ACIT, CIRCLE - 34, KOLKATA , KOLKATA vs. BHAWARLAL ALOKE KUMAR , KOLKATA

- This assessee‘s appeal for assessment year 2014-15 arises against the Commissioner of Income Tax (Appeals)-10, Kolkata’s order dated 23.01.2018 passed in case No.224/CIT(A)-10/C-34/14-15/16-17/Kol, involving proceedings u/s 143(3) of the Income Tax Act, 1961; in short ‘the Act’. Case called twice. None appears at the assessee’s behest despite the registry having sent an RPAD notice. It is accordingly proceeded ex parte.

The appellant I Ld A.R for the appellant on the other hand advanced the following arguments through his written submission: a. All the subject three parties were having Income Tax PAN (quoted by Ld. AO himself), VAT TIN no. and bank accounts. These parties have filed their respective Income Tax Returns for the subject year under consideration. Hence, doubts of Ld. AO about even the identity of three mentioned parties are uncalled for. b. None of these three parties or their Directors had or have any relationship whatsoever with the appellant Finn or its partners, and that there was no material whatsoever to establish that money paid by appellant to these parties ever came back to appellant. c. The purchase made from these pal-ties were supported by bills which were duly recorded in appellant's books of accounts and these books have not been rejected by Id. AO. d. All types of profit ratios viz. gross profit ratio, net profit ratio and operating profit ratio for the year under consideration are higher than earlier years' same ratio accepted in scrutiny assessments as well as respective average ratio of four year-s as is seen from charts depicted in appellant's written submission. e. The gross profit ratio, net profit ratio and operating profit: ratio of the year under- consideration, after considering the impact of addition of Rs.3,22,28,000/- made by Ld. A,O show very abnormal increase in respective ratio from the earlier year's respective ratio accepted by Department in scrutiny assessments or respective average ratio of four years as depicted in charts submitted by the appellant. f. Moreover, Ld. AO had not brought or: record any other comparable instance of higher profit ratios in the line of appellant's business for the year under consideration. Hence, the Ld AO's allegation of appellant resorting to bogus purchases to reduce its profit is merely surmise and conjecture of ld. A/O and has no substance. g. The appellant has no statutory power to enforce attendance of any party before the Ld AO and appellant had no direct or indirect control over the way of maintaining accounts and other affairs of concerned parties hence non- appearance of concerned parties before Ld. AO or any alleged discrepancy in ACIT, Cir-34, Kol. Vs. Bhawarlal Aloke Kumar Page 3 these parties’ accounts filed before MCA, cannot be the sole guiding factor to term the entire purchases from, the said three parties as bogus. These parties may have their personal reasons for non appearance before the Ld. AO or for not presenting true accounts but merely for that appellant ought not to be penalized.

The appellant has relied upon certain judicial decisions and Court Rulings, and they are quite relevant in the factual and legal matrix of the case: a. CIT Vs. Nikurij Eximp Enterprises P Ltd.(2015) 372, ITR 619 (Born) (2013) 35 taxman.com 384,(Bombay) "7. -----------we find that the Tribunal has deleted tile additions on account of bogus purchases nor only on the basis or stock statement i.e. reconciliation statement, but also in view of the other facts. The Tribunal records that the Books of Accounts of the respondent- assessee have not been rejected. Similarly, the sales have not been doubted and it is an admitted position that' substantial amount of sales have been made to the Government Department i.e. Defence research and Development Laboratory, Hyderabad. Further, there were confirmation letters filed by the suppliers, copies of invoices for purchases as well as copies of bank statement all of which would indicate that the purchases were in fact made. In our view merely because the suppliers have nor appeared before the Assessing Office or the CIT(A), one cannot conclude that the purchases were not made by the respondent- assessee. The Assessing Officer as well as CIT(A) have disallowed the deduction of Rs1.33 crores on account of purchases merely on the basis of suspicion because the sellers and the canvassing agents have not been produced before them, 11fe rind that the order of the Tribunal is well a reasoned order taking into account all the facts before concluding that the purchases of Rs.1.33 crores was not bogus. No fault can be found with the order dated 30.04.2010 of the Tribunal. " b. ACIT Vs. Bharat Hi-Tech (Cement) P,Ltd,,(201.6) 46 CCH 0012 Kol Trib (2016) 176 TTJ (Kol) 166 “7.3. We have heard the rival submissions and perused the materials available on record. We find from the paper book that the entire ledger account of the supplier was provided before the Learned AO. We find that M/s Shakti Trading Company (supplier) is registered under sales tax laws vide registration number JST No.JR 349S(C) LEF – 23.9.2K; CST No.19751387254 and TIN No. 19751428091. We are in agreement with the Learned AR that the purchases made from this party are forming part or sales tax records and stock register. It is not the case of the Learned AO that the concerned supplier had not supplied any goods to the assessee. This is evident from one of the sample invoices submitted by the assessee before the AO which proved that the goods had indeed moved from supplier to the assessee. Moreover, what purchased by the assessee is the raw material without which, it could not he, manufactured the finished product i. e cement. Admittedly the cement manufacture has been sold and the proceeds thereon is credited to profit and loss account. We find that the payment for purchases have been made by account payee cheques which fact has been accepted as genuine by the Learned AO. We also find that the assesses had given reasonable ACIT, Cir-34, Kol. Vs. Bhawarlal Aloke Kumar Page 4 explanation before the lower authorities that the proprietor of Shakti Trading Company had expired and their business is closed in the last known address with the assessee and no subsequent transactions were made with the said supplier. We find that the Learned AO had treated this purchase as bogus only on the limited ground that his notice u/s 133(6) of the Act could not be served on the supplier in the address given by the assessee. In our opinion, this alone cannot be the deciding factor for treating the purchases as bogus. Nothing prevented the Learned AO from making the verification from the bankers of the assessee as to whether the payments made by the assessee through account payee cheques had indeed been credited only to the account of the supplier or not. We find that the payments made to the supplier has been accepted as genuine by the Learned AO. Then the scope for disputing the purchases made from supplier is lost. Hence we don't find any infirmity in the order of the Learned CITA in this regard. Accordingly, the ground no. 6 raised by the revenue is dismissed. " c. Beauty Tax (Earlier Florals India) Vs. DCIT Order dated 10.04.2017 of Hon'ble ITAT, Jaipur Bench in "8 The only grievance of the Assessing Officer is that the assessee has failed to produce the party so as to establish genuineness of the transaction and secondly, no payment has been made to the party till the year end. The Id. CIT(A) while confirming the disallowance has stated that though confirmation has been obtained from the petty, however, a simple confirmation is not sufficient to establish the fact of purchase without elaborating what more is required from the assessee to justify its claim. Regarding non appearance of the supplier, the assessee has submitted that the supplier was based in Delhi and he has denied coming to Jaipur but at the same time, he has sent its requisite confirmation directly to. the department by the registered post. Further the amount outstanding against the said purchases has been paid by account payee cheque in April and May, 2015 and now there is no outstanding amount against the said supplier. Regarding the other details submitted by the assessee, namely copy of ledger amount and purchase bill of M/s Mahaveer Textiles, copy of the confirmation of the amount sent by M/s Mahaveer Textile Mills to the department and the' fact that the materials so purchases form part of the turnover and which has been exported, there is no finding by the Assessing Officer as to reasons for non acceptance of the said documents and in absence of that, the stand taken by the Revenue cannot be accepted. Merely non-appearance of the supplier in absence of any other corroborate evidence cannot. be a basis of justify the stand of the Revenue that the transaction of purchase is bogus. In the result the purchases made from M/s Mahaveer Textiles have not been proved to be bogus by the Revenue and the said additions cannot be sustained in the eye of law in absence of any conclusive evidence brought on record. The ground of appeal taken by the assessee is thus allowed. " d. ACIT Vs. Mahesh Kr. Shah Order dated 31.01.2017 of Hon'ble ITAT Mumbai Bench in ITA No. 5194/Mum/2014:

Hon'ble Bombay High Court in the case of Nikunj Eximp Enterprises (P) Ltd (216 Taxman 171)" held as under ;- Section 37(1) of the Income-tax Act, 1961-----------·-------------·------------ ----- -.------- -------------.--- - whether merely because suppliers had not appeared before Assessing Officer or Commissioner (Appeals), it could not be concluded that purchases were not made by assessee - Held, yes [Para 71 [In favour of assessee. The above decision squarely applies to the case of the assessee as entire sales in case of assessee is made to the Government.

Furthermore, the Hon'ble Gujarat High Court in the case of Commissioner of Income-tax v, M.K. Brothers (Gujarat High Court) (163 ITR 249), held as under:- [----------------------.---- Whether Tribunal was justified in deleting aforesaid addition to income of assessee on ground that there was no evidence to show that vouchers given by those parties to assessee were bogus or that any part of those payments came back to the assessee-Held, yes 13. In view of the detailed finding recorded by CIT(A), which has not been controverted by Id. DR by brining any positive material on record, we do not find any reason to interfere in the order of CIT(A). Applying the proposition of law discussed in the above judicial pronouncements to the facts of the instant ACIT, Cir-34, Kol. Vs. Bhawarlal Aloke Kumar Page 7 case .. we do not find any infirmity in the order of CIT(A) sustaining addition of Rs.3 lakhs out of total purchases. " h. Shubh Laxmi Exports Vs. ITO (2007) 26 CCH 041.4 Jaipur Trib (2008) 10 DTR (Jp. Trib.) 0281 "11. ----------Undisputedly, it is not a/ways within the control of a purchaser to produce the suppliers before the AO to establish the genuineness of claim of purchases. What is expected from a prudent purchaser to establish genuineness of claim of purchases is furnishing of purchase bill containing al! the necessary details of the transaction, payment- through banking channel, books of account, etc. In the present case the assessee had furnished purchase bills issued by named four parties, their CST/RST number. PANs, proof regarding payment made by account payee cheques, etc. which was expected from a prudent purchaser. Thus, the assessee had discharged its primary onus.” i. Rajesh P. Soni Vs. ACIT (20()6) 100 TT) (Ahd. ) 892 11. W have considered the rival submissions and perused the record. The admitted facts of the case are that purchase were recorded in the regular books of account maintained. The purchase 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 sale against the purchases are not doubted. It is not the case of AO that amounts paid for purchases had come back to the assessee. We noticed that the AO had made addition merely on the ground that the suppliers are not located and they were not produced for examination. After considering the facts of the case we are of the view that when purchases are supported with authenticated purchase bills having sales tax numbers and payment through cheques, the addition cannot be made under s. 69 or 69A as in this section the addition can be made in following Circumstances: "(i) when assessee has made investment which is not recorded in the books of account, or (ii) the assessee otters no explanation or the explanation is not satisfactory.”

After going through the findings of the Ld. AO and the appellant's submissions with judgments cited, I am of the considered view that addition of whole amount of purchases made from a party just because that party did not appear before the Ld. AO or because it had not maintained its accounts correctly, is unjustified particularly when identities of parties are proved, bills of parties are produced, confirmation from those parties are on record, payment to these parties are through banking channels, these parties have no proximal or distal relationship with the appellant and appellant's different profit ratios for concerned year (year ended 31.03.2014) have shown better results than respective average ratio. It is also to be kept in mind that instant case is not precisely a case attracting addition u/s 69C of Income Tax Act, 1961. It is also noteworthy that earlier veer's assessments have been completed under section 143(3) of the Income Tax Act and the profit ratios after addition of the entire alleged bogus purchases from these three parties go up abnormally high from the respective ratio accepted in earlier years in scrutiny assessments. There is nothing on record to suggest such abnormally high ratios in any other comparable case of same line of business and tote: turnover of the appellant has not been cast ACIT, Cir-34, Kol. Vs. Bhawarlal Aloke Kumar Page 8 aspersions on by the Ld. AO. At the same time, the facts of non-appearance concerned parties before Ld. AO cannot be ignored altogether and if no addition made, non-compliance of Department notices may become an acceptable position wand therefore in my considered view there have to be certain deterrents in the matter.

I find that in the circumstances emanating from the case, the Ld AO has treated the alleged purchases as bogus, but has not rejected the books of accounts, which in essence means that the sales have been found to be acceptable. In my considered view of the factual matrix, this would appear to be a case where purchases have been made from parties other than those mentioned in the books of accounts. These purchases were in all probability from the grey market, and accordingly bills obtained. I find that in such situations, Hon'ble Courts have taken a view that the entire unverified purchases are not rendered vulnerable for addition; rather only the "element of profit" embedded from such purchases ought to be considered for addition. It would be just and fair in my considered view to arrive at such percentages of the profits which would justify such addition.

The CIT(A), after considering the explanations of the assessee and also relying upon the decision of Hon'ble Gujarat High Court in the case of Vijay Proteins Ltd vs CIT (2015) 58 Taxman.com 44 and CIT vs Smit P Sheth 356 ITR 451 (Guj, held that ACIT, Cir-34, Kol. Vs. Bhawarlal Aloke Kumar Page 10 the evidences gathered during the course of assessment proceedings revealed that the assessee was one of the beneficiaries of BJ Exports group accommodation entries provided by Shri Bhanwarlal Jain group. He also observed that it is also an admitted fact that the assessee has not filed necessary evidences to justify the purchases from those parties. The fact that notices issued u/s 133(6) to the addresses provided by the assessee have been returned by the postal authorities unserved also indicates that the parties are not existed at the given addresses. All these facts go to prove that purchases from the above parties are not genuine and hence, the AO was right in treating 'purchases from said party as bogus in nature. The CIT(A) further observed that the AO has not disputed sales declared by the assessee. The purchases / sales co-relation has not been controverted by the AO. No discrepancy in stock has been pointed out. The fact that payments made for the purchases are routed through banking channels is not disputed. No evidence has been brought' on record to show that the cash payment made on the purchases has been paid back to the assessee by the seller. Thus, at best, it can be concluded that the primary inputs behind availing such bogus bills was to reduce the profits. In the facts and circumstances and also by considering the ratio of judgement of Hon'bfe Gujarat High Court cited supra, the CIT(A) directed the AO to estimate profit of 30% on the alleged bogus purchases. Aggrieved by the order of CIT(A), the assessee is in appeal before us.

The Ld.AR for the assessee submitted that the Ld. CIT(A) erred in BJ Exports group disallowing 30% of the purchases made from M/s Little Diam ignoring the fad that the purchases were made wholly and exclusively for the purposes of business and the purchases are exported in the normal course of business of the assessee. The Ld.AR further submitted that merely because third parties had made unsubstantiated statements, it cannot not be said that the purchases made by the assessee were bogus or unverifiable. The assessee has discharged its onus by furnishing all details called for to prove the genuineness of the purchases. In the absence of incorrectness of books of account or stock registers, merely on the basis of third party statement addition cannot be made in spite of producing all the details.

On the other hand, the Ld. AR submitted that the AO has brought out clear facts to the effect that purchases from above parties are bogus in nature is evident from the fact that the parties have accepted before DGIT (Inv) that they are involved in providing accommodation entries. The Ld. DR referring to the decision of Hnon'ble Supreme Court in the case or N.K. Proteins Ltd in SLP 759 of 2017 dated 16-01- 2017 submitted that once it is proved that the purchases are bogus, then addition should be made for entire purchases and not for profit element embedded in such purchases. In this case, elt evidences lead to a conclusion that the assessee has taken accommodation entries from the above parties and hence, the AO has rightly mode addition towards bogus BJ Exports group purchases and his order should be restored. 9 . We have heard both the parries and perused materials available on record. The AO disallowed purchases made from certain parties on the basis of information received from DCIT (Inv) which was further supported by the list prepared by Maharashstra Sales tax department which show» these parties as suspicious hawala operators involved in providing accommodation entries. The AO further observed that during the course of search in Bhanwarlal Jain group, Shri Bhanwarlal Jain and his son Shri Rajesh Bhanwarlal Jain admitted that they have floated dummy concerns in the name of friends and relatives which were engaged in giving accommodation entries. The AO based on the information received from DGIT(Inv) coupled with further independent enquiries conducted during the course or assessment proceedings, came to the conclusion that the purchases from the said parties are ACIT, Cir-34, Kol. Vs. Bhawarlal Aloke Kumar Page 11 bogus in nature and assessee failed to substantiate the above purchases with necessary evidences. According to the AO, though assessee furnished purchase invoices and proof of payments, the fact that the parties themselves admitted that they were involved in providing accommodation entries, the evidences filed by the assessee cannot- be taken as conclusive to held the purchases as genuine in nature. The contention of the assessee is that merely because parties have not responded to the notice addition cannot be made towards purchases which BJ Exports group are supported by proper evidences. The assessee also contended that the AO has not pointed out any irregularity in the books of account of stock statement and in the absence of any finding as to the incorrectness of hocks of account, addition cannot be made solely on the basis of third party statement.

The AO made additions based on the information received from Maharashtra Sales-tax department end the DGIT(Inv). The AO further observed that the parties have admitted before the sales-tax department that they are providing accommodation entries without actual delivery or goods. We find that the AO has brought out clear facts to the effect that the assessee has made purchases from certain parties who are involved in providing accommodation entries, No doubt, the assessee has furnished certain evidences to prove the purchases as genuine. Bur the fact remains that the notices issued u/s 133(6) to the addresses given by the assessee were returned unserved with remark "no such parties are available at the given address, Therefore we are of the considered view that mere production of purchase bill end payment proof would not absolve the assessee of his initial onus to prove the purchases, more particularly, when other (acts clearly show .a finger on the assessee that the above parties are involved in accommodation entries and the assessee is one or the beneficiaries of such accommodation entries. Therefore, the AO has right in treating the purchases made from above parties are not BJ Exports group genuine. We further observe that the assessee has furnished certain evidences including purchase bills and payment proof to prove the purchases. The assessee also produced books of account and stock details before the AO. The AO has not pointed out any discrepancy in books of account and stock registers, The AO has never doubled sates declared by the assessee. In the absence of any finding as to the incorrectness in books of account and stock registers, purchases cannot be doubted. Under these facts and circumstances it can be concluded that the assessee has obtained bills to reduce profits. Hence, what needs to be taxed in this case is only the profit element embedded in such purchases, but not the entire purchases from the above parties.

Having said so, let us examine what is reasonable profit in case of these transactions. Various courts and tribunals have upheld estimation of profit ranging from 12.5% to 25% depending upon facts and circumstances of each case. The Hon'ble Gujarat High Court in the case of Vijay Proteins Ltd vs ACIT (supra) has upheld estimation of net profit at 15% on bogus purchases. In yet another case, the Hon'ble Gujarat High Court in the case of CIT vs Smit P Sheth (supra) has taken a view that no uniform yardstick call be applied for estimation of net profit which depends upon facts and circumstances of each case. The Hon'ble High Court further observed that in such cases, the profit BJ Exports group element embedded in such purchases can only be added to the income of the assessee. The ITAT, Mumbai Benches in several cases has upheld estimation of net profit at 12.5% on such purchases. Therefore, considering the overall facts & circumstances of the case and also relying upon the ratio of case laws discussed above, we are of the view that in the case of bogus purchases, only profit element embedded in such purchases needs to be taxed but not total purchases. Accordingly, we direct the AO to estimate net profit at 12.5% on total alleged bogus purchases.

The facts and circumstances in & 5444/Mum/2016 are identical to ITA No.5442/Mum/2016 but for the figures which we have decided above. Since the facts and circumstances are identical the decision and discussion made in the foregoing paragraphs equally apply to these appeals also. The AO is directed to estimate net profit at 12.5% on total alleged bogus purchases for assessment years 2008-09 and 2009-10 also. These appeals are partly allowed.

In the result, all the three appeals are partly allowed. Order pronounced in the open court on 13th September, 2017. [Unquote] 8. Accordingly, in my view, a fairly estimated addition on account of the Net Profit out of aggregate purchases made from the subject three parties would meet the ends of justice. Considering all the aspects narrated above, it is directed that addition on account of purchases from these three parties be restricted to 15% of aggregate purchases from these parties and it comes to Rs.48,34,200j- being 15% of Rs.3,22,28,000/-. The grounds no. 1 to 6, accordingly, stand adjudicated as partly allowed, as indicated supra.”