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Income Tax Appellate Tribunal, G Bench, Mumbai
Before: Shri B.R. Baskaran & Shri Ravish SoodShri Sujeet Y. Singh
This appeal filed by assessee is directed against the order dated 30.11.2016 passed by the CIT(A)-41, Mumbai and it relates to A.Y. 2006- 07. The assessee is aggrieved by the decision of the CIT(A) in partially confirming the addition related to bogus purchases.
The assessee is a manufacturer of drugs and pharmaceuticals. The Revenue received information from the Sales Tax Department of Government of Maharashtra that certain dealers are indulging in providing accommodation entries without actually supplying materials. It was noticed that the assessee herein has purchased goods from two of such parties to the tune of `70.34 lakhs during the year under consideration and the AO reopened the assessment for the year under consideration by issuing notice under Section 148 of the Income Tax Act, 1961 (hereinafter "the Act"). The AO noticed that the assessee did not maintain stock register. The notices issued by the AO under Section 133(6) of the Act were returned unserved. Before the AO the assessee submitted that the Shri Sujeet Y. Singh p0ruchases were made on credit and in the subsequent year the assessee has written off all the balances due to both the supplies. It was also submitted that the assessee has manufactured drugs by using chemicals purchased from both the parties and have exported the same. Accordingly it was pointed out that there is no reason to doubt the genuineness of the purchases. The AO was not convinced with the explanation of the assessee. Accordingly he disallowed the entire amount of `70.34 lakhs and added the same to the total income of the assessee.
In the appellate proceedings, the learned CIT(A) took the view that the profit element embedded in the transactions of purchase should be assessed. For this purpose he took support of the decisions rendered by the Hon'ble Gujarat High Court in the case of Vijay Proteins Ltd. vs. CIT (2015) 58 taxmann.com 44 (Guj) and CIT vs. Simit P. Sheth (2013) 356 ITR 451 (Guj). The learned CIT(A) took the view that the profit element embedded in the purchases can be estimated at 30%. Accordingly he sustained the addition to the extent of 30% and granted partial relied. Still Aggrieved, assessee has filed this appeal before us.
The learned A.R. submitted that the assessee has asked for reasons for reopening of the assessment but the AO has not furnished the same till date. The learned A.R. further submitted that the assessee has exported its goods and hence the goods could not have been manufactured without using material purchased from the impugned dealers. Accordingly the learned A.R. submitted that there is no reason to sustain the addition partially also.
On the contrary, the learned D.R. submitted that the assessee has failed to furnish any evidence to prove receipt of materials and its consumption. The assessee has not maintained any stock register. Accordingly the learned D.R. submitted that the learned CIT(A) was justified in sustaining the addition to the extent of 30% of the value of bogus purchase.
In the rejoinder the learned A.R. submitted that the profit element of 30% estimated by the learned CIT(A) is very much on the higher side. The Shri Sujeet Y. Singh learned A.R. submitted that the assessee is showing gross profit @ 28.62% which is very much comparable with the market trend. It was pointed out to the learned A.R. that the assessee has not maintained stock register and has also not proved receipt and consumption of materials. Accordingly it was suggested that the profit element embedded in the impugned purchases is required to be added, the learned A.R. submitted that the profit element of 30% estimated by the CIT(A) is on the higher side and accordingly prayed that it may be reduced. She submitted that the Hon'ble Gujarat High Court in the case of CIT vs. Simit P. Sheth 356 ITR 451 has sustained the addition to the extent of 12.5%. The learned D.R. submitted that 12.5% estimated by the Hon'ble Gujarat High Court included profit element of 2.5%.
Having heard the rival submission, we are of the view that the profit element embedded in the impugned purchases are required to be assessed in the hands of the assessee, as the assessee has failed to furnish the stock register and also evidence for receipt and consumption of materials. Since the assessee has exported materials, the receipt of materials cannot be doubted. The possibility is that the assessee might have purchased materials from one party and obtained bills from another party. Accordingly the profit element embedded in the purchase may be added in the hands of the assessee. The learned CIT(A) has estimated the profit element at 30% which, in our view, is on the higher side. The learned A.R. submitted that the VAT rate applicable to the impugned purchases is 12.5%. Accordingly, by following the ratio rendered by the Hon'ble Gujarat High Court in the case of Simit P. Sheth (supra) we modify the order passed by the learned CIT(A) and direct the AO to sustain the addition to the extent of 15% of the value of alleged bogus purchases.