PRAVINBHAI MOHANBHAI VADI,JAMNAGAR vs. PR. COMMISSIONER OF INCOME TAX, JAMNAGAR, JAMNAGAR

Shri Chetan Agarwal, Learned Counsel for the assessee, submitted that during the assessment proceeding, the assessing officer has examined the issue raised by the ld. Pr. CIT, by issuing four notices of hearings, and after going through the reply of the assessee, against these notices, the assessing officer, took a plausible view and made the estimated addition at the rate of 25% of total purchases, in the hands of the assessee. The ld. Pr. CIT has invoked the jurisdiction under section 263 of the Act and solely on the ground that the purchases made by the assessee were bogus, and therefore, entire addition should be made in the hands of the assessee in respect of bogus purchases instead of 25% addition made by the AO on account of bogus purchases, which is not acceptable, because only profit element embedded in the purchases were disallowed by the assessing officer, which is Pravinbhai Mohanbhai Vadi 5 acceptable. The AO has examined all the documentary evidences submitted by the assessee and took a plausible view and added 25% of the bogus purchases. Therefore, such assessment order is neither erroneous nor prejudicial to the interest of the revenue, therefore, the jurisdiction exercised by the ld. Pr. CIT is bad in law and hence order passed by the ld. PCIT may be quashed.

We have heard both sides in detail and also perused the records of the case including the paper book filed by the assessee. We note that main grievance of the learned PCIT was that assessing officer has not conducted proper enquiry and detailed verification. Therefore, we should examine, first of all, that what type of enquiry was conducted by the assessing officer, and whether these enquiries were sufficient or not, considering the facts and circumstances of the case. We note that the AO has issued first notice to the assessee, under section 142(1) of the Act, which is placed at page no.5 of the assessee`s paper book, wherein the AO has asked pertinent question, which is reproduced below:

Log books of warehouses to verify the entry and exit of vehicles carrying purchased goods 6. Complete set of Income Tax Return for A.Y. 2021-22 of the above mentioned parties.

The assessee also submitted reply dated 23.12.2022 before the AO ( vide PB No.4 at page no.1380), which is reproduced below: “With reference to your honours show cause notice dated 08.12.2022 proposing an addition 25% on sale Rs. 20,49,99,184/- by following decision of Vijay Proteins Ltd. the Hon'ble Supreme Court vide order dated 06/04/2015 disallowance bogus Purchases against the same we would like to submit as under:- We would like to mentioned that in your earlier show cause notice you have pointed out to submit documents for purchase where we have submitted the complete details of purchase then your honours has shifted from the subject matter of show cause to estimation of profit on sale @ 25% which is very higher side without pointing out of any defect in our submitted documents for purchase. 1. Firstly, we would like to draw your kind attention to the fact that your honour has mentioned our purchase from parties mentioned are completely genuine for which we have submitted the completed documents available with us as mentioned below: a. Bills b. Delivery challans. c. Mode of transportation d. Lorry receipts e. E Way Bills f. Photos of material purchase 2. We have also submitted contra Confirmation from said parties which can establish the credit worthiness and geniuses of transaction incurred for the year under consideration. Further appreciate that certain parties has not answered and for which we have inquired upon that and got answer that they don't know about this type of compliance and hence they have given confirmation to us for submission. 3. Your honour has not pointed out any specific defects and hence where the defects pointed out in documents submitted by us and just completing the assessment on the basis of estimation / assumption. 4. We draw your kind attention judicial pronouncement as Ld. AO has not pointed out any specific defects and hence where the defects pointed out in the books of accounts were of general or technical nature and no suppression of sale or purchase was pointed out book results or books of accounts Pravinbhai Mohanbhai Vadi 9 cannot be rejected". Vadayattu Jewellery Vs. State of Kerala (1997) 104 SIC 121, (Ker.). The department has to prove satisfactorily that the accounts books are unreliable, incorrect or incomplete before it can reject the accounts. Rejection should not be done lightly". St. Terrsa Oil Mills vs. State of Kerala (1970) 76 ITR 365 (KER.). Without prejudice to our factual submission, evidence submitted before your honour has prepared mindset for estimation we would like to submit as under :-

Further your honour may kindly appreciate that assessee had engaged in details compilation for submission and in-between, show cause notice was issued.

During the course of assessment, assessee has already submitted party wise purchase chart having Address, PAN, Opening Balance, Purchase, GST, TCS, Payment made, Closing Balance etc. and Assessee has also submitted party wise sundry creditors chart having Address, PAN, Opening Balance, net of transaction, Closing Balance etc. which duly reflects that assessee has discharged his complete responsibility. We hereby submit following documents of said parties as required by your honour : a. Bills b. Delivery challans. c. Mode of transportation d. Lorry receipts e. E Way Bills f. Photos of material purchase

We enclosed herewith contra Confirmation from said parties which can establish the credit worthiness and geniuses of transaction incurred for the year under consideration. Further appreciate that certain parties has not answered and we have inquired upon that and got answer that they don't know about this type of compliance and hence they have given confirmation to us for submission.

We hereby submit stock register having Party Name, Inward Quantity, Inward Value, Outward Quantity, Outward Value and closing quantity and value for honours kind verification, 8. It was submitted that all of purchases are genuine and paid through banking channel from the said purchases we have sold goods and declared the same as sales. If the purchases are not genuine as alleged by your Pravinbhai Mohanbhai Vadi 15 honour, then how sales can be effected. Your honour has only proposed to disallow purchases and accepted our sales, leading to addition of entire sales to net profit, which is impossible to imagine.

It was also submitted that without prejudice to our submission that our entire purchases are genuine, but even if it is assumed there is deficiencies, in that case also entire purchases cannot be disallowed, since sales is accepted and not disturbed. In such as case at most profit embedded in purchase can be added to income. 10.Your honour may appreciate that assessee has already filed return considering actual sales and purchases then It will be injustice to assessee whether entire purchases are taken as an addition, it is double income consideration and paid tax.”

Therefore, we find that AO has issued three notices under section 142(1) of the Act and against these notices, the assessee has submitted reply with documentary evidences. The AO has also issued two show cause notices during the assessment proceedings, and against these notices, the assessee submitted its reply before the AO along with documentary evidences. Therefore, allegation of the learned PCIT that during the assessment proceedings, the assessing officer did not conduct proper enquiry, is baseless.

From above various notices and submissions filed by the assessee, we note that the detailed inquiry, investigation and deliberation on issue of purchases from alleged 17 parties was made and AO had concluded that the purchases from said parties was not genuine. However, AO was also of opinion that 100% purchases cannot be disallowed and percentage of profit should be disallowed therefore, considering the decision of various courts, the assessing officer observed as under on page no.22 and 23 of the assessment order. "The assesses has made substantial purchases from the suppliers who are either non filer or have filed non business ITR or reflected case a substantially lower turnover in ITR as compared to shown in GSTR-1 return. It is seen from the data available on portal out total - parties -parties have not filed their return of income for year under consideration. One person is a salaried person from whom purchases made by the assessee. Therefore, after considering the fact and Pravinbhai Mohanbhai Vadi 16 information available on record, the assessee has failed to established the correctness/genuineness of purchases due non verification of genuineness of purchase. In view of the facts as discussed above, it is a crystal clear case of unaccounted/ unexplained expenditure in the form of bogus purchases made to give it a shape of legal one. This fact also got support from the fact that the said parties also remained nonresponsive/ non traceable after multiple efforts. This means that the said parties are bogus or has not declared any such sales in the Asst. Year 2021-22 as they are either non-filer or have filed non business ITR or reflected a substantially lower turnover in ITR as compared to turnover shown in GSTR 1 return and there is a possibility that assessee has booked bogus expenses in order to reduce its profit/taxable income for the asst. year 2021-22. Thus, it is established that the purchases are nothing but bogus entries only and a colorable device adopted by the assessee to reduce its profit by showing paper purchases only, which needs to be disallowed, However, there are certain case laws wherein instead of entire disallowance of bogus purchases, certain percentage of disallowance deeming hidden profit was held appropriate by Hon'ble Tribunals and Courts. Disallowance @ 25% out of bogus purchases, held as reasonable in the case of Vijay Proteins Ltd. The Hon'ble Supreme Court vide order dated 06/04/2015 dismissed the SLP filed by the assessee and confirmed the finding of the Hon'ble Gujarat High Court in the case of Vijay Proteins and other decisions of the Gujarat High Court in the case of Sanjay Oil Cake Industries vs. CI T (2009), 316 ITR 274."

We note that above conclusion of the assessing officer is plausible view taken by the assessing officer during the course of assessment proceedings, which should not be erroneous and prejudicial to the interest of the revenue. Therefore, in the course of assessment proceedings, after considering the issue of purchases from alleged 17 parties, the AO has taken plausible view following decisions of various high courts, as noted above in the conclusion of the assessing officer. Hence, the order passed by AO is not erroneous and prejudicial to the interest of revenue and therefore, the proceedings initiated u/s.263 of the Act, needs to be quashed. Instead of entire disallowance of bogus purchases, certain percentage of disallowance deeming hidden profit was held appropriate by assessing officer and disallowance @ 25% out of bogus purchases, held as reasonable. Hence, the order passed by AO is neither erroneous nor prejudicial to the interest of revenue.

According to us, the present order of AO passed u/s 143(3) dated 26.12.2022 of the Act cannot be termed as erroneous since enquiry was, in fact, carried out by him on the issue on which the ld PCIT has found fault with and has taken a Pravinbhai Mohanbhai Vadi 17 plausible view. Thus we note that the AO enquired during assessment proceedings and the assessee had filed details before him. So we find that the AO’s action cannot be termed “erroneous”. Since not only enquiry was carried out by the AO on the issue under consideration and based on the evidence gathered, he has taken a plausible view, which at any rate cannot be called as an un-sustainable view. Let us take the guidance of judicial precedents laid down by the Hon’ble Apex Court in Malabar Industries Ltd. vs. CIT [2000] 243 ITR 83(SC) wherein their Lordship have held that twin conditions needs to be satisfied before exercising revisional jurisdiction u/s 263 of the Act by the CIT. The twin conditions are that the order of the Assessing Officer must be erroneous and so far as prejudicial to the interest of the Revenue. In the following circumstances, the order of the AO can be held to be erroneous order, that is (i) if the Assessing Officer’s order was passed on incorrect assumption of fact; or (ii) incorrect application of law; or (iii)Assessing Officer’s order is in violation of the principle of natural justice; or (iv) if the order is passed by the Assessing Officer without application of mind; (v) if the AO has not investigated the issue before him; then the order passed by the Assessing Officer can be termed as erroneous order. Coming next to the second limb, which is required to be examined as to whether the actions of the AO can be termed as prejudicial to the interest of Revenue. When this aspect is examined one has to understand what is prejudicial to the interest of the revenue. The Hon’ble Supreme Court in the case of Malabar Industries (supra) held that this phrase i.e. “prejudicial to the interest of the revenue’’ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Their Lordship held that it has to be remembered that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. When the Assessing Officer adopted one of the courses permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the CIT does not agree, it cannot be treated as an Pravinbhai Mohanbhai Vadi 18 erroneous order prejudicial to the interest of the revenue “unless the view taken by the Assessing Officer is unsustainable in law”. Therefore, we are of the considered opinion that AO’s order cannot be termed as erroneous as well as prejudicial to the interest of the revenue and therefore, jurisdictional condition precedent as prescribed by statute for invoking revisional jurisdiction is absent and therefore, we are inclined to quash the impugned order dated 06-02-2025 of the ld. PCIT.

In the result, appeal filed by the assessee is allowed.