ACIT-19(2), MUMBAI vs. M/S.KWALITY TUBES, MUMBAI

O R D E R

PER RAVISH SOOD, JM

1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is justified in not confirming the addition of Rs. 3,48,83,485/- made by the Assessing Officer on account of peak of credits claimed by the assessee in view of the decision of the Hon'ble Supreme Court dated 10.01.2017 in the case of N. K. Proteins Ltd. wherein the Hon'ble Supreme Court confirmed the entire addition on account of bogus purchase.

P a g e | The ACIT-19(2) Vs. M/s Kwality Tubes 2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is justified in confirming the addition @ 6.5% of total purchases of Rs.6,31,22,978/- made by the assessee from nine parties when during the invest(gat/on made by sale tax department of Maharashtra Government, it was conclusively proved beyond doubt that these parties are only into providing accommodation entries and do not do any real business.

Name Amount of Sales to assessee Remarks in FY 2010-11(Rs) BAJARANGI STEEL P. LTD. 366309 Returned undelivered by the postal authorities JAI STEEL & ALLOYS 10977007 Returned undelivered by the postal authorities P a g e | The ACIT-19(2) Vs. M/s Kwality Tubes KRISHNA CORPORATION 8690416 Returned undelivered by the postal authorities POONAM STEEL 799675 Returned undelivered by the postal authorities REALTY SALES (INDIA) 103940 Returned undelivered by PVT. LTD. the postal authorities RUPANI & COMPANY 30029312 Returned undelivered by the postal authorities. SATYANARAYAN STEEL & 121815 Returned undelivered by ENGG. CO. PVT. LTD. the postal authorities STAINLESS IMPEX PVT. 408859 Returned undelivered by LTD. the postal authorities VATIKA METALS PVT. LTD. 4428605 Returned undelivered by the postal authorities On the basis of the aforesaid factual position, the A.O called upon the assessee to produce the aforesaid parties for verification and, also to prove the genuineness of the purchase transactions on the basis of supporting documentary evidence. However, as the assessee failed to produce the aforesaid parties from whom purchases were claimed to have been made for necessary verification before the A.O, and also could not substantiate the genuineness of the purchase transactions by placing on record supporting documentary evidence, therefore, the A.O concluded that no genuine purchases were made by the assessee from the said parties. In the backdrop of the aforesaid facts, the A.O worked out the peak credit pertaining to the purchases claimed by the assessee to have been made from the aforementioned 9 parties at Rs. 3,48,83,485/- and added the same to the total income of the assessee.

3. Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) after deliberating on the facts of the case observed, that as the assessee had failed to discharge the onus that was cast upon it to prove the genuineness of the purchase transactions, therefore, the A.O had rightly concluded that the assessee had not made any genuine purchases from the said parties. However, the CIT(A) was of the view that the addition in the hands of the assessee was liable to be restricted to the extent of the profit element embedded in the purchases which were claimed by the assessee to have been P a g e | The ACIT-19(2) Vs. M/s Kwality Tubes made from the aforementioned parties. On the basis of his aforesaid observations, the CIT(A) relying on the judgment of the Hon‟ble High Court of Gujarat in the case of CIT Vs. Simit P. Sheth (2013) 356 ITR 451 (Guj) concluded, that the addition in the hands of the assessee was liable to be restricted to the extent of 6.5% of the aggregate value of the bogus purchases of Rs.6,31,22,978/- that were claimed by the assessee to have been made from the said parties.

4. The revenue being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. Departmental Representative (for short „D.R‟) took us through the observations of the A.O in context of the issue under consideration. It was submitted by the ld. D.R, that as the assessee had failed to substantiate the genuineness and veracity of the purchase transactions under consideration, therefore, the A.O had in all fairness restricted the addition to the extent of peak amount of credit of Rs. 3,48,83,485/- and, added the same under Sec. 69C of the I.T Act. Accordingly, it was submitted by the ld. D.R that the order passed by the A.O may be restored and that of the CIT(A) be vacated. 5. Per contra, the ld. Authorized Representative (for short „A.R‟) for the assessee relied on the order passed by the CIT(A). It was submitted by the ld. A.R, that the CIT(A) after considering the VAT rate of 4% applicable in the case of the assessee had in all fairness restricted the addition to the extent of 6.5% of the aggregate value of the purchases, which were claimed by the assessee to have been made from the aforementioned parties. 6. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record. Admittedly, as the assessee had failed to discharge the onus that was cast upon it as regards proving the P a g e | The ACIT-19(2) Vs. M/s Kwality Tubes authenticity of the purchases claimed to have been made from the aforementioned 9 parties, therefore, the A.O in the totality of the facts of the case, had rightly concluded, that no genuine purchases were made by the assessee from the aforementioned parties. At the same time, we are persuaded to subscribe to the observation of the CIT(A), that since the purchases made by the assessee were not bogus, but were made from parties other than those mentioned in the books of accounts, therefore, only the profit element embedded in such purchases could be added to the assesses income. Insofar the quantification of such profit element is concerned, we find that the Hon’ble High Court of Bombay in its recent judgement in the case of Pr. Commissioner of Income Tax-17 Vs. M/s Mohhomad Haji Adam & Company (ITA No. 1004 of 2016, dated 11.02.2019), while upholding the order of the Tribunal, had observed, that the addition in the hands of the assessee as regards the bogus/unproved purchases was to be made to the extent of bringing the G.P rate of such purchases at the same rate of other genuine purchases. The Hon‟ble High Court while concluding as hereinabove, had observed as under:

8. In the present case, as noted above, the assessee was a t r a d e r o f f a b r i c s . T h e A O f o u n d t h r e e e n t i t i e s w h o w e r e 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 sale 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 trade. The Tribunal, therefore, correctly restricted the additions limited to the extent of bringing the G.P. 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 as the question regarding addition of Rs.3,70,78,125/- as gross profit on sales of Rs.37.08 Crores made by the Assessing Officer despite the fact P a g e | The ACIT-19(2) Vs. M/s Kwality Tubes that the said sales had admittedly been recorded in the regular books during Financial Year 1997-98 is concerned, we are of the view that the assessee cannot 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 a result of which profit comes to 5.66% Therefore, considering 5.66 % of Rs.3,70,78,125/- which comes to Rs.20,98,62 1.88 we think it fit to direct the revenue to add Rs.20,98,621.88 as gross profit and make necessary deductions accordingly. Accordingly, the said question is answered partially in favour of the assessee and partially in favour of the revenue.

In these circumstances, no question of law, therefore, arises. All 9. Income Tax Appeals are dismissed, accordingly. No order at costs.” As such, the Hon‟ble jurisdictional High Court had observed, that the addition in respect of purchases which were found to be bogus in the case of the assessee before them, who was a trader, was to be worked out by bringing the G.P. rate of such bogus purchases at the same rate of other genuine purchases.