SIRAJUDDIN MUJIBULLAH SIDDIQUI,MUMBAI vs. INCOME TAX OFFICER 31(3)(4), MUMBAI

The only issue in this appeal of assessee is against the order of CIT(A) directing the AO to restrict the addition made by AO being estimate of profit percentage at the rate of 18% on bogus purchases. For this assessee has raised following ground: - “1. The learned ITO erred in making addition of Rs. 15,87,164/- treating genuine purchases effected by the Appellant as bogus / non genuine purchases based on the list of suspicious dealer published by Sales Tax Department enven though all the details such as Invoice copy. Proof of Delivery, Bank statement et. were submitted by the Appellant. The Appellant preferred an appeal before The Hon. Commissioner of Appeals - 34, Mumbai who confirmed the entire addition without giving any relief in the matter stating the purchases to be non-genuine. The Appellant prays to delete the entire addition on appreciation of facts and give justice by deleting the entire addition.

Briefly stated facts are that the assessee engaged in the business of manufacturing of slotted angles, racks and fabrication work under the name of FM Fabrication Company. The AO received information from DGIT (Investigation), who in turn received information from Sales Tax Department, Mumbai that the assessee has made purchases from hawala parties, as listed in hawala dealers by the Maharashtra Sales Tax Department who are providing bogus bills of purchase amounting to Rs. 7,58,082/- as admitted by these hawala dealers in their deposition before the authorities. The same reads as under: - Name of the hawala Dealer Amounts of purchases Nageshwar Enterprises 3,66,392/- National Trading Co. 3,91,690/- 4. The AO issued noticed under section 133(6) to the parties which returned back with the remark as “left” and assessee failed to produce these parties. During the course of assessment proceedings and during appellate proceedings, the assessee submitted documentary evidences such as payment received against such sales, receipt of material purchases, account payee cheque. According to the AO, the assessee failed to establish the genuineness of the purchase and accordingly, he made addition of unproved purchase of ₹ 7,58,082/- to the returned income of the assessee. Aggrieved, assessee preferred the appeal before CIT(A), who restricted the disallowance at 18% of the bogus purchases by observing in para 12 by following the decision of Hon’ble Gujarat High court in the case of CIT vs. Smith P. Seth (2013) 356 ITR 451 (Guj) & others by observing as under: - “12. In the case of the assessee the goods purchased from M/s Nageshwar Enterprises and MIs National Trading Co were lying in stock of the assessee as at 31.03.2009. In order to ascertain that the goods had actually been consumed in the next financial year the assessee was directed to prove the consumption of the material in the subsequent financial year. The assessee has been able to file the necessary fabrication and sale invoices as well as debtor's ledgers in this regard. It is noted that the assessee is able to broadly prove that he had used the impugned purchases for manufacture. In view of the above discussion it is held that while the assessee is unable to substantiate his purchases from the hawala dealers the assessee was able to prove consumption of the material. Therefore, it can only be presumed that the purchases of the assessee have been made from some other source because the Hawala dealers were not genuine traders at all and they had only supplied the purchase bills to the assessee. Therefore, it is reasonable to come to a conclusion that the assessee had sourced its materials from some other source or from the grey market and the only issue left was to decide the quantum of addition. It is seen that the assessee has declared a gross profit rate of 18% in the regular books of account maintained by it and it is held that the addition of a further sum calculated @18% of the bogus purchases of Rs. 7,58,082/- is sufficient to take care of the embedded profits in the purchases made from the grey markets. As a result the addition of Rs. 7,58,082/- is reduced to Rs. 1,36,455/- and the assessee gets a relief of Rs. 6,21,627/-. The grounds of appeal of the assessee are partly allowed as above.”

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