MITESH ILESH GADHIA,MUMBAI vs. DCIT CEN CIR 4(2) , MUMBAI

The facts relating to the issue are discussed in brief. The assessee is engaged in the business of trading in steel and metal items under the name and style M/s CNK International. The revenue carried out search operations in the hands of a company named M/s Ushdev International Ltd. During the course of search, it was noticed that it has purchased goods from certain dealers, who have been identified as hawala dealers by Shri Mitesh Ilesh Gadhia the Sales tax department of Government of Maharashtra, i.e., those dealers were providing only accommodation bills without actually supplying materials. It was also noticed that certain other group concerns were also purchasing materials from such hawala dealers. It was noticed that the assessee has also purchased goods from a concern M/s Ragini Trading & Investments P Ltd, which, in turn, has purchased goods from some hawala dealers. The AO has stated that the assessee herein is a group concern of M/s Ushdev International. However, the Ld A.R disputed the said fact and submitted that the assessee does not belong to the above said group. Consequent to the search operations, the assessee’s case was also centralised with the present assessing officer and the present assessment has been completed u/s 143(3) r.w.s 153A of the Act.

The AO noticed that the assessee has purchased materials to the tune of Rs.5268.07 lakhs from M/s Ragini Trading and Investments Ltd (hereinafter referred as “RTIL”). As noticed earlier, M/s RTIL had purchased goods from some of parties identified as hawala dealers by the Sales tax department. Hence the revenue had also carried out survey operations in the hands of RTIL and it was noticed that the purchases have been made from parties identified as hawala dealers. It was also noticed that those hawala dealers had confessed before the Sales tax department that they have provided only accommodation bills without actually supplying materials.

M/s RTIL has sold the goods to various persons and the assessee herein is one of them. The AO noticed that the assessing officer of RTIL had rejected the books of accounts of RTIL, since it had declared loss of Rs.4.42 crores on a sales of Rs.836.63 crores and accordingly estimated profit of M/s RTIL at 0.25% of the sales. In view of the above, the AO formed the view that the purchases made by the assessee herein from M/s RTIL cannot be considered as genuine, since the assessee has also used the same modus operandi of booking bogus purchases from various hawala parties through M/s RTIL.

The AO was not convinced with the explanations furnished by the assessee. He observed that the assessee has failed to furnish inward- outward register and also did not furnish proof for delivery of materials. By placing reliance on the decision rendered by Hon’ble Supreme Court in the case of CIT vs. Calcutta Agency Ltd (19 ITR 191), the AO held that the onus lies upon the assessee to prove all expenses. He further held that payment by account payee cheque is not sacrosanct and is not sufficient to establish genuineness of the purchases as pronounced by Hon’ble Supreme Court in the case of Kachwala Gems vs. JCIT (2007) (288 ITR 10). The AO also observed that the real test with regard to the genuineness of transaction is “Preponderance of Probabilities” and surrounding circumstances as per the decision rendered by Hon’ble Supreme Court in the case of C. Vasantlal & Co. vs. CIT (1962)(45 ITR 206), Chaturbhuj Panauj AIR 1969 (SC) and Sumati Dayal vs. CIT (1995)(214 ITR 801)(SC) and CIT vs. Durga Prasad More (82 ITR 540). The AO also held that the purchases made from hawala dealers falls within the ambit of “colouorable devices” as observed by Hon’ble Supreme Court in the case of Mc Dowell and Co Ltd vs. CTO (154 ITR 148). The AO also relied upon various other case laws to hold that the entries made in the books of accounts are not determinative of the genuineness. He also took support of the decision rendered by Hon’ble Delhi High Court in the case of CIT vs. La Medica (250

Accordingly, the AO held that the purchases made by the assessee remained unverifiable and accordingly rejected the books of account u/s 145(3) of the Act. In this regard, he took support of decision rendered by Hon’ble Supreme Court in the case of Kachwala Gems (supra) and Durgaprasad More (supra). The AO further took the view that the assessee has made purchases from hawala parties with the intention to inflate expenses. He further observed that the detailed investigation regarding modus operandi of such parties has shown that the payments were received by these parties against the bogus bills by cheque and the same amounts were returned in cash to the beneficiaries. The AO took the view that the assessee’s case fall in the above said category and accordingly held that the assessee has inflated the expenses by routing cash through hawala parties. Accordingly he disallowed entire purchases of Rs.5268.07 lakhs made from M/s RTIL in FY 2009-10, i.e., the year under consideration.

In the appellate proceedings, the Ld CIT(A) noticed that the assessee has not directly purchased goods from the hawala dealers. The Ld CIT(A) further took the view that the assessee cannot be given any special treatment, which is different from a case where the tainted purchases were made directly from suspicious hawala dealers. He further noticed that the assessee, in the statement taken from it during the course of survey, had stated that it would procure the materials from the market, only after receiving orders from its customers. Accordingly he noticed that the assessee has made back to back sales of materials procured from M/s RTIL. He further noticed that the softcopy of accounts impounded during

Aggrieved by the order passed by Ld CIT(A), the assessee has filed this appeal before us.

The Ld A.R submitted that the assessee has not purchased goods from any of the tainted/hawala dealers. It is the case of the revenue that M/s RTIL, from whom the assessee has purchased goods, had purchased goods from hawala dealers. He submitted that the sales made by M/s RTIL have been accepted in the hands of RTIL, meaning thereby, the purchases made by the assessee from RTIL could not have been suspected. He submitted that the assessee has furnished all the relevant details, viz., the purchase invoices, the quantity details, sales details, payment details and the quantity details reconciling the purchases with sales. Further the assessee has also furnished confirmation letter obtained from M/s RTIL. He submitted that the AO has disbelieved the purchase transactions only for the reason that the assessee has not furnished inward-outward register

The Ld A.R submitted that the Ld CIT(A), however, was not justified in adopting the Gross profit rate of 12.50% for estimating the profit from alleged bogus purchases. He submitted that the Ld CIT(A) has placed his reliance on the decisions rendered in the case of purchases made from hawala dealers. He submitted that the facts in the present case are different, i.e., the assessee has not purchased goods from any of the hawala dealers. The assessee has purchased goods from M/s RTIL, which, in turn, has been alleged to have procured materials from hawala dealers. The Ld A.R submitted that the assessee has been operating on a thin margin and the overall gross profit declared in the case of trading in steel is only 0.10%. He further submitted that the assessee has worked out the gross profit rate from the purchases made from RTIL and other purchases. The same works out to 0.06% and 0.11% respectively. Accordingly he submitted that the Ld CIT(A) was not justified in adopting the gross profit rate of 12.50% in the facts of present case.

The Ld D.R, on the contrary, supported the order passed by Ld CIT(A). He further submitted that the assessee had agreed for addition of 12.50% of value of purchases before Ld CIT(A). He also submitted that the assessing officer has taken the view that the assessee has used M/s RTIL as pipeline agency for purchasing goods from hawala dealers.

In the rejoinder, the Ld A.R submitted that the assessee has not accepted for addition of 12.50% of value of purchases, as submitted by Ld D.R. He submitted that the assessee had raised an alternative contention before Ld CIT(A) that the profit may be estimated. However, the assessee is standing by its original contention that the purchases made from M/s RTIL cannot be considered as bogus in nature. He further reiterated the point that the sales made by M/s RTIL have been accepted in its hands and the very same sales constitute purchases in the hands of the assessee. Accordingly he submitted that there is no reason to suspect the purchases made by the assessee. He further submitted that M/s RTIL is assessed to tax and hence the AO’s observation that the assessee has made purchases from hawala dealers through M/s RTIL is based on surmises and conjectures only.

We have heard rival contentions and perused the record. There is no dispute with regard to the fact that the assessee has not purchased goods from any of the dealers, who have been identified as hawala dealers by the Sales tax department. The assessee has purchased goods from M/s RTIL, which in turn has been alleged to have purchased goods from hawala dealers. From the assessment order, we notice that the assessing officer of Shri Mitesh Ilesh Gadhia M/s RTIL has rejected the book results and estimated Net profit of M/s RTIL @ 0.25% of the value of sales, meaning thereby, the sales made by the above said party, i.e., M/s RTIL has been accepted by its assessing officer. As submitted by Ld A.R, the sales made by M/s RTIL to the assessee would constitute purchases in the hands of the assessee. Hence there is merit in the contentions of Ld A.R that there is no reason to suspect the purchases, when the sales made by M/s RTIL have been accepted in its hands.

The assessing officer has observed that the assessee has failed to produce inward-outward register as well as delivery challans in respect of purchases made from M/s RTIL. He has also observed that the Standard Operating Procedure has not been followed in respect of these purchases. However, it is the submission of the assessee that the purchases made from M/s RTIL have been sold on back to back basis and goods were delivered directly from the site of suppliers to the site of its customers. We notice that the Ld CIT(A) has accepted this fact. The Ld CIT(A) has further noticed that the assessee has furnished quantity details before the AO and the tax auditors have also certified the same. Accordingly we notice that the assessee is able to make one to one reconciliation of purchases made from M/s RTIL with the sales made by it. As rightly pointed out by Ld A.R, the assessee could not have sold the goods without actually purchasing the same. Though the assessing officer has observed that the assessee might have received the cash back from its suppliers, yet the same is based on surmises and conjectures only and not based on any material on record.

Before us, the Ld A.R placed reliance on the decision rendered by Ahmedabad bench of Tribunal in the case of Shri Tejus Rohitkumar Kapadia (supra), which has since been upheld by Hon’ble Gujarat High Court. In the above said case, the purchases made by the assessee were disbelieved on the basis of information obtained in the hands of another assessee. The Ld CIT(A), however, noticed that the assessee was a trader and he has sold the goods purchased from a concern named M/s Raj

Before us, the Ld A.R also filed a chart to show that the assessee has furnished all the details in order to prove the genuineness of purchases made from M/s RTIL. For the sake of convenience, we extract below the same.

Whether Ragini has paid Yes, Page 8 VAT on such alleged bogus purchases/ sales 10. Whether Assessee has paid Yes, Page 8 VAT on such alleged bogus purchases / sales 11. Whether Quantitative records Yes, Page 8 Yes. Page 4, maintained by the Assessee 8, 10 12. Whether One to One co- Yes. Page 11 Yes. Page 4, 8, relation of purchases from 9, 11 Ragini established with sales 13. Whether Entire purchases Yes, Page 8 Yes made by Assessee from Ragini recorded as sales by Ragini.

Whether any adverse inference No, Page 12 No, Page 4 has been drawn for sales made by the Assessee out of the purchases from Ragini 15. Whether Payments to Ragini Yes. Page 6 Yes, Page 4, 8 made by crossed account payee cheques 16. Whether any evidence to Yes, Page 12; No, Page 4 show that money received back however such by the Assessee from Ragini statement is not substantiated A perusal of the chart would show that there is merit in the contentions of the assessee. We notice that the assessee has taken all possible steps and produced relevant documents to prove the genuineness of purchases made from M/s RTIL. On the contrary, the various evidences furnished by the assessee has not been disproved by the assessing officer. Hence the view taken by the AO was not based on any material. We notice that the Ld CIT(A) has, however, estimated the profit from purchases, even though he has accepted that the assessee has sold the goods and the said sales has Shri Mitesh Ilesh Gadhia been accepted by the AO. We have earlier noticed that the Ld CIT(A) has estimated the profit at 12.50% of the value of purchases and allowed credit of G.P declared by the assessee on such purchases.

Before us, the Ld A.R furnished a chart showing the G.P rate earned on the purchases made from M/s RTIL, G.P rate earned from other purchases and overall G.P rate declared by it. We notice that the overall G.P rate declared by the assessee is 0.10%, while the G.P rate declared on purchases made from M/s RTIL and others was 0.06% and 0.11%. We notice that the assessee is operating on low margin and hence the G.P rate of 12.50% estimated by the Ld CIT(A) is very much on the higher side. From the discussions made supra, we are of the view that there is no material to substantiate the view taken by the AO and hence the entire addition should be deleted. However, the assessee has not cited any reason as to why the G.P rate on purchases made from M/s RTIL is lower than that earned from other purchases. Hence, in order to put this issue at rest, we modify the order passed by Ld CIT(A) on this issue and direct the AO to estimate the G.P on purchases made from M/s RTIL at 0.11% , i.e., the rate of G.P, the assessee earned from other purchases and sustain the addition to that extent. We order accordingly.

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