ITO, WARD - 4(3), KOLKATA , KOLKATA vs. ABC ELECTRICALS PVT. LTD., , KOLKATA

BEFORE SHRI S. S. GODARA, JM & DR. A. L. SAINI, AM आयकर अपीलसं./I.T.A Nos.153 & 154/Kol/2018 (�नधा�रण वष� / Assessment Years: 2013-14 & 2014-15) ITO, Ward-4(3), Kolkata Vs. ABC Electricals Pvt. Ltd. Room No.44, 10th Floor, Fortuna Tower, 23A, Netaji Subhas Road, (Opp. Coal Bhawan), Kol-1. �थायीलेखासं./जीआइआरसं./PAN/GIR No.: AACCA7561P (Revenue/Department) .. (Assessee ) & आयकर अपीलसं./I.T.A Nos.155 & 156/Kol/2018 (�नधा�रण वष� / Assessment Years: 2013-14 & 2014-15) ABC Electricals Pvt. Ltd. Vs. ITO, Ward-4(3), Kolkata Room No.44, 10th Floor, Fortuna Tower, 23A, Netaji Subhas Road, (Opp. Coal Bhawan), Kol-1. �थायीलेखासं./जीआइआरसं./PAN/GIR No.: AACCA7561P (Assessee) .. (Revenue/Department) Revenue/Department by : Shri A. K. Nayak, CIT Assessee by : Shri Subash Agarwal, Advocate सुनवाईक�तार�ख/ Date of Hearing : 03/09/2019 घोषणाक�तार�ख/Date of Pronouncement : 15/11/2019 आदेश / O R D E R Per Shri S. S. Godara: The Revenue and assessee have filed their instant cross-appeals for assessment years 2013-14 to 2014-15 arise against the Commissioner of Income Tax (A) - 2, Kolkata’s separate orders; both dated 01.12.2017 passed in Case No.10147/CIT(A)-2/2016-17 & No.10919/CIT(A)-2/2016-17 restricting the Assessing Officer’s action disallowing the entire purchases of Rs.4,90,30,444/-

I.T.A Nos.153 & 154/Kol/2018 & & 156/Kol/2018 ABC Electricals Pvt. Ltd. and Rs.2,28,86,352/- to the extent of the profit element therein reading figures of Rs.69,72,348/- and 37,22,278/-; respectively in proceedings u/s 143(3) of the Income Tax Act 1961; in short ‘the Act’.

Heard both the parties. Case files as well as the relevant paper book stand perused.

“Ground No - 2 and 3 The grounds of appeal as raised by the assessee against the order of the assessing officer are as under:- For that on the facts and I the circumstances of the cases Ld. A.O was not justified in making addition of Rs 56002792/- on account of alleged bogus purchase. Without prejudice to the above ground, the Ld. A.O ought to have applied gross profit on alleged bogus purchase instead of adding the entire alleged bogus purchase of Rs.56002792/- The AR of the appellant during the appellate proceedings, furnished written submissions as under:- In regards to the above grounds, it is submitted before your honour that the central excise department had earlier made enquiries on 14 suppliers of the appellant and had concluded that purchases made by the appellant had escaped payment of central excise duties as the summons sent to the suppliers returned unserved and accordingly the Ld. Assessing Officer was informed the same by way of letter dated 21.04.2014. Further, the Ld. Assessing Officer also issued summons to 6 other parties but the said summon also returned unserved. Accordingly, during the assessment proceedings, the director of the appellant company was asked to provide the details of such purchases. The director produced the ledger of the suppliers and relevant bank statements but Ld. Assessing Officer was not contented with the paper. No further opportunity was given to the director and addition was confirmed on the basis of the letter of the central excise wing. I regards to the above, we would submit before your honour the copy of letter received by the Ld. Assessing Officer (A-l) along with show-cause notice issued by the central excise department(A-2). From the copy of letter dated 20.04.2014 and show cause relied by the Ld. Assessing Officer, your honour will notice that the appellant was alleged to evade central excise duty by concealing goods manufactured by them by them by means of trading goods to avoid central excise duty. The basis of reaching such conclusion was given in the letter dated 21.04.2014 i.e. summons issued to the suppliers of the appellant returned unserved. Therefore, it is acknowledged before your goodself that the central excise department has confirmed in its report that the entire amount of the purchase amount to Rs.33757074/- were either manufactured or were unaccounted purchases made by the assessee and therefore, it is evident that appellant had physical goods available for sale. Further,

I.T.A Nos.153 & 154/Kol/2018 & & 156/Kol/2018 ABC Electricals Pvt. Ltd. neither the Central Excise Department nor the Ld. Assessing officer has suspected the sales made by the appellant as the entire sales was made to Coal India Ltd and its subsidiaries and the same has also been confirmed by the general manager of eastern coal fields from the copy of showcase. Therefore it can be precisely shouldered that though the purchase of the appellant may be held as bogus but the very fact that the goods were existing and the same were sold to a government enterprise cannot be ignored. We are enclosing item wise summary of goods sold to South Eastern Coal Fields Ltd along with copy of bills to prove that apparently there was a sale (A-3). Further the ld. Assessing Officer has mentioned in his assessment order than the vat registration of most suppliers has been cancelled or were about to be cancelled in this regard it is submitted on the date on which transaction has been made, the VAT registration of the suppliers were valid and they were active fillers of VAT return therefore same cannot be a valid reason for treating the purchases. Copy of documents related to their vat registration numbers are enclosed(A- 4) from which there identity on the date of transition can be verified. In the above circumstances, the Ld. Assessing Officer had erred in adding the entire purchases of the appellant because the sales were never suspected. The Ld. Assessing Officer should have estimated the income of the appellant by taking average gross profit of-the appellant and then he should have estimated the income by applying gross profit percentage on the purchases which has been disallowed. On true accounting wisdom, every purchase has a corresponding sale and since we have established that goods were available for sale, the entire purchases cannot be added when the sale of the appellant has not been suspected. We would like to mention that average gross profit of last three years should be taken in to account for calculation of concealed income. The calculation of gross profit rate as per last three financial years is enclosed(A-5). Sir, we would like to submit that in the case V R Textiles V/s J.C.I.T. (OSD) similar to our case the A.O. also noted that search was conducted by excise department who have discovered that the assessee was indulging in evasion of excise duty by clandestine manufacturing and removal of the excisable goods without entering them into the books of account. As in our case in this case it was also noted that the assessee had accepted additional liability of excise duty before the excise authorities in respect of goods which have been sold without recording the same as per the Annexure prepared by the excise officials and the matter was resolved by the Settlement Commission. In the case referred the A.O. treated the entire amount of undisclosed sales as unaccounted income of the assessee as showcased by your honour instead of applying gross profit rate on such unaccounted sales. The Hon'ble ITAT relying on the decision of the Hon'ble Gujarat High Court in the case of CIT Vs President Industries Ltd. 258 ITR (Guj) 654 in which it, was held that "addition cannot be of entire undisclosed sale proceeds. Only the profit embedded in sale proceeds can be taxed", has held that "the learned CIT(A) was, therefore, justified in applying gross profit rate against unaccounted sales for the purpose of making the addition on account of undisclosed income of the assessee." Against the decision of the Hon'ble ITAT/Ahmedabad the department preferred an appeal before the Hon'ble Gujarat High Court vide Tax Appeal no.1828 of 2010. The said appeal of the department was dismissed by the Hon'ble High Court by observing as under - "Thus, it could be seen from the order of the Tribunal, on proper appreciation of facts and material on record, it concluded the issue in favour of the assessee and against the Revenue. It found sufficient material on record to uphold the findings arrived at by the CIT [A] and for so doing, it had given cogent reasons in its order. For having found no material to come to any conclusion that the order of the Tribunal is suffering from any infirmity or has given rise to any question of law for the consideration of this Court, this Tax Appeal requires no further meritorious consideration, and is therefore, dismissed." Some other judgements in favor of the appellant: - Ishwin Purshotam Bajai vs. ITO (ITAT Mumbai) (I.T.A. No. 4736/Mum/2014)

I.T.A Nos.153 & 154/Kol/2018 & & 156/Kol/2018 ABC Electricals Pvt. Ltd.

Though S 133(6) notices were returned unserved and the assessee could not produce the alleged bogus hawala suppliers, the entire purchases cannot be added as undisclosed income. The addition has to be restricted by estimating Gross Profit ratio on the purchases from the alleged accommodation entry providers. ACIT vs. Jaybharat Textiles & Real Estate Ltd (ITAT Mumbai)(ITA 5163/mum/2013) Purchases cannot be treated as bogus where (i) assessee has furnished quantitative reconciliation, (ii) Gross Profit rate is comparable to earlier & subsequent years, (iii) suppliers are income-tax assessees and their sales have not been treated as bogus by their AOs, (iv) payments are by account payee cheques and other documentary evidences are available. In the matter of Nikuni Exim Enterprises Pvt. Ltd. (2013 (1) TMI 88- BOMBAY HIGH COURT), the Hon'ble Bombay High Court has specifically held that in a case where sales are considered genuine, no addition, on account of bogus purchases, can be made. Furthermore, the rejection of such purchases will bring the G.P. of the assessee astronomically high which is impossible to earn in this line of trade and by no way compares with the past history of the assessee's own case. For the proposition that where the books of accounts have been duly audited, details furnished by the assessee and assessing officer has detected no defect therein in the account books, the book on cannot be disproved. The assessing officer's effort to verify purchases through Inspector of the office is not worthy of any substance in view of the veracity of the creditors. If the confirmations are produced the non-production of the creditors physically does not entitle to disallow all the purchases. In such eventuality, the assessing officer could have resorted the provisions u/s 133(6) and Sec. 131 the he All the payments were made through account payee cheques which have not been doubted or challenged by assessing officer and no information from the bank was sought about the creditors which would also have proved their identity. Reliance is placed on following judgments: -CIT Vs. Ms Nikuni Exim Enterprises Pvt. Ltd. (Bom.) (ITA no. 5604 of 2010 dated 17-12-2012). -Addl CIT Vs. Bahari Bros (1985) 154 ITR 244 (Pat.); -Nemi Chand Kothari Vs. CIT (2003) 264 ITR 254 (Gau.). For the proposition that where the account books of the assessee are not rejected the addition cannot be made and the payments having been made through account payee cheques which has not been controverted by the assessing officer, cannot be disallowed Further reliance is placed on: (i) Sagar Boss Vs. ITO 56 ITD 561- holding that when the particulars and details of purchases along with payments through account payee cheque numbers; bills bearing sales-tax numbers are produced along with the addresses thereof, the purchases cannot be disallowed. (ii) ITO Vs. Surana Traders 92 ITD 212 (Mum.) - For the proposition that when quantitative tally of sales is furnished along with the details of purchases, in such eventuality even if the purchasers are not available, no addition can be made merely on assumption or surmises. (iii) Umacharan Shaw& Bros Vs. CIT (1959) 37 ITR 271 (SC)-for the proposition that it is settled law that suspicion, howsoever, strong cannot take the place of legal proof. In light of above discussion and several judicial precedents, it is requested before your honour to direct the Ld. Assessing Officer to apply the average GP of last 3 years on the accounted purchase/sales of the appellant rather than disallowing entire purchases made by it. I have considered the submissions of the authorized representative of the appellant as well as the assessment order framed in the light of the materials available on record before the assessing officer during the assessment proceedings. The AO has mentioned that the central excise department had earlier made enquiries on 14 suppliers of the appellant and had concluded that I.T.A Nos.153 & 154/Kol/2018 & & 156/Kol/2018 ABC Electricals Pvt. Ltd. purchases made by the appellant had escaped payment of central excise duties as the summons sent to the suppliers returned unserved and accordingly the Assessing Officer was informed the same by way of letter dated 21.04.2014. Further, the Assessing Officer also issued summons to 6 other parties but the said summons also returned unserved. Accordingly, during the assessment proceedings, the director of the appellant company was asked to provide the details of such purchases. The director produced the ledger of the suppliers and relevant bank statements but Assessing Officer was not contented with the paper. The addition was confirmed on the basis of the letter of the central excise wing. The AR of the appellate has submitted that from the copy of letter and show cause relied by the Assessing Officer, the appellant was alleged to evade central excise duty by concealing goods manufactured by them by means of trading goods to avoid central excise duty. The basis of reaching such conclusion was given in the letter i.e. summons issued to the suppliers of the appellant returned unserved. Therefore, the central excise department has confirmed in its report that the entire amount of the purchases amount to Rs 3,37,57,074/- were either manufactured or were unaccounted purchases made by the assessee and therefore, it is evident that appellant had physical goods available for sale. Further, neither the Central Excise Department nor the Assessing officer has suspected the sales made by the appellant as the entire sales was made to Coal India Ltd and its subsidiaries and the same has also been confirmed by the general manager of eastern coal fields from the copy of showcase. Therefore, it can be precisely shouldered that though the purchase of the appellant may be held as bogus but the very fact that the goods were existing and the same were sold to a government enterprise cannot be ignored. The item wise summary of goods sold to South Eastern Coal Fields Ltd were also filed along with copy of bills to prove that apparently there was a sale (A-3). Further the A.O has mentioned in his assessment order than the vat registration of most suppliers has been cancelled or were about to be cancelled. In this regard it is submitted on the date on which transaction has been made, the VAT registration of the suppliers were valid and they were active fillers of VAT return therefore same cannot be a valid reason for treating the purchases as bogus. The copy of documents related to their vat registration numbers are enclosed (A-4) from which there identity on the date of transition can be verified.In the above circumstances, the Assessing Officer had erred in adding the entire purchases of the appellant because the sales were never suspected. The Assessing Officer should have estimated the income of the appellant by taking average gross profit of the appellant and then he should have estimated the income by applying gross profit percentage on the purchases which has been disallowed. On true accounting wisdom, every purchase has a corresponding sale and since it has established that goods were available for sale, the entire purchases cannot be added when the sale of the appellant has not been suspected. The average gross profit of last three years should be taken in to account for calculation of concealed income. Furthermore, the rejection of such purchases will bring the G.P. of the assessee astronomically high which is impossible to earn in this line of trade and by no way compares with the past history of the assessee's own case. The AR also placed his reliance on various case laws as mentioned in the submission of the appellate as above. The finding of these case are as under;-  That AO cannot reach to a conclusion that the purchases are "bogus" merely on ground of information from Sales Tax Department and non-production of Suppliers before him when the assessee had produced all the relevant materials before him to prove the genuineness of the transaction.  That addition under section 69 was not justified merely because suppliers could not be located and were not produced for examination.  That when purchases were recorded in the regular books of account maintained. The purchased are supported by proper bills/vouchers. The assessee filed the necessary details regarding name, address, sales-tax number. The payments were made through banking channels. Thus, the sales against purchases are not doubted. It is not the case of AO that amounts paid for purchases had come back to the assessee. AO had made addition merely on the ground that the suppliers are not located and they were not produced for examination. This is not a relevant factor.

I.T.A Nos.153 & 154/Kol/2018 & & 156/Kol/2018 ABC Electricals Pvt. Ltd.

 Though Section 133(6) notices were returned unserved and the assessee could not produce the alleged bogus hawala suppliers, the entire purchases cannot be added as undisclosed income. The addition has to be restricted by estimating Gross Profit ratio on the purchases from the alleged accommodation entry providers. Purchases cannot be treated as bogus where (i) assessee has furnished quantitative reconciliation, (ii) Gross Profit rate is comparable to earlier & subsequent years, (iii) suppliers are income-tax assessees and their sales have not been treated as bogus by their A.Os, (iv) payments are by account payee cheques and other documentary evidences are available. The AR of the appellate has further placed his reliance on the Hon'ble ITAT relying on the decision of the Hon'ble Gujarat High Court in the case of CIT Vs President Industries Ltd. 258 ITR (Gui) 654 in which it was held that "addition cannot be of entire undisclosed sale proceeds. Only the profit embedded in sale proceeds can be taxed", has held that "the learned CIT(A) was, therefore, justified in applying gross profit rate against unaccounted sales for the purpose of making the addition on account of undisclosed income of the assessee." Against the decision of the Hon'ble ITAT/Ahmedabad the department preferred an appeal before the Hon'ble Gujarat High Court vide Tax Appeal no. 1828 of 2010. The said appeal of the department was dismissed by the Hon'ble High Court by observing as under – "Thus, it could be seen from the order of the Tribunal, on proper appreciation of facts and material on record, it concluded the issue in favour of the assessee and against the Revenue. It found sufficient material on record to uphold the findings arrived at by the CIT[A] and for so doing, it had given cogent reasons in its order. For having found no material to come to any conclusion that the order of the Tribunal is suffering from any infirmity, or has given rise to any question of law for the consideration of this Court, this Tax Appeal requires no further meritorious consideration, and is therefore, dismissed.” I have also gone through the show cause cum demand notice as issue by the central excise department which is annexed as annexure 1 with the assessment order passed by the assessing officer. The commissioner Central excise, Kolkata V Commissionerate come the conclusion that the so called suppliers to the appellate did not exist and some of them are registered with Sale department for other purpose or for different nature of trade. It means that appellate did not purchase them as he claimed to have purchased from them. The Commissioner has further come to the conclusion that from the reasons as mentioned in his notices, none of the vendors is found physically or otherwise present on the given address, it is obvious that all the purchases documents, in relation to the so called trading goods, were not genuine. The materials could not have been supplied by these vendors as they are non-existent and these must have manufactured in the factory premises or on behalf of the appellate in some other places. The Commissioner has further mentioned that the replies received from the subsidiaries of coal India Ltd confirmed that the goods supplied by the appellate were purchased by them. The Commissioner has further come the conclusion on the basis of reasons as mentioned in his notice that it appears that the appellate are manufacturing spare parts as mentioned in the report. It has mentioned that it is clear from the reasons as mentioned in the notice that all the goods cleared by the manufacturer before their clients (subsidiaries of coal India Ltd) and this is obvious because they are submitting the copy of their central excise registration certificate to their clients but on the other hand they are showing clearance as trading of spares and mis-declaring themselves as trader before the department of central excise. It is also clear from the showcase cum demand notice issued by the department of central excise that the appellate company did not made purchases and all the so called suppliers are not genuine. It is also proved from the same notice that the items were supplied by the appellate to the subsidiaries of the coal India ltd. So the issue here is that the appellate has failed to prove the identity and genuineness of the venders form where he claimed to have made purchase of materials. Keeping in view of above, I agree with the submission of the appellate for making the gross profit addition on the unverifiable purchases over and above the gross profit as declared by the appellate. While taking the gross profit rate of 12.45% as earned by the appellate during the year under consideration on the unverifiable purchases, the addition come to Rs 69,72,348/- (5,60,02,792 * 12.45 %). The AO is directed to delete the balance addition of Rs 4,90,30,444/- (Rs.5,60,02,792 –

I.T.A Nos.153 & 154/Kol/2018 & & 156/Kol/2018 ABC Electricals Pvt. Ltd.

Rs.69,72,348/-). The addition to the extent of Rs 69,72,348/- is upheld and balance is deleted. The assessing officer has also taken same view in the appellant's own case for assessment year 2014-15 while making the addition relating to the parties against notices were returned unserved as issued by his during the assessment proceeding. It is also similar to notices as issued by the central excise department. This ground of appeal is partly allowed.”

3. Learned CIT-DR vehemently contends that the CIT(A) has erred in law and on facts in restricting the impugned entire purchases disallowance to the extent of the profit element only. His case therefore is that since the assessee could not prove its purchases since the suppliers in issue did not exist as per the central excise department’s enquires, the impugned disallowances deserve to be restored in entirety.

4. Learned AR strongly supports the CIT(A)’s action in Revenue’s appeals that the impugned purchase disallowances has rightly been restricted the only to the extent of profit element therein. He further pleads as per the assessee’s sole grievance in its two cross-appeals that income ought to have been adopted in the nature of net profits after reducing the operative costs than gross profits only.

5.1 The assessee’s grievance also deserves to be rejected as their lordships held therein that it is the gross profit and not the net profit including all operative costs

I.T.A Nos.153 & 154/Kol/2018 & & 156/Kol/2018 ABC Electricals Pvt. Ltd. available to be disallowed in case of bogus purchases. We accordingly affirm the CIT(A) findings for making subject-matter of challenge in all these four cross- appeals filed at Revenue’s and assessee’s behest.

5.2 No other argument has been raised before us.

Order is pronounced in the open court on 15.11.2019.