REETA JAIN,MUMBAI vs. INCOME TAX OFFICER 30(3)(2), MUMBAI

1) In the facts & circumstances of the case and in law, the Ld CIT (A) has erred by confirming the addition of Rs. 18,23,371/- (being 8% of the alleged hawala purchase of Rs. 2,28,19,876/-) and by further enhancing the addition by Rs. 2,09,96,505/- U/S 69C 2) In the facts & circumstances of the case and in law, the Ld CIT (A) has erred by ignoring the rules of natural justice, not providing material before the AO and himself and by not providing cross examination of the relevant parties. 3) In the facts & circumstances of the case and in law, the Ld CIT (A) has erred by confirming the addition and making the enhancement due to absence of third party independent evidences and ignoring that books of accounts were rejected and ignoring the important observations by the AO in Para 6.1, 6.3 and 6.4 of the assessment order.

Brief facts of the case are that the assessee is a dealer in all kind of Papers, filed her return of income for Assessment Year 2010-11 on 21.09.2010 declaring total income of Rs. 3,76,540/-. The return was processed and accepted under section 143(1) of the Act. The assessment was re-opened on the basis of information received from Sale Tax Department, Government of Maharashtra, about the assessee, being one of the beneficiaries who have taken accommodation entries from hawala & 1063/M/18-M/s Reeta Jain dealers declared by Maharashtra Sale Tax Department. The assessment was completed under section 143(3) r.w.s 147 of the Act on 22.02.2016.

On appeal before the ld. CIT(A), the addition was not only confirmed, but it was further enhanced by making addition of Rs. 2,09,96,505/- to the total income of assessee. The ld. CIT(A) enhance the addition on his observation that the assessee failed to produce the parities concerned as well as vital evidence like inward register, lorry receipt for purchase of ITA No. 1062 & 1063/M/18-M/s Reeta Jain goods, regular stock register and proof of payment received against sale.

We have heard the submissions of the ld. Authorized Representative (AR) of the assessee and the ld. Departmental Representative (DR) for the Revenue and perused the material available on record. We have also deliberated on the various case laws relied by lower authorities. The ld. AR of the assessee submits that filing of appeal before the First Appellate Authority (FAA) has become curse for the assessee, the ld. CIT(A) instead of considering the facts of the case sympathetically enhance the addition by making disallowance of purchases of aggregate of all of the alleged bogus purchases from all eleven parties. The ld. AR of the assessee submits that the assessee is dealers of Paper and declared Gross Profit (GP) @ 7.15%. The ld. AR of the assessee further submitted the chart of financial working from Assessment Year 2009-10 to 2014-15, showing the details of purchases, sales, Gross Profit, Gross Profit ration, Net Profit, Net Profit ration of alleged bogus purchases identified/disputed by Revenue. The Assessing Officer rejected the books of account of assessee and made addition and estimated the GP of assessee at 10.81% by considering all the facts. Though the GP addition & 1063/M/18-M/s Reeta Jain made by Assessing Officer was on higher side, the assessee approached the ld. CIT(A) for further relief, however the ld. CIT(A) made the addition of entire purchases from 11 parties. The ld. AR of the assessee submits for subsequent year i.e. assessment year 2012-13 the Assessing Officer made similar addition and estimated the GP at 7.04% against 5.52% shown by assessee. On appeal before the ld. CIT(A), the addition was sustained and on further appeal before the ITAT, the disallowance was confirmed. The ld. AR of the assessee submits that facts for the year under consideration are identical compared to the Assessment Year 2012- 13 and therefore, the disallowance on account of alleged bogus purchases in any case should not exceed more than the disallowance made by Assessing Officer.

On the other hand, the ld. DR for the Revenue supported the order of authorities below. The ld. DR further submits that the Hon’ble Gujarat High Court in case of N.K. Proteins Ltd. vs. DCIT in Tax Appeal No. 240-242/2003 dated 20.06.2016 held that once a finding of fact has been given that entire purchases is shown fictitious invoices and debited in Profit & Loss Account are established as bogus. The entire purchases are liable to be disallowed. The facts of N.K. Proteins Ltd. (supra) are fully ITA No. 1062 & 1063/M/18-M/s Reeta Jain applicable on the present case and that the assessee is not entitled for any relief.

We have considered the rival submission of the parties and have gone through the orders of authorities below. The Assessing Officer made the addition by rejecting the books of account. The Assessing Officer while estimating the GP addition observed that there cannot be a uniform yardstick in making the estimation, the estimation by rule of thumb as absolutely infirm. The estimation must necessarily vary with the nature of business; judgment can only be based on the material available on record, past record and considering the totality of the fact. The Assessing Officer concluded that real income is neither notional nor astronomical, income be estimated while making GP estimation. We have noted that the Assessing Officer has not disputed the sale of the assessee. The Assessing Officer rejected the books on his observation that the purchases shown by assessee are unverifiable.

The ld. CIT(A) during the first appellate stage issued notice of enhancement under section 251(2) dated 16.10.2017 as to why the purchases of Rs. 2.28 crore from eleven parties identified during the assessment proceeding should not be treated as bogus. The assessee filed its reply dated 13.11.2017. In the reply, the assessee contended that she & 1063/M/18-M/s Reeta Jain has purchased the goods as mentioned in the transactions and are properly accounted. The purchases have been affected for trading and goods are sold to various reputed parties. There is no dispute regarding the sales. The assessee also contended that all the vendors during the period were registered with the Sale Tax Department. The Sale Tax Department found those dealers as they failed to discharge their liability of tax to the Sale Tax Department. The Assessing Officer never doubted the sales of the assessee. There cannot be sale without purchase. The assessee has properly discharged his opinion in furnishing last known address of all the parties, proof of payment, and copy of account. The Assessing Officer should have issued summons to enforce the attendance of the parties and to given an opportunity to assessee to cross-examine.

The contention of assessee was not accepted by ld. CIT(A). The ld. CIT(A) observed that Assessing Officer issued notice to all the parties under section 133(6), which were returned un-served by postal authorities. The assessee was given opportunity to produce the parties for verification. The assessee expressed her inability to produce the parties. & 1063/M/18-M/s Reeta Jain The Assessing Officer asked the assessee to produce Inward Register, Lorry receipt for purchase of goods from the parties. These vital documents were not produced. The assessee produced the only document such as Ledger Account, Copy of payments, payment made by cheques.

We have seen that ld. AR of the assessee has filed financial working from Assessment Year 2009-10 to 2014-15. In the Assessment Year, the assessee has shown the purchases of Rs. 4.23 crore and sales of Rs. 4.57 crore and declared GP @ 7.15% and Net profit of 0.89%. However, no bogus purchases were identified by revenue. For Assessment Year 2010- & 1063/M/18-M/s Reeta Jain 11, the assessee has shown the purchases of Rs. 4.55 crore and sales of Rs. 4.99 crore on which Gross Profit is declared at 7.16% and Net Profit at 1.5%. The Revenue has identified 50% purchases as bogus (though the assessee claimed otherwise). For Assessment Year 2011-12. The assessee has shown the purchases of Rs. 7.03 crore and sales of Rs. 7.52 crore on which Gross Profit was declared at 6.79% and Net Profit at 1.19%. The Revenue has identified 20% of purchases as bogus. For Assessment Year 2012-13, the assessee has shown the purchases of Rs. 8.22 crore and sales of Rs. 8.87 crore on which Gross Profit is shown at 5.52% and Net Profit at 1.10%. The Revenue has identified 9% of purchases as bogus.

We have noted that for all Assessment Year beginning from 2009-10 to 2013-14, the assessee’s average Gross Profit @ 5.68 % and average Net Profit @ .93%. However, for the year under consideration the assessee has shown GP @ 7.16% and NP @ 1.05%. We have further noted that the assessing officer has not doubted the sale of the assessee; sale is not possible without purchases.

Considering the submissions of the ld representatives of the parties, and facts of the case and the details of financial working furnished before us, and the peculiarity of the present case, we are of the view that the finding of the ld CIT(A) is not sustainable under the law. It is settled position that, under the Income-tax Act only real income can be taxed by the revenue, even in cases where whole transaction is not verifiable due to various reasons, the only taxable is the taxable income component and not the entire transaction. The Hon’ble Bombay High Court in case of CIT vs. Hariam Bhambhani in ITA 313/2013 decided on 04.02.2015 also held that revenue is not entitled to bring the entire sale consideration to & 1063/M/18-M/s Reeta Jain tax but only profit attributable on such unrecorded sale consideration alone can be subject to income-tax. After considering the nature of business activities of the assessee conducted during the relevant period.

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