DEPUTY COMMISSIONER OF INCOME TAX-4(3)(1), MUMBAI vs. PHONEIX FOILS PRIVATE LIMITED, MUMBAI

Ground No. 1 & 2 5. These grounds raised by the revenue are inter connected and inter related and relates to challenging the order of Ld. CIT(A) in directing the AO to delete the additions made on account of bogus purchases and on account of commission charges computed @ 1 % of such purchases, therefore we thought it fit to dispose of the same by this common order.

5.3.1. I have considered the stand of the AO in the assessment order as well as the submissions of the appellant. The appellant is engaged in the business of dealing in aluminium foil. The sales comprises of exports and domestic. The said sales are well supported. The said fact has been accepted by the AO and has raised no dispute as to sales. In respect of purchases of the goods is concerned the appellant has submitted various details. The details shows that the appellant has been maintaining stock records which shows the quantity of goods inward, outward and stock Phoneix Foils Pvt. Ltd. in hand and the valuation thereof. The Tax Audit Report confirms the same. The books of account have been audited and that there is no adverse finding in the assessment order to that effect.

5.3.2. In respect of purchases .from the bogus parties, the appellant has submitted details of purchases along with payment details. The goods purchased are reflected in the stock records. The payment made to the said 4 parties is reflected in the bank statements against their respective names. It shows that payments have been made in the regular course of business from available funds and that instances of cash deposited against payment made to the bogus parties is not noticed.

5.3.3. On the face of the records and details submitted there is nothing incriminating that can be drawn to infer that the said transactions is merely bogus purchases and not genuine. More importantly there no direct evidence which has been brought on record by the AO. No nexus has been established as to circulating of funds or that cash was paid to third parties for actual purchase and that cash has been received on issue of cheques.

5.3.4. The A.O. has based on the information received from the DDIT has formed opinion that the appellant is Phoneix Foils Pvt. Ltd. one of the beneficiaries who has made alleged bogus purchases.

5.3.5. The AO has stated that actual purchase has been made but from third party as against the paper purchases from the said 4 parties. The main contention of the AO is not the purchase of goods but the manner of purchase. Accordingly the AO presumed that the appellant would have inflated the expenses by way of accommodation of bills. However, any concreted enquiry in this regard has not been carried out. The AO has estimated 12.5% of the bogus purchases as cost that would have been inflated. The AO has further estimated 1% as commission incurred for availing the above paper bills. On going through the assessment order there is no incriminating evidence from which said presumption would have drawn. It is settled law that suspicion howsoever strong, cannot take the place of evidence and hence, the contention of the AO that the appellant has made bogus purchases and further the commission would have paid has to be rejected.

5.3.6. It is observed that the appellant has shown gross profit of 14.63% amounting to Rs. 6,92,36,123/- which for any manufacturing unit is fairly reasonable. Further, the appellant has disclosed net profit of 2.38% amounting to Rs. 1,12,71,229/-. Taking into Phoneix Foils Pvt. Ltd. consideration the facts of case and the details submitted there remainse no room for Estimating the income.

5.3.8. It is well settled that no disallowance can be made as a leap in the dark. The AO is not entitled to make a guess without evidence. The assessment of any particular year cannot be based on mere suspicion or bare guess, but on a legitimate material from which a reasonable inference of any expenditure being of the disallowable nature could be drawn and that the initial burden of finding such material is on the AO as held by Hon'ble High Court Orissa in the case of Bansidhar Onkarmall Vs. CIT (1953) 23 ITR 353(Orissa) where it observed as under :-

There was no doubt that the view taken by the income- tax authorities bases on the alleged presumption was erroneous in law. "Past history" may be legitimate material, but that is not sufficient by itself without more, to justify assessment in a particular year. There must be some material relatable to the accounting year which taken with the "past history" may reasonably entitle the income-tax authorities to hold that there must in fact have been some "concealed income during the accounting year and which is liable to assessment.

Phoneix Foils Pvt. Ltd. To base an assessment barely on a presumption relating to capital found to exist in some previous year appeared to be unwarranted. The income-tax authorities proceeded on the view that the burden of proof was on the assessee to show that the "past capital" has disappeared, for which there was no justification, and no authorities has been shown. It is well the assessment of any particular year must be based not on mere suspicion or bare guess, but on legitimate material from which a reasonable inference of income having been earned during the accounting year in question could be drawn, and that the initial burden of finding such material, however slight, was on the income-tax authorities and not on the assessee. The facts before the income-tax authorities were not sufficient to shift the burden of proof on to the assessee. There facts did not necessarily justify_anvprima facia inference that the past capital produced income during the accouting year. Before such an inference could be drawn, some foundation must be laid for the assessment that there was income from such capital during the accounting year. Therefore, on the facts and in the circumstances of the case, the Tribunal erred on confirming the additions of amounts in question.

Phoneix Foils Pvt. Ltd. 5.3.14. Thus, keeping in view the present facts of the case and applying the ratio of the decision of Hon'ble jurisdictional ITAT of Mumbai as well as jurisdictional High Court of Mumbai where various legal issues arising out of additions of similar nature have been thread-bare discussed and also other decision of Hon'ble ITAT/High Courts/Supreme Court, it will be difficult to sustain the additions made by the AO only on the ground that the suppliers of the materials/goods were defaulters in not paying VAT to the Sales-tax Department of Maharashtra or the suspicious dealers were not produced before the AO during the assessment proceedings. The claim of the appellant is that they have made the entire payment through banking channel. In fact, when the appellant was directed, they have produced chart of such payment through banking channel. Further, the AO has failed to substantiate that the assessee made payment through banking channel and received it back in cash. If the suppliers have not paid VAT charges to the Govt. of Maharashtra, but taken the same from the purchasers (here assessee), such differentiaLamount needs to be added in the hands of dealer and they are liable for any action by the Govt. of Maharashtra for their such defaults.

Phoneix Foils Pvt. Ltd. In the light of the above factual narration, various references and judicial propositions I reach to the conclusion that the AO has not been able to prove that the purchases made from the said 4 parties are bogus and that the same are paper transactions. Therefore, the disallowance made by the AO of Rs. 61,94,812/- and Rs. 4,95,584/- is deleted. In result, this ground of appeal is Allowed.

7. After having gone through the facts of the present case and hearing the parties at length, we find that as per Ld. DR, the assessee had actually purchases goods in cash from third parties and had booked purchases bills issued by the said four parties i.e. Rolex Trading Co., Steelco Steel Industries, Advance Steelage, Shri Sundha Steel Pvt. Ltd. It was submitted that the AO had disputed the manner of purchase and not the purchases of goods. It was also submitted by Ld. DR that in the process, the assessee had inflated the expenditure by showing higher amount of purchase price through fictitious invoices in the name of the said bogus parties and thus AO after rejecting the books of accounts, rightly disallowed a sum of Rs. 61,94,812/- computed @ 12.5% of the purchases and @ 1% commission from the said four Phoneix Foils Pvt. Ltd. parties. Ld. DR therefore on the above arguments requested for allowing the grounds raised by the revenue by relying upon the orders passed by AO.

8. On the other hand, Ld. AR reiterated the same arguments as were raised by him before Ld. CIT(A) and also relied upon the orders passed by the Ld. CIT(A). Ld. AR also relied upon the written submissions as are contained in para no. 5.2 of the order of Ld. CIT(A) and submitted that all the details of purchases were submitted before the AO in the shape of copy of ledger account, purchase invoices, copy of bank statement reflecting payment made to the parties, detailed submissions explaining that how the purchases should not be treated as bogus and also submitted stock records. It was submitted that the AO failed to find any discripency from the records submitted by the assessee, but had merely reiled upon the list submitted by the Sales Tax Department. It was also submitted that as far as the genuineness of the transactisons are concred, the suspicion of highest degree cannot take place of evidence and relied upon several judgments, which are quoted in the order of Ld. CIT(A).

Phoneix Foils Pvt. Ltd.

There was no doubt that the view taken by the income- tax authorities bases on the alleged presumption was erroneous in law. "Past history" may be legitimate material, but that is not sufficient by itself without more, to justify assessment in a particular year. There must be some material relatable to the accounting year which taken with the "past history" may reasonably entitle the income-tax authorities to hold that there must in fact have been some "concealed income during the accounting year and which is liable to assessment.

To base an assessment barely on a presumption relating to capital found to exist in some previous year appeared to be unwarranted. The income-tax authorities proceeded on the view that the burden of proof was on the assessee to show that the "past capital" has disappeared, for which there was no justification, and no authorities has been shown. It is well the assessment of any particular year must be based not on mere suspicion or bare guess, but on legitimate material from which a reasonable inference of income having been earned during the accounting year in question could be drawn, and that the initial burden of finding such material, however slight, was Phoneix Foils Pvt. Ltd. on the income-tax authorities and not on the assessee. The facts before the income-tax authorities were not sufficient to shift the burden of proof on to the assessee. There facts did not necessarily justify_anvprima facia inference that the past capital produced income during the accouting year. Before such an inference could be drawn, some foundation must be laid for the assessment that there was income from such capital during the accounting year. Therefore, on the facts and in the circumstances of the case, the Tribunal erred on confirming the additions of amounts in question.

(2015) 372 ITR 619 (Bom) on the issue of bogus purchases had also deleted the additions made by the AO on account of so called bogus purchases by holding that merely because of supplier have not appeared before the AO, one cannot conclude that the purchases were not made by the assessee.

Ground No. 3 15. This ground raised by the revenue is general in nature, thus requires no specific adjudication.