METAL INDIA,DELHI vs. ITO, NEW DELHI

The brief facts of the case are that an original return of income for the AY 2006-07 was filed by the assessee declaring total income of Rs. 4,42,610/- and the same was processed under section 143(1) of the Income tax Act, 1961 (in Short “Act”). Later, a letter dated 26.3.2013 was received from the office of the Chief Commissioner of Income Tax, Delhi-I, New Delhi therein forwarding letter dated 19.3.2013 received from the Commissioner of Income Tax, Central 2 II, New Delhi alongwith CD containing the details of the accommodation entries provided by Sh. Rakesh Gupta, Sh. Vishesh Gupta, Sh. Navneet Jain and Sh. Vaibhav Jain was appearing. After going through the complete list and indentifying the parties and after recording the reasons, the AO made an addition of Rs.79,86,868/- on account of bogus purchase and completed the assessment at an income of Rs. 84,29,480/- u/s. 143(3)/147 of the I.T. Act, 1961 vide his order dated 06.03.2014. Against the order of the AO, the assessee came in appeal before the Ld. CIT(A), who vide impugned order dated. 18.03.2016 not only dismissed the appeal of the assessee but also enhanced the addition made by the AO of Rs. 79,86,868/- to Rs. 99,78,004/- which includes enhancement of Rs. 3,93,705/-on account of commission paid on obtaining the accommodation entries and enhancement of 20% of the purchases of Rs. 15,97,431/- on account of understatement of the profit for the same. Aggrieved by the order of the Ld. CIT(A), the assessee filed this appeal before the Tribunal challenging the reopening of the assessment as well as the additions sustained/made by the CIT(A). The said appeal came up for hearing before this tribunal. The ITAT vide order dated 25.5.2017 held that reopening of the assessment was bad in law. Since the reopening was held to be bad in law, the ITAT did not adjudicate upon the other grounds raised by the assessee on the merit of the addition. The Revenue filed appeal before the Hon’ble High Court of Delhi against the order dated 25th May, 2017 passed by the ITAT. The Hon’ble Court vide its order dt. 07.02.2018 held that the reassessment in this case was validly reopened and accordingly reversed the order of the ITAT on the issue of the reopening and directed the ITAT to examine the merits of the assessee’s appeal. The relevant findings of the Hon’ble High Court are as under:

Accordingly, this appeal has been fixed to decide the issue on merit. The grounds taken by the assessee on merit are as under:

On the facts and circumstances of the case, the learned CIT(A) has erred, both on facts and in law in confirming the addition on account of bogus purchases, rejecting the material and evidences brought on record by the assessee to show that the purchases and sales were made in the regular course of business. 8. (i) On the facts and circumstances of the case, the learned CIT(A) has erred, both on facts and in law, in enhancing the addition made by the AO by an amount of Rs.3,93,705/- on account of commission paid in cash on the alleged bogus purchases. (ii) That the learned CIT(A) has erred in making the addition by disregarding the explanations and evidences brought on record by the assessee. 9. (i) On the facts and circumstances of the case, the learned CIT(A) has erred, both on facts and in law, in making an addition for an amount of Rs.15,97,431/- on account of the GP understated by the assessee on the alleged bogus purchases. (ii) That the learned CIT(A) has erred in making the addition by estimating the income at an arbitrary rate of 20% of the purchases made from these parties, without there being any basis for the same and by rejecting the explanations of the assessee.

On the facts and circumstances of the case, the learned CIT(A) has erred, both on facts and in law in rejecting the contention of the assessee that the addition so made on the basis of material collected at the back of the assessee, is bad in law and liable to be deleted.

On the facts and circumstances of the case, the learned CIT(A) has erred, both on facts and in law in rejecting the contention of the assessee that the addition made by the AO is untenable in the eyes of law, having been made without providing opportunity to cross examine the person on the basis of whose statement the allegations have been made against the assessee and without following the principles of natural justice. 12. The appellant craves the leave to add, amend or alter any of the grounds of appeal.”

The Ld. CIT(A) has confirmed the action of the AO in regard to the addition of Rs. 79,86,868/- and has further enhanced same by making an addition of Rs. 15,97,431/- being 20% of the above purchases on the presumption that there would be understatement of profit on above purchases. The CIT(A) has further added a sum of Rs. 3,93,705/- on account of presumption that assessee would have paid such commission for taking bogus accommodation entries. It was submitted that the CIT(A) has gone wrong in sustaining the addition as well as in enhancing the income. It is a case where the assessee has maintained complete books of accounts and has made the purchases in the normal course. The Ld. AR invited attention to the assessment order passed by the AO to point out that the allegation levied against the assessee are unsustainable and the additions have been made by indulging into surmises and conjuncture. It was further submitted that similar additions were made by the AO on the same set of facts for the same assessment year in other cases. Those cases have been subject matter of appeal before the ITAT and after examination of all the facts, the ITAT has deleted the entire addition. The Ld. AR placed a list of the cases where similar issues have come up before the ITAT and the additions have been deleted. At the time of hearing, Ld. Counsel for the assessee has stated that the issues involved in the present appeal is squarely covered by the judgement of ITAT Delhi, dated 28.10.2015 in the case of Unique Metal Industries vs ITO in and others various orders applying the same ratio. In reply, the LD. DR relied upon the order of the authorities below.

We have heard both the parties, perused, and considered the relevant records available with us specially the impugned orders passed by revenue authorities and copy of the Tribunal’s order dated 28/10/2015 passed in the case of Unique Metal Industries vs. ITO in ITA No. 1372/Del/2015.

The department has also made assessment of these persons in respect of the business of scrap carried on by them. The Revenue is doubting the purchases of the assessee on the basis that these persons have made a statement that they have issued accommodation bills and have not made actual sales to the assessee. Can such statements be taken at its face value? If these people were engaged in the scrap trade as contended by the learned AR then there is every possibility that these persons would have collected the scrap for which they were not having any invoices or source of supply and have sold the same to the assessee and to various other parties. On being caught at wrong foot these persons have taken the defence that the sales made by them are not genuine and they have issued accommodation bills. In the present case the assessee had made purchases and there are corresponding sales. These sales are not being doubted. If sales are not being doubted, then obviously purchasing would be there. Now the learned CIT(A) held that purchases made by the assessee are not genuine and the assessee would have made purchases from some other person. The case of the assessee is that it has made purchases from these very persons and having made the payment by account payee cheque and there being nothing adverse in the transaction, it is for the supplier i.e. so called people to explain their source of purchases and not the assessee. The Revenue is trying to shift the onus on the assessee by making presumption that the purchases made by it are not genuine despite accepting the same. In my opinion shifting of this onus and the assumption being made that the purchases are not genuine in the present set of facts is not correct. There would have been some logic, had these people would not have been in the same trade and had there been some other circumstances leading to the conclusion that the so called purchases under no circumstances can be from these persons. Adverse inference cannot be drawn against a person merely on the basis of doubt. Doubt howsoever strong cannot par-take the character of legal proof. In the present cases there is a complete trail of the purchases and sales so far as assessee is concerned. The assessee has been able to correlate each transaction of purchase with sale as is evident from the submission before the learned CIT(A).

There is a complete co-relation between the purchases and the sales and the same is fully documented. Thus the AO as well as leaned CIT(A) was not correct in drawing adverse inference against the assessee on this account. If further note that the leaned cIT(A) while giving a finding that the purchases are bogus has placed much reliance on the statement of these persons. As discussed hereinabove the statement of these persons cannot be taken on the fact of it in view of the surrounding facts. These persons were definitely in the trade. These persons have not appeared before the Assessing Officer despite repeated summons being issued. Had these persons were clean and wanted to stand by their statement given before the assessing Officer and the affidavit filed, there was no reasons for these persons to not to appear and to stand by their statement. I am also of the view that the CIT(A) was not justified in drawing adverse inference on the basis of the transportation. As rightly pointed by the learned AR that these were local movements. The purchases and sales were within the walled city of Delhi were the transportation is by manual driven carts and the charges for the same are debited under the head cartage. Further when sales are accepted as genuine, then definitely the transactions have occurred and movements of goods have taken place. It is also not the case of the learned CIT(A) that transactions has not happened. Thus transaction on such facts cannot be a basis to draw adverse inference against the assessee. I further note that the learned CIT(A) has upheld the allegation of the Asses sing Officer of the bogus purchases by making an observation that the appellant’s dealing with these parties is not free from any doubt. It is a settled law that doubt cannot be a basis for sustaining the allegation. On the contrary the assessee had lead sufficient evidences in support of its purchases which the assessing Officer in my view has not been able to rebut. Accordingly I am of the view that in the facts and circumstances of the case it cannot be said that the purchases made by the assessee are bogus.

As regards the additionof20% sustained by the learned CIT(A) I am of the view that since purchases are not bogus the addition on this account cannot be sustained. Even otherwise the addition of 20% on the facts and circumstances is apparently too high. The learned CIT(A) having held that tax has to be levied on real income and the profit cannot be ascertained without deducting the cost of purchases from the sales as otherwise it amount to levy of tax on gross receipt, she ought to have applied' profit rate in this nature of trade. Estimating profit at the rate of 20% by taking into consideration the or visions of section 40A(3) will not lead to determination of correct real income. Section 40A(3) is meant for a different purpose when the assessee has made purchases in cash. This provision cannot be applied in such cases. Once the purchases are held to be bogus then the trading results declared by the assessee cannot be accepted and right course in such case is to reject books of accounts and profit has to be estimated by applying a comparative profit rate in the same trade. Though there can be a little guess work in estimating profit rate but such profit rate cannot be punitive.”

In view of the above, the addition sustained by the learned CIT(A) is directed to be deleted and grounds No. 4 to 11 are allowed 5.3 The above order has been followed in the following cases: • Unique Metal Industries Vs ITO Dated. 28.10.2015 • M/s RadheyShyam& Co. vs ITO, ITA No.1429/Del/2015, dated 30.11.2015, SMC-1 Bench-Delhi ITAT

In the result, appeal of the assessee stand allowed.