KONARK PETRO PRODUCTS INDIA PVT. LTD,MUMBAI vs. ACIT - CIRCLE -1, KALYAN

O R D E R Per G Manjunatha, AM : This appeal filed by the assessee is directed against the order of the CIT(A)-2, Pune dated 08-01-2018 and it pertains to AY 2010-11. The assessee has filed the following grounds of appeal:-

“1. On facts and under the circumstances of the case and in law, the Honorable Commissioner of Income Tax (Appeals) was not justified in sustaining addition of Rs.5,62,500/- made by the learned Assessing Officer on 2 ITA 3222/Mum/2018 account of the alleged total suspicious purchases. The learned Assessing Officer had disallowed the total alleged suspicious purchases amounting to Rs.5,62,500/-“

Subsequently, the case has been reopened u/s 147 of the I.T. Act, 1961, on the basis of information received from sales-tax department, as per which certain dealers were involved in providing accommodation entries of bogus purchase bills to a large number of taxpayers and the assessee being one of the beneficiaries of such bogus bills. Accordingly, notice u/s 148 dated 20-06-2016 was issued and served upon the assessee. Thereafter, the case was selected for scrutiny and notices u/s 143(2) and 142(1) of the Act, were issued. In response to notice, the authorised representative of the assessee appeared from time to time and filed various details as called for. During the course of assessment proceedings, AO noticed that the assessee has purchased materials from four parties listed in his assessment order at para 2.3 amounting to Rs.5,62,500. The AO further observed that the parties from whom purchases were made were appearing in the list of suspicious dealers prepared by sales-tax department, consequently called upon the assessee to file necessary details including purchase bills, delivery challans, and other

3 ITA 3222/Mum/2018 details to prove genuineness of purchases. In response, the assessee has furnished details of purchases alongwith copy of purchase bills and payment proof for such purchases, but failed to file further evidence of transportation bills, delivery challans, etc. The AO, on the basis of information furnished by the assessee and also by taking note of information received from DGIT (Inv), came to the conclusion that purchases from the above parties were bogus in nature which are not supported by necessary evidences. The AO further observed that although 133(6) notices were issued to the parties, but such notices were returned unserved with a remark “left”. Therefore, he came to the conclusion that the assessee failed to prove the purchases with necessary evidence and accordingly made addition of ts.5,62,500 u/s 69C of the Act.

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“4.7 Hon'ble ITAT Pune bench in a recent decision in the case of M/s, Chhabi Eiectricals Pvt. Ltd and Ors. in dated 28.04.2017 has laid down following guidelines for making disallowances in the cases of hawala purchases: j. In case no information is received by the Assessing Officer from the Sale Tax Department and no copy of statement recorded or any other evidence is received from the Sales Tax Department, then no addition is to be made on the basis of name of hawala dealer in the list prepared by the Sales Tax Department, where the assessee had asked for the said information during assessment proceedings. ii. Where the Assessing Officer had received the statements of persons who had admitted to have just issued bills of sale without any delivery of goods. In view of such evidence, where the , . assessee had not entered into real transaction of purchase of goods and in the absence of any delivery of goods, the sales are bogus and the entire sales are to be added in the hands of assessee. Admittedly, the dealer had not even paid VAT against such passing of goods. The case where the Assessing Officer had confronted the ^ information received from the Sales Tax Department and had supplied copies of statements recorded and had also issued notice under section 133(6) of the Act, where hawala dealer was not traceable and in the absence of the assessee failing to file any documentary evidence of delivery of goods, addition is to be upheld in the hands of assessee on account of such bogus purchases iv. The next instance is the case of goods which have been admittedly sold by the hawala dealer and has been received by the assessee, who in turn had maintained quantitative details and also evidence of its movement i.e. transportation details and quality control details of consumption of the said material or exact details of sale of the same consignment through same transporter directly to the party, then the total purchases cannot be added in the hands of assessee. However, since the purchases are madefrom the grey market, some estimation needs to be made in the hands of assessee. The Tribunal in M/s. Chetan Enterprises Vs. ACIT (supra) has already held that the addition be made by estimating the same @ 10% of the alleged hawala purchases, over and above the GP shown by the respective assessee. v. Another set of cases where the statements recorded by the Sales Tax Department have been handed over to the assessee and the copies of same have been supplied to the assessee, then where .the assessee established the case of receipt of goods and its onward transmission, then the factum of purchases by the assessee stands established in such circumstances. However, estimation is to be made in the hands of assessee because of purchases from the grey market and following the above said ratio, addition is to be made by estimating the same @ 10% of the alleged hawala purchases, over and above the net profit shown by the assessee.

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The case of the appellant falls under clause ii and ill of the aforesaid guidelines as in the present case, notices sent u/s 133(6) came back unserved and the appellant could not produce the parties for verification. Not only that, no other details evidencing genuineness of the purchases could be filed excepting self made ledger. 4.9 The appellant has taken an alternative argument that only gross profit may be taxed on these purchases. I am unable to accept this contention and I draw strength from the decision of Hon'ble High Court of Gujarat in the case of N.K. Proteins Ltd vs. DCIT in IT Appeal No. 240-242/2003 dated 20/06/2016 in which the Hon'ble Court has recognised the principle that if an expenditure including purchases is proved to be bogus under the IT Act then the provision of Section 69C does not permit allowing partial expenditure. The relevant portion of the decision of the Hon'ble Court reads as under: "The Tribunal in the case of Vijay Proteins Ltd. us. CIT has observed that it would be just and proper to direct the Assessing Officer to restrict the addition in respect of the undisclosed income relating to the purchases to 25% of the total purchases. The said decision was confirmed by this Court as well. Onconsideration of the matter, we find that the facts of the present case are identical to those of M/s. Indian Woollen Carpet Factory /supra) or M/s. Vijay Proteins Lid. In the present case the Tribunal has categorically observed that the assessee had shown bogus purchases amounting to Rs. 2,92,93,288/- and taxing only 25% of these bogus claim goes against the principles of Sections 68 and 69C of the Income Tax Act. The entire purchases shown on the basis of fictitious invoices have been debited in the trading account since the transaction has been found to be bogus. The Tribunal having once come to a categorical finding that the amount of Rs. 2,92,93t288/- represented alleged purchases from bogus suppliers it was not incumbent on it to restrict the disallowance to only Rs. 73,23,322/~." 4.1.0 In the above case, Hon'ble ITAT had given the finding that entire purchases were claimed in the P&L account on the basis of fictitious invoices. The finding was based on seized materials and other documents. Hon'ble ITAT had confirmed only 25% of the purchases as disallowable and not 100% as made by the AO. Hon'ble Court in view of these facts held that once the entire purchases were found to be bogus then restricting the disallowance only to the of 25°/0 9oes against the principle of Section 69C of the IT Act. It is noticed that SLP filed against the decision of Hon'ble High Court was dismissed by the Hon'ble Supreme Court in CC No. 769/2017 vide order dated 16.01.2017. 4.11 In the light of the aforesaid discussion on the facts of the case, I find no merit in the arguments taken on behalf of the appellant. On the face of adverse finding by the Sales Tax Department with regard to the alleged suppliers which were further corroborated during the assessment proceedings, it is held that the appellant was involved in Hawala transaction to the extent of purchases of Rs. 5,62,500/-. The appellant just procured accommodation bills without any actual transaction and therefore the addition made by the Assessing Officer is confirmed. The grounds raised are accordingly dismissed.”

6 ITA 3222/Mum/2018 an opportunity of hearing to the assessee to argue its case on merits, which is evident from the fact that although the CIT(A) claims to have issued notice of hearing, but nothing is coming out of the order of the CIT(A) on which date such notice has been served on the assessee. The Ld. AR further submitted that although he has passed exparte order, but decided the issue on merit and upheld addition made by the AO towards bogus purchases by following the decision of Gujarat High Court in the case of NK Proteins Ltd vs CIT in to 242/2003 dated 20-06-2016 where the High Court has affirmed additions made by the AO towards total bogus purchases, but fact remains that the same Gujarat High Court in the case of CIT vs Simit P Sheth (2013) 356 ITR 451 (Guj) had held that in bogus purchases only profit element needs to be taxed depending upon facts of each case, but not whole bogus purchases and accordingly sustained 12.5% profit on such bogus purchases, therefore, a reasonable profit may be estimated because the assessee has filed complete details about the purchases from those parties and also the AO neither pointed out any discrepancy in books of account nor made out a case of sales outside books.

7 ITA 3222/Mum/2018 to have made purchases where appearing in the list of suspicious / hawala dealers prepared by sales-tax department. It is also an admitted fact that the assessee has filed complete details including purchase bills and payment proof against such purchases through proper banking channel. It is also an admitted fact that when the AO has caused enquiries about whereabouts of the parties by issue of notice u/s 133(6), notices to such parties were returned unserved with a remark “left”or “unknown”. Under these facts, it is difficult to accept the arguments of the assessee that purchases from those parties are genuine which are supported by necessary evidences. At the same time, we notice that the AO has also failed to reach to a logical conclusion by conducting necessary enquiries to ascertain true nature of the transactions between the parties, but he went on to make addition only on the basis of information received from DGIT(I nv) which was further supported by sales-tax department’s report.

Therefore, we are of the considered view that either party failed to prove their case with necessary evidence. Under these circumstances, the only option left with us is to settle the dispute by following certain judicial precedents. The Hon’ble Gujarat High Court in the case of CIT vs Simit P Sheth (supra) had considered an identical issue and after considering relevant facts held that in case of purchases, which are not proved to the satisfaction of the AO, then only profit element embedded in those purchases needs to be taxed, but not whole

8 ITA 3222/Mum/2018 purchases from those parties. The ITAT, Mumbai in a number of cases has taken a consistent view and directed the AO to estimate profit ranging from 10% to 15% depending upon facts of each case. In this case, admittedly, the assessee is in the business of manufacturing of goods. Therefore considering the nature of business of the assessee and also taking support from the decision of Hon’ble Gujarat High Court in the case of CIT vs Simit P Sheth (supra), we are of the considered view that to end dispute between the parties, a reasonable profit needs to be estimated on alleged bogus purchases.

Accordingly, we direct the AO to estimate 12.5% profit from total alleged bogus purchases from those parties.

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Order pronounced in the open court on 26-06-2019.