DCIT, CIRCLE -2(1)(1), AHMEDABAD, PRAHLAD NAGAR vs. PANCHAM DEVELOPERS, CHANDKHEDA

Now the Revenue is now in appeal before us. The following grounds have been taken in this appeal:

Shri. Abhijit, ld. SR-DR submitted that in the course of assessment it was duly established that the purchases made by the assessee from the four parties were bogus. The notices sent to the four parties were all returned unserved. The assessee had also failed to produce the four parties before the AO in spite of specific requisition. It was also found that VAT registration of all the four parties were cancelled. Further no evidence for transport of materials purchased from them was brought on record. The ld. SR-DR submitted that ld. CIT(A) had categorically held that the purchases made by the assessee from those four parties were bogus. Under the circumstances, he should have confirmed the entire addition of Rs.3,50,55,146/- on account of bogus purchase made from the four parties. The ld. SR-DR contended that the direction of the Ld. CIT(A) to make addition for the profit element embedded in the bogus purchases had completely nullified the addition as the profit element of these purchase transactions was already accounted for in the books of accounts of the assessee. He, therefore, requested that the entire addition made by the AO may kindly upheld.

Per contra, Shri Karan Shah, Ld. AR of the assessee explained that the assessee was engaged in construction activity and the materials purchased from the four parties were khapchi, bricks, sand, cement, tiles, painting materials etc. without which the construction activity was not possible. He explained that the materials purchased from the four parties were duly utilised by the assessee for the construction activity. Further that the payment to all the parties were made through account pay cheques, which was not disputed. The ld. AR further submitted that the DCIT Vs Pancham Developers, AY- 2017-18 4 assessee had brought on record all evidences for the purchase in the form of invoices and the payment details. Under the circumstances, no addition for entire purchase of Rs.3,50,55,146/- could have been made. The ld. AR supported the order of the ld. CIT(A) to restrict the addition to the extent of profit element embedded in the purchases.

We have considered the rival submissions. It is found that the addition of Rs. 3,50,55,146/- in respect of bogus purchase pertained to the following four parties.

The undisputed facts are that the notice u/s 133(6) sent by the AO to these four parties was returned unserved and the assessee had failed to produce these parties before the AO. Neither any alternate address of DCIT Vs Pancham Developers, AY- 2017-18 5 the parties was brought on record nor it was explained as to how the four parties had vanished. Merely because the assessee had made the payments through cheque and produced the invoices, the purchases could not have been treated as genuine. The AO had specifically required the assessee to produce evidence for delivery of goods, which was not complied. From the copy of invoices brought on record it is found that no lorry number is appearing in any of the documents and there is no evidence for transportation of materials in respect of purchases made from these four parties. It is found that the ld. CIT(A) had given the following finding in respect of purchase made from these four parties:

After holding that the purchase of Rs.3,50,55,146/- made from the four parties was bogus, the ld. CIT(A) had directed to restrict the addition DCIT Vs Pancham Developers, AY- 2017-18 6 on account of bogus purchases to the extent of gross profit element embedded in these bogus purchases. The contention of the Revenue is that the addition for entire bogus purchase should have been upheld. There is no dispute to the fact that the assessee was engaged in construction activity and the building could not have been constructed without the materials viz. kapchi, bricks, sand, cement, tiles, painting materials etc. purchased from the four parties. Against the material purchase of Rs.8,64,94,449/- during the year, the assessee had disclosed project income of Rs.9,21,05,000/- and work-in-progress of Rs.12,04,98,000/- in its P&L account. Considering the turnover and the closing stock as disclosed by the assessee, the purchases made during the year cannot be held as disproportionate. As the sales and the closing stock of the assessee has not been disputed by the Revenue, one can only conclude that the assessee had made purchases from different parties but the bills were obtained from other parties. The addition for entire bogus purchase of Rs.3,50,55,146/- from the four parties, would result in a highly disproportionate gross profit rate for the current year, which would not be justified. Taking a holistic view of the accounts of the assessee, it is held that no disallowance for the entire purchase of Rs.3,50,55,146/- made from the four non-existent parties, was called for merely because the assessee was unable to produce evidence for transportation of goods purchased from the four parties. Since the construction activity carried on by the assessee has not been disputed, it would be reasonable to conclude that the purchases were not made from these four parties but from certain other parties and the profit derived in such transactions will be certainly higher than the normal GP rate as disclosed by the assessee. Therefore, the direction of the ld. CIT(A) to DCIT Vs Pancham Developers, AY- 2017-18 7 restrict the addition in respect of bogus purchase of four parties only to the extent of gross profit element embedded in such purchase cannot be held as correct.

In the case of Premkumar B. Rathi (59 taxmaznn.com 203) (Guj.), Hon’ble Gujarat High Court had upheld the disallowance of 10% of bogus purchases as confirmed by the Tribunal. Similarly, in the case of Simit P. Sheth (38 taxmann.com 385) (Guj), the Hon’ble Gujarat High Court had held that only profit element embedded in purchases made from accommodation entry providers could be added and upheld the addition of 12.5% sustained by the Tribunal. In the case of Bholanath Poly Fab P. Ltd. (40 taxmann.com 494) (Guj,) also, the Hon’ble Gujarat High Court had reiterated that only profit margin embedded in bogus purchases could be subjected to tax and not the entire purchases. Similarly, Hon’ble Gujarat High Court in the case of Kesari Exports, (174 taxmann.com 162) had upheld the addition of 6% of bogus purchases made from accommodation entry provider.

Considering the consistent view of the Hon’ble Jurisdictional High Court that only profit margin embedded in the bogus purchases are required to be taxed, it will be reasonable to restrict the addition in respect of purchases made from the four non-existent parties @ 5% higher than the GP rate disclosed by the assessee in the current year. Accordingly, the Assessing Officer is directed to work out the profit out of the purchase of Rs.3,50,55,146/- made from the four parties by applying GP rate of 5% more than the GP rate as disclosed by the assessee in the current year. The ground taken by the Revenue is partly allowed.

In the result, the appeal of the Revenue is partly allowed.