income of the appellant. The CIT (A) failed to appreciate that the AO did not carry out any independent enquiry himself and did not point out any defect in the evidence furnished by the Appellant. Therefore, the addition is liable to be deleted. The CIT (A) failed to appreciate that the AO had not provided the Appellant any material on which he placed his reliance in making the impugned addition thereby violating the principles of natural justice. The CIT (A) ought to have provided such material to the Appellant before adjudicating on the impugned addition. Therefore, the addition is not justified. The learned CIT (A) failed to appreciate the submission made before him with respect to VAT Audit report of M/s. Suzlon. In para 9 of the CIT (A) order, the learned CIT (A) mentioned that he appellant did not furnish any details in support of the grounds of appeal no.

5. Whereas in para 4 of the CIT (A) order with respect to the appellant’s contentions & submission, the appellants written submission dated 28.05.2018, the appellant has clearly mentioned and submitted the requisite documents in respect to the grounds of appeal no.

5. Thus, the order passed is contradictory on the above grounds. Therefore, the addition made and the ground treated as dismissed is not justified. The appellant crave leave to add, amend, alter and/or vary any of the grounds of appeal before or at the time of hearing”.

3. The brief facts of the case are that the assessee filed its return of income on 24.09.2010 declaring total income to the tune of Rs.18,22,550/- for the A.Y. 2010-11. The return was processed u/s 143(1) of the I.T. Act, 1961. Thereafter, the case was reopened u/s 147 of the Act and notice u/s 148 of the Act was also issued on dated 19.09.2014. In replied to the notice, the assessee filed the return of income which he had filed earlier. Thereafter, the notices u/s 143(2) & 142(1) of the Act were issued and served upon the assessee. The assessee was engaged in the business of 2 A.Y.2010-11 Trading of auto parts and accessories. The case of the assessee was reopened on the basis of DGIT (Inv.) Wing, Mumbai, being one of the beneficiary of the bogus bills from Sandoz Steel in sum of Rs.58,11,747/-. The AO issued the notice u/s 133(6) of the Act but notice was not served being the party was not residing there. Thereafter by applying the ratio of the decision in case of CIT Vs. Simit P. Sheth (2013) reported in 356 ITR 451 (Guj), the AO restricted the addition to the extent of 12.5% i.e. 7,26,469/- of the bogus purchase in sum of Rs.58,11,747/-. The total income of the assessee was assessed to the tune of Rs.25,49,019/-. Feeling aggrieved, the assessee filed an appeal before the CIT(A) who dismissed the appeal of the assessee, therefore, the assessee has filed the present appeal before us.

4. We have heard the argument advanced by the Ld. Representative of the Department and perused the record. The notice was not served upon the assessee. However, the assessee was stated to be not residing there. The addition was raised on the basis of this fact that the notice u/s 133(6) of the Act was not served upon the assessee and the assessee failed to produce the party to substantiate his claim. In the instant case, the sale is not doubted. It is settled law that when the sales are not doubted then the100% disallowance for bogus purchase cannot be done. No sale could be done without actual purchases. The proposition is supported by decision of the Jurisdictional High Court in case of Nikunj Eximp Enterprises (in writ petition no 2860 order dated 18.06.2014). The facts and circumstances of the present case indicate that the assessee purchased the material from the grey market. Making purchases through the grey market gives the assessee savings on account of non-payment of tax and others at the expenses of the 3 A.Y.2010-11 exchequer. As regards the quantification of the profit element embedded in making of such bogus/unsubstantiated purchases by the assessee is concerned, we find that the Hon’ble High Court of Bombay has recently decided the matter of controversy in case of PCIT Vs. M. Haji Adam & Co. (ITA. No. 1004 of 2016 dated 11.02.2019). The relevant para no. 8 is hereby reproduced as under: -

8. In the present case, as noted above, the assessee was a trader of fabrics. The A.O. found three entities who were indulging in bogus billing activities. A.O. found that the purchases made by the assessee from these entities were bogus. This being a finding of fact, we have proceeded on such basis. Despite this, the question arises whether the Revenue is correct in contending that the entire purchase amount should be added by way of assessee's additional income or the assessee is correct in contending that such logic cannot be applied. The finding of the CIT(A) and the Tribunal would suggest that the department had not disputed the assessee's sales. There was no discrepancy between the purchases shown by the assessee and the sales declared. That being the position, the Tribunal was correct in coming to the conclusion that the purchases cannot be rejected without disturbing the sales in case of a trader. The Tribunal, therefore, correctly restricted the additions limited to the extent of bringing the G.I. rate on purchases at the same rate of other genuine purchases. The decision of the Gujarat High Court in the case of N.K. Industries Ltd. (supra cannot be applied without reference to the facts. In fact in paragraph 8 of the same judgment the Court held and observed as under “So far the question regarding addition of Rs.3,70,78,125/- as gross profit on sale of Rs.37.08 crores made by the Assessing Officer despite the fact that the said sales had admittedly been recorded in the regular books during F.Y. I997-98 is concerned; we are of the view that the assessee be punished since sale price is accepted by the revenue. Therefore, even if 6 % gross profit is taken into account, the corresponding cost price is required to be deducted and tax cannot be levied on the same price. We have to reduce the selling price accordingly as result of which profit comes to 5.66%. Therefore, 4 A.Y.2010-11 considering 5.66% of Rs.3,70,78,125% which comes to Rs.20,98,621.88 we think if fit to direct the revenue to add Rs.20,98,621.88 as gross profit and made necessary deductions accordingly. Accordingly, the said question is answered partially in favour of the assessee and partially in favour of the revenue.

5. In the said judgment, the addition in connection with the bogus purchase was to be limited to the extent of bringing the gross profit rate on such purchases at the same rate as of other genuine purchases. We respectfully following the order of the Hon’ble High Court set aside the finding of the CIT(A) on this issue and restored the issue before the AO to decide the matter of controversy afresh with the direction to the AO to restrict the addition as regards the bogus purchases by bringing the gross profit rate on such bogus purchases at the same rate as that of the other genuine purchases. Needless to say that an opportunity of being heard is required to be given to the assessee in accordance with law.