SUBHASH D. CHAUDHARY,MUMBAI vs. INCOME TAX OFFICER, WARD 1(4), KALYAN

The assessee in his appeals challenged the order of the Ld.CIT(A) in partly sustaining the non-genuine purchases and at the same time directing the Assessing Officer to determine the quantum of disallowance u/s. 40A(3) of the Act whichever is higher. The Revenue in its appeals challenged the order of the Ld.CIT(A) in granting part relief to the assessee instead of sustaining the addition/disallowance as made by the Assessing Officer.

Briefly stated the facts are that, the assessee is engaged in the business of paper trading. Assessee filed returns for all these three years and they were processed u/s. 143(1) of the Act for the A.Ys. 2010-11 & 2011-12 and an assessment was completed u/s. 143(3) of the Act for the A.Y.2009-10. Subsequently, based on the information received from Sales Tax Department which contains details of beneficiaries and the entry providers the Assessing Officer noticed that assessee is one of the 3 TO 5044 & 5144 TO 5146/MUM/2017 (A.Ys: 2009-10, 2010-11 & 2011-12) Shri Subhash D. Chaudhary beneficiaries of such entry providers who have provided only accommodation entries in respect of purchases without movement of goods, reopened the assessments by issue of notice u/s. 148 of the Act for the A.Ys. 2009-10 to 2011-12 which are under consideration. The re- assessments were completed u/s. 143(3) r.w.s. 147 of the Act by Assessing Officer by adding purchases made by the assessee from certain parties as mentioned in the assessment order, as non-genuine purchases as the assessee could not produce the parties and also since the notice issued u/s. 133(6) of the Act was returned unserved. Assessing Officer also observed that assessee has not provided sufficient information to prove the genuineness of the purchases. Thus, he added entire purchases made by the assessee from the dealers who are appearing as entry providers with the Sales Tax Department, and accordingly brought to tax.

On appeal the Ld.CIT(A) considering the submissions of the assessee, evidences furnished, the remand report of the Assessing Officer and referring to various case laws estimated the profit element @12.5% in the purchases treated as non-genuine by the Assessing Officer. He also observed that assessee made payments in making these purchases otherwise than account payee cheques exceeding the limit specified u/s. 40A(3) of the Act, and directed the Assessing Officer to 4 TO 5044 & 5144 TO 5146/MUM/2017 (A.Ys: 2009-10, 2010-11 & 2011-12) Shri Subhash D. Chaudhary verify the details and compute the disallowance whichever is higher i.e. @12.5% of purchases or disallowance worked out u/s. 40A(3) of the Act whichever is higher.

Before us, the Ld. Counsel for the assessee mainly argued on invocation of provisions of section 40A(3) of the Act in respect of purchases made by the assessee otherwise by way of account payee cheques, when the Ld.CIT(A) rejected the Books of Accounts of the assessee and estimated the profit element of the purchases treated as non-genuine by the Assessing Officer. Ld. Counsel for the assessee referring to Para No. 7.6 of the Ld.CIT(A) order submitted that Ld.CIT(A) invoked the provisions of section 145(3) of the Act and rejected the Books of Accounts observing that the genuineness and reasonableness of the purchases cannot be ascertained from the records/books maintained by the assessee and hence books are not complete in every respect. Therefore, the Ld. Counsel for the assessee submitted that once the Books of Accounts are rejected invoking provisions of section 145(3) of the Act there is no justification in invoking provisions of section 40A(3) of the Act for making separate addition. Reliance is placed on the decisions in the case of CIT v. Smt. Santosh Jan [296 ITR 324] and CIT v. Aggarwal Engg. Co. [302 ITR 246].

Ld. DR vehemently supported the orders of the Assessing Officer. He further submits that the Ld.CIT(A) should not have estimated the profit element @12.5% and should have sustained the entire addition as made by the Assessing Officer since the assessee could not prove the genuineness of the purchases.

We have heard the rival submissions, perused the orders of the authorities below. On a perusal of the assessment order, we find that the purchases made by the assessee were treated as non-genuine based on the information provided by the Sales Tax Department that certain dealers have provided only accommodation entries without movement of goods. The assessments of the assessee were reopened based on this information and in the course of the assessment proceedings the Assessing Officer required the assessee to prove the genuineness of the purchases made from certain parties as mentioned in the Assessment Order. The assessee submitted part information in respect of A.Ys. 2010- 11 & 2011-12. However, in respect of A.Y. 2009-10 there appears to be 6 TO 5044 & 5144 TO 5146/MUM/2017 (A.Ys: 2009-10, 2010-11 & 2011-12) Shri Subhash D. Chaudhary no response from the assessee and therefore the Assessing Officer treated the entire purchases made from parties reported as entry providers, as non-genuine.

Before the Ld.CIT(A) the assessee furnished copies of invoices, bank statements, purchases were correlated with the corresponding sales made to various parties, correlating each of the respective sales vis-à-vis impugned purchases, statement of stock purchases and sale for the A.Ys.2009-10 & 2011-12. Therefore, it was contended that the entire purchases were genuine and it was also contended that in any case entire purchases cannot be added. We find that Ld.CIT(A) considering the submissions of the assessee and calling for the remand report from the Assessing Officer and the details furnished by the assessee concluded that entire purchases cannot be added as non-genuine and he estimated the profit element @12.5% of such purchases as reasonable.

While estimating the profit element from such purchases the Ld.CIT(A) rejected the Books of Accounts of the assessee by invoking the provisions of section 145(3) of the Act. He observed that in the absence of confirmation and other corroborative evidences, it is not able to determine the correct amount of income from the records/books maintained by the assessee and hence books are not complete in every

In the case of CIT v. Smt Santosh Jain (supra) the Hon'ble Punjab & Haryana High Court held that, where the income of the assessee has been computed by applying the gross profit rate there is no need to look into the provisions of section 40A(3) of the Act as applying the gross profit rate takes care of expenditure otherwise than by way of crossed also. In holding so the Hon'ble High Court followed the decision of the Hon'ble Allahabad High Court in the case of CIT v. Banwari Lal Banshidhar [229

We observe that the Ld.CIT(A) rejected the Books of Accounts by invoking the provisions of section 145(3) of the Act. When once the Books of Accounts are rejected the only course of action is to estimate the profits by ignoring the book results. Therefore, the Ld.CIT(A) is not justified in estimating the profit element from the purchases and at the same time invoking the provisions of section 40A(3) of the Act for computing the disallowance. Thus, we hold that since the gross profit from the purchases is estimated there cannot be any disallowance u/s. 40A(3) of the Act. The question of invoking the provisions of section 40A(3) of the Act will not arise when once the Books of Accounts are rejected and the profit element in the purchases are estimated. Further, we observe that the sales of the assessee have been accepted by the Assessing Officer thereby the Assessing Officer has already accepted the gross profit shown by the assessee which is around 5% to 7.5% for all these three Assessment Years i.e. 2009-10 to 2011-12. Ld.CIT(A) estimated the profit element of the purchases treated as non-genuine @12.5% placing reliance on the decision of the Hon'ble Gujarat High Court in the case of Simit P. Sheth [356 ITR 451]. Since the assessee is only a trader in paper business and had already shown the gross profit on sales at 5% to 7.5% for all these

For the A.Y 20011-12 the assessee contended that assessee filed return on 31.07.2012 and the time limit for issue of notice u/s. 143(2) for completion of assessment u/s. 143(3) of the Act was available up to 30.09.2013. However, notice u/s. 148 was issued on 28.06.2013 and the reopened assessment was completed on 16.03.2015 u/s. 143(3) r.w.s. 147 of the Act. Therefore, it was contended that notice u/s. 148 of the Act cannot be issued when time limit for issue of notice u/s. 143(2) for making assessment u/s. 143(3) was not expired. Reliance was placed on the decision of the Hon'ble Madras High Court in the case of CIT v. TCP Ltd. [323 ITR 346].

As regards to this submission, in the absence of any specific ground or additional ground taken by the assessee either before the Ld.CIT(A) or 10 TO 5044 & 5144 TO 5146/MUM/2017 (A.Ys: 2009-10, 2010-11 & 2011-12) Shri Subhash D. Chaudhary before us, we are not inclined to go into this aspect of the matter and therefore this submission of the assessee need not be adjudicated.

In the result, appeals of the assessee are partly allowed and appeals of the Revenue are dismissed.