SACHIN ANANTRAY GHELANI,MUMBAI vs. INCOME TAX OFFICER-27(3)(2), MUMBAI

O R D E R

PER AMARJIT SINGH, JM:

1 The learned Assessing officer erred in making an addition of' Rs.23,80,889/- being 12.5% of Rs.1,90,47,912 being alleged bogus purchase merely based on third party evidence even though all the proof and documents to prove the genuineness of the purchase like purchase order copies, purchase challan, purchase bill, item-wise stock statement. A.Y.2010-11 bank statements evidencing the payments for purchases totaling Rs.1,90,47,912 made from his Bank Account to various parties was submitted during the course of hearing and it was not proved that the appellant had received cash back from the purchasers.

2. The sales of the corresponding purchase has not been disputed by the Assessing Officer and the appellant's GP Ratio is 9.21% during the year.

3. The Applicant craves leave to add, amend, alter or delete any of the above Grounds of Appeal. ”

3. The brief facts of the case are that the assessee filed his return of income on 19.06.2011 declaring total income to the tune of Rs.13,53,160/- 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 148 of the Act by issuance of notice dated 20.03.2015. In pursuance of notice, the assessee filed the return of income which he had filed earlier on 19.06.2011. Thereafter, notices u/s 143(2) & 142(1) of the Act were issued and served upon the assessee. The assessee was proprietor of M/s. Sachin Threads engaged in the business of Trading in Yarn and during the year under consideration derived income from business & profession & other sources. The case of the assessee was reopened on the basis of the letter received from the DGIT(Inv.), Mumbai in which it was conveyed that the assessee has taken the bogus purchase entry from the following four parties:-

Sr. No. PAN of Hawala Name of the Hawala Amount (Rs.) F.Y. Supplier Supplier 1 AQIPR7316G PadmavatiTrading co. 30,21,980/- 2009-10 2 AAEPP2019G Namrata Trading Co. 40,67,102/- 2009-10 3 AUHPK4858R Indus Sales Corp 65,78,520/- 2009-10 4 AAAPB9546J Appolo Sales Corp. 53,80,310/- 2009-10 2 A.Y.2010-11 The assessee was asked to prove the transaction and the AO also issued the notice 133(6) to the relevant parties. The parties nowhere appeared. The assessee has also failed to prove the genuineness of the transaction, hence, the AO disallowed the bogus purchase @ 12.5% of Rs.1,90,47,912/- i.e. 23,80,989/- and added to the income of the assessee. The total income of the assessee was assessed to the tune of Rs.37,34,150/-. 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.

ISSUE NOs.1 & 2

No. 1 & 2, the assessee has challenged the action of the AO for re-opening the assessment u/s. 148 of the Act. 5.1.1 From a perusal of the AO's assessment order, it is seen that the AO in this case has followed due procedure prescribed under the law to reopen the case for the year under consideration. From the assessment order, it is also observed that the assessee has acknowledged the notice issued by the AO & duly complied with the statutory notices. The 3. A.Y.2010-11 appellant has even submitted in response to notice u/s. 148 that the return of income filed on 19.06.2011 may be considered as return filed in response to notice u/s. 148 of the Act. 5.1.2 It is also seen that the assessment year reopened is within 4 years from the end of relevant assessment year and no assessment u/s 143(3) of the Act had been made earlier. Therefore, the provisions of first proviso to section 147 of the Act do not apply. In this view of the matter, in my view, the A.O. on the basis of material available with him which had direct nexus with the factum of income escaping assessment was justified in re-opening the assessment. In this regard, I draw support from the Hon'ble Supreme court decision in the case of ACIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. SC, 210 CTR 0030, (2007) 'SC,), dated: 23- 05-2007., wherein the Apex court has explained the post 01-04-1989 position with regard.to section 147 by holding as under: "17. The scope and effect of s. 247 as substituted with effect from I. April, 1989, as also ss. 148 to 152 are substantially different from provisions as they stood prior to such substitution. Under the old provisions s. 147, separate cls. (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under s. I47(a) two conditions wet required to be satisfied firstly the AO must have reason to believe that profits or gains chargeable to income-tax have escaped assessment, and secondly he must also have reason to believe that such escapement from occurred by reason of either (i) omission or failure on the pan of the assessee to disclose fully or truly all material facts necessary for his assessment of tin year. Both these conditions were conditions precedent to be satisfied before the AO could have jurisdiction to issue notice under s. 148 r/w S. 14 7(a). under the substituted s. 147 existence of only the first condition suffices. 1 other words if the AO for whatever reason has reason to believe that incur has escaped assessment it confers jurisdiction to reopen the assessment. It however to be noted that both the conditions must be fulfilled if the case fall within the ambit of the proviso to s.

4 A.Y.2010-11 5.1.3 Further, it is seen that the AO in this case has followed due procedure prescribed under the law to issue notice u/s. 143(2) and 142(1) of the Act which was duly served on the assessee. It is also seen that in response to the said statuary notices, AR of the assessee attended before the AO, discussed the and furnished the details called for.

5.1.4 In view of the facts and circumstances explained above, I am of the opinion that the objections of the appellant regarding the reopening of the case u/s 147/148 of the Act for the year under consideration are not valid, and hence dismissed. Thus, the action of the AO in issuing the notice under section 148 and order passed u/s. 143 (3) r.w.s. 147 of the Act is upheld. Thus, Grounds of appeal No.1 & are dismissed.

5.2 Vide grounds of appeal

No. 3 to 6, the assessee has challenged the action of the AO in making an addition of Rs.23,80,989/- being estimated the profit element calculated @ 12.5% embedded in impugned purchases of Rs.1,90,47,912/-, treated as bogus purchases by the AO. The AO had received information from the Investigation Wing of the department that the assessee had taken accommodation bills for purchases from the parties declared as hawala operators by Maharashtra Sales Tax Department. During the Course of re-assessment proceedings, the AO seen that the assessee had made purchases from various parties out of which Rs.1,90,47,912/- effected from the parties as mentioned below: Sr. No. Party who have issued Amount (Rs.) bogus bills to the assessee

1. PadmavatiTrading o. 30,21,980/- 2. Namrata Trading Co. 40,67,102/- 3. Indus Sales Corp 65,78,520/-

4. Appolo Sales Corp. 53,80,310/- Total 1,90,47,912/- The name of the above parties figured in list of suspicious dealers on the Maharashtra Sales Tax Department, who had issued accommodation entries without actual delivery of goods.

5 A.Y.2010-11 5.2.1 The AO, in his aforesaid assessment order has further mentioned that the Sale's- Tax Department had conducted independent inquiries in the case of each hawala operator, including in the case of above stated hawala operator and it was conclusively proved that these parties/operator were engaged in the business of conclusively proved that these parties/operators were engaged in the business of providing accommodation entries only. These parties mostly indulged in following activities: a) issuing only bills and doing non-genuine business (hawala Business); b) not maintaining stock and not keeping stock Register c) not effecting any purchase; and d) there was no transaction of goods. e) entries were being provided by the parties for commission." 5.2.2 During the course of re-assessment proceedings, in order to ascertain genuineness of purchases made by the assessee, the AU conducted independent inquiries by issuing notice u/s. 133(6) of the Act to the parties which were returned unserved by the postal authorities. Thereafter, the AO brought this fair to the notice of the assessee during the course of assessment proceedings and to assessee was asked to produce the party for verification and also show cause as I why the purchases made from the aforesaid parties should not be disallowed. I response to the AO's above query, the AR of the assessee made written submissions wherein it was submitted that the purchases shown by the asses from the said parties are genuine purchases and payments to these parties we] also made through account payee cheque. Further, the assessee also expressed h inability to produce the party. Further, the assessee also failed to furnish evidences, such as, delivery challans, transportation details etc. to substantiate h claim of purchases from the aforesaid parties. The assessee could only furnish copies of bank statements claiming that the purchases made were genuine as the payments have been made through banking channels. 5.2.3 The AO did not accept assessee's contention That the payment was made through banking channel and therefore, the purchases were genuine. Since, the assessee could not produce the abovementioned parties before the AO, it could not provide the evidences of the purchase like delivery challan, transport bills etc., and the assessee has not given any evidence which leads to the conclusion that the purchases were actually made by the assessee from the above-mentioned parties and the said party actually existed. The AO has held that since purchases 6 A.Y.2010-11 shown by the assessee during the year remains unverifiable, therefore is a possibility of leakage of revenue. The AO relying on various case laws mentioned in his order, held that purchases shown to have been effected from the above mentioned parties were not genuine transactions and disallowed an amount of Rs.23,80,989/- being 12.5% of the total purchase of Rs.1,90,47,912/- and added to the total income of the assessee. 5.3 On the other hand, it is the contention of the assessee that the AO has termed the said purchases as bogus transaction merely based on the information of the Sales Tax Department. The details of purchases from the parties along with the ledger account, copy of purchase bills and copy of bank statement evidencing payment through the banking channels were submitted in the course of assessment proceedings. The Department has failed to bring on record any clinching evidence to prove that these alleged purchases were bogus and not Ld The A.O has ignored that fact that the sales have been effected has been accepted and there is no dispute on that side. The appellant has relied on various case laws as mentioned in his aforesaid submissions. 5.4 Having considered the assessment order of the AO and the submissions of the assessee, it is seen that the main plank of assessee's arguments regarding the genuineness of the purchases was that the payment has been made by cheque/banking channels and which has not found favour with court’s/Tribur’s pronouncements like in the case of M/s. Kanchwala Gems vs. JCIT dated 10.12.2003 by the Hon'ble ITAT, Jaipur wherein it is held that payment by account payee cheque is not sufficient to establish the genuineness of purchases. The said decision of the ITAT, Jaipur has been affirmed by the Hon'ble Supreme Court in the case of M/s. Kachwala Gems vs. JCIT (2006) 206 OR (SC) 585: 288 ITR 10 (SC). Thus, the main contention of the appellant does not hold much water. The AO has formed his views about the bogus nature of the purchases made by the appellant from the above parties on the basis 4. statements recorded by the Sales Tax Authorities as well as further inquiries carried out by him independently. The information received from the Sales Tax authorities was only a piece of evidence to initiate in-depth independent investigation on the issue. The appellant has not been able to establish one to one relationship/nexus between the purchases and sales. The assessee has not been able' to produce the party from whom purchases have been alleged to have been made. The appellant has also failed to produce corroborative evidence in the form of transport that the alleged purchases were actually transported to its premises and entered in the stock register. it is also fact that the AO has not confronted the assessee with all the 7 A.Y.2010-11 information in his possession like statements of the alleged hawala operators. Further, the AO stopped his investigation with the return of his 133(6) notices. He did not go ahead with money trail of cheques debited in the appellant's bank account towards the alleged purchases though such investigation do not lead to concrete results in the case of hawala dealers and investigators often reach dead end in such cases. It is not the case of the AO that the impugned purchases have conclusively been established as not having been effected at all. The AO has only found the impugned supplier as bogus parties. 5.4.1 In the facts and the circumstances of the case, the total purchases shown to be made from the aforesaid parties cannot be held to be entirely bogus. It needs to be appreciated that in order to achieve the reported sales/turnover, there must be some corresponding purchases, whether effected from the alleged entry providers or from the grey market without bills. Thus, there ought to be some purchases made and hence, entire disallowance is not justified. In this regard, the ratio laid down by the Hon’ble Bombay High Court in the case of CIT v. Nikunj Eximp Enterprises (P.) Ltd., 372 ITR 619 (Bombay), is quite relevant wherein Hon'ble High Court has held that - When the assessee have filed letter of confirmations of the suppliers, Bank statement highlighting the payment entries through account payee cheque copies of invoices, stock reconciliation statements before the AO; and merely cause the suppliers did not appear before the AO, one cannot conclude that e purchases were not made by the assessee. The AO cannot disallow the purchases on the basis of suspicion because the suppliers were not produced before them." 5.4.2 In view of the discussion as above, it is clear that materials purchase and sold by the appellant cannot be doubted though it is not possible for tip assessee to establish one to one nexus/link between purchases and sales. However, the fact of the matter remains that these transactions are not verifiable from all parties in question as it could not be established that purchases had been effected from the parties in question. Thus, the purchase prices shown on the invoice: produced could not be subjected to verification and as such it was difficult t1 establish the correctness of the purchase prices paid for the materials purchased In the absence of any such verification as to the correctness of the price paid for the materials purchased by the appellant, the purchase price paid as mentioned oi the invoices/bills cannot be accepted as the correct price paid for the good purchased from such parties. In view of the same, the possibility of over-invoicing of the materials purchased to reduce the profit cannot be ruled out. Therefore 8 A.Y.2010-11 the gross profit rate shown by the appellant for the year under consideration cannot be relied upon. In the circumstances, the correct approach in such transactions would be to estimate the additional benefit or profit earned on these Purchases and not to disallow the entire purchases from the aforesaid parties. In my view either the purchases from such party is over invoiced or the purchase were actually made but not from the party from which it was claimed to have been made and instead may have been purchased from grey market without proper billing or documentation. 5.4.3 In many judicial pronouncements on the issues, the Courts have taken a consistent view that in case of non-existent parties from which the purchases are shown to have been made, only a part of such purchase can be disallowed, particularly in such cases where the corresponding sales are not doubted. Alternatively, the profit embedded in such sales against the alleged bogus purchases should be brought to tax. 5.4.3.1 In the case of CIT-1 Vs. Simit P. Sheth, of 2012, order dated 16/01/2013, while deciding a similar issue, the Hon’ble High Court of Gujarat has held that: “We are broadly in agreement with the reasoning adopted by the Commissioner(A) with respect to the nature of disputed purchases of steel. It may be that the three suppliers from whom the assessee claimed to have purchased the steel did not own up to such sales. However, vital question while considering whether the entire amount of purchases should be added back to the income of the assessee or only the profit element embedded therein was to ascertain whether the purchases themselves were completely bogus and nonexistent or that the purchases were actually made but not from the parties from whom it was claimed to have been made and instead may have been purchased from grey market without proper billing or documentation. In the present case, CI believed that when as a trader in steel the assessee sold certain quantity of steel, he would have purchased the same quantity from some source. When the total sale is accepted by the AO, he could not have questioned the very basis of the purchases. In essence therefore, the Commissioner (A) believed assesseessees theory that the purchase were not bogus but were made from the parties other than those mentioned in the books of accounts. That being the position of entire purchase price but only profit element embedded in such purchases car be added to the income of the assessee. So much is clear by decision of high Court. In particular, Court has also taken a similar view in case OA Commissioner of Income Tax-IV vs. Vijay M Mistry Construction Ltd with order dated 10.01.2011 passed in Tax Appeal No. 9 A.Y.2010-11 1090 of 2009 and in case 01 Commissioner of Income Tax-I vs. Bholanath Poly Fab Pvt. Ltd. vide order dated 23.102012 passed in Tax Appeal No. 63 of 2012. The view taken by th Tribunal in case of Vijay Proteins Pvt. Ltd. Vs. CIT reported in 58 lTD 42 came to be approved." 5.4.4 Similarly, while dealing with an identical issue, in the case of CIT1 Vs Bholanath Poly Fab (P) Ltd., of 2012, in the order dated 23/10/2012, the Hon'ble High Court of Gujarat has held as under: "We are of the opinion that the Tribunal committed no error. Whether the purchases themselves were bogus or whether the panics from whom such purchases were allegedly made were bogus is essentially a question of fact The Tribunal having examined the evidence on record came to th conclusion that the assessee did purchase the cloth and sell the finished goods. In that view of the matter, as natural corollary, not the entire amount covered under such purchase, but the profit element embedded there it would be subject to tax. This was the view of this court in the case of Sanjay Oilcake Industries v. CIT [2009) 316 ITR 274 (Gui). Such decision is also followed by this court in a judgment dated August 16,2011, in Tax Assessment proceedings. No.6 79 of 2010 in the case of CIT v. kishor Amrutlal Patel. In the result, ta; appeal is dismissed." (emphasis supplied) 5.4.5 In view of the facts and circumstances of the case and the judicial pronouncements cited above, what can he disallowed or taxed in the instant case, is the excess profit element embedded in such purchases shown to have been made from aforesaid parties. As narrated earlier, the AO in this case has held that the parties from whom the purchases were made by the appellant were found be bogus, estimations ranging from 12.5% to 25% have been upheld by the Hon’ble Gujarat High Court, depending upon the facts of the case. In a number/series of recent cases involving similar set of facts as in the instant case, the Hon'ble Mumbai Tribunal has estimated the G.P. addition on account of such bogus purchases as 12.5%, some of which are listed below: i) Smt. Kiran Navin Doshi in ITA. No. 2601/Mum/2016 dated 18.01.2017. ii) Ashwin Purshotam Bajaj & Anr. Vs ITO & Anr., in ITA No.4 736/Mum/2014, 5207/Mum/201 4, dated: 14-12-2016. iii) ITO & Anr. Vs. Manish Kanji Patel & Anr., in ITA No. 7299/Mum/2014, 7154/Mum/2012 & 7300/Mum/2014, 7627/Mum/2014, dated: 18-05- 2017. 10 A.Y.2010-11 iv)Ratnagiri Stainless Pvt. Ltd. Vs. 17'0, in dated: 04-04-2017. v) Metropolitan Eximchem Ltd., ITA No. 2935/Mum/2015, dated:29-03- 2017. vi) Ronak Metal Industries vs. ITO, ITA No. 722/Mum.201 7 (dtd. 04.09.2017 vii) ITO vs. Jugraj R. Jain, TEA No. 2571/Mum/2016 & 2572/M/2016 dtd. 02.08.2017; viii) B. J. Exports vs. Asstt. Commissioner of Income tax, ITA No. 5442- 5444/Mum/2016 dated 13.09.2011 ix) Batliboi Environmental Engineering Ltd. vs. Deputy Commissioner of Income-tax, ITA No. 2840 & 3482/M/2015 dated 15.03.2017; x) Deputy Commissioner of Income-tax & Anr. Vs. Remi Process Plant & Machinery Ltd. & Mr., ITA No. 1723/M/2015, 1817/M/2015 dated 21.03.2017. xi) Suit. Usha B. Agarwal vs. 17'0, ITA No. 7034/Mum/2016, dated 01.09.2017. In view of the above discussed factual matric and precedents, I am of the view that the AO is justified in estimating the profit element calculated @ 12.5% embedded in impugned purchases of Rs.1,90,47,912/- shown from the hawala parties and adding the same to the total income returned. The asses order of the AO is a well-reasoned and a speaking order giving in detail the reasons for his fair estimation and therefore, I do not see any reason to take in the matter different from the one taken by the AO. The action of the estimation of 12.5% GP is sustained. Thus, the grounds of appeal

No. 3 to 6 dismissed.”

5. It is not in dispute that the AO reopened the assessment on the basis of the letter received from the DGIT(Inv.), Mumbai in which it was conveyed that the assessee has taken the accommodation entry from the four parties namely (i) Padmavati Trading Co. (ii) Namrata Trading Co. (iii) Indus Sales Corp. (iv) Appolo Sales Corp, total purchase in sum of Rs.1,90,47,912/-. The AO issued the notices to prove the genuineness of the claim. The AO issued notices u/s 133(6) which were received back 11 A.Y.2010-11 unserved. However, the assessee produced the stock register, utilization of purchase material and mode of payment. The AO was of the view that the documents produced before him were not sufficient to prove the genuineness of the claim on account of this fact that no delivery challan of any kind was produced to which it can be assumed that the assessee has taken the actual delivery. The parties were also not produced. No receipt of any kind of the material was produced. Bills and payment through cheques are not sufficient to prove the doubtful transactions specifically in view of the decision of the Hon’ble Supreme Court in case of Kachawal gem Vs. Jt. CIT(2007) 288 ITR 10 (SC). No verification from the parties received. The verification of the Maharashtra Sales Tax Department speaks about false bills without delivery of goods. The assessee opted to file the appeal before the CIT(A) who also declined the claim on the basis of almost same reasons but also discussed the latest law . The assessee took the plea that the gross profit of the assessee was between the 8 to 10% and during the F.Y.2009-10 the same was 9.21%. The addition to the extent of 12.5% was not justifiable. The CIT(A) placed reliance upon the decision in case of Kachawal gem Vs. Jt. CIT(2007) 288 ITR 10 (SC) in which the payment by cheque was nowhere considered as sufficient evidence to prove the genuineness of the claim. The assessee also took the plea that the sale is not disputed and books of account have not been rejected, therefore, the profit ratio is liable to be considered at the rate of which the assessee declared. It is true that whole addition is not required but the profit ratio of the bogus purchase is liable to be added to the income of the assessee. The CIT(A) has relied upon the decision in case of CIT Vs. Nikunj Eximp Enterprises (P.) Ltd., 372 ITR 619 (Bom) and CIT-1 Vs. Simit P. Sheth (ITA. No. 12 A.Y.2010-11 553 of 2012 dated 16.01.2013 Bombay High Court and CIT Vs. Bholanath Poly Fab (P) Ltd., (ITA. No.63 of 2013 Gujarat High Court. The CIT(A) has also relied upon the number of cases mentioned in the above while reiterating of the finding of the CIT(A) in which the profit ratio was estimated @ 12.5% Accordingly to these decisions, profit embedded to the bogus transaction is liable to be added to the income of the assessee. The CIT(A) has restricted the addition upon the bogus purchase to the extent of 12.5%. No new evidence produced before us. The facts are not distinguishable at this stage. However, the assessee placed reliance upon the decision in case of CIT Vs. Nangalia Fabrics Pvt. Ltd. (Gujarat High Court), Tax Appal No. 689 of 2010, dated 22.04.2013, 334 ITR 111 Calcutta Diagnostics Vs. CIT, 163 ITR 249 (Guj) CIT Vs. M.K. Bros and ITO Vs. Permanand (2007) 107 TTJ 395 (Jd) (Trib). The applicability of these decisions is required to be seen on the basis of the facts and circumstances of these cases which nowhere seem to be applicable in the instant case. The estimation profit upon bogus purchase to the extent of 12.5% nowhere seems unjustifiable, therefore, taking into account all the facts and circumstances, we are of the view that the CIT(A) has decided the matter of controversy judiciously and correctly which is not liable to be interfere with at this appellate stage. Accordingly, these issues are decided in favour of the revenue against the assessee.

13 A.Y.2010-11