DCIT, CIR-26(1), KOLKATA, KOLKATA vs. M/S CHIEN HSING TANNERY, KOLKATA

ORDER Shri S.S. Godara, JM:

1. This Revenue’s appeal for assessment year 2012-13 arises against the CIT(A), 7, Kolkata’s order dated 17-04-2017 passed in case no. 559 & 4/CIT(A)-7/Kol/Circle- 26/16-17 involving proceedings u/s 147 of the I.T Act, 1961 (in short ‘Act’) . Heard both the parties. Case file perused.

2. The Revenue’s sole substantive ground/grievance raised in the instant appeal seeks to reverse the CIT(A)’s findings partly upholding the Assessing Officer’s action treating the assessee’s alleged bogus purchase amounting to Rs.250,21,568/- to the extent of gross profit estimation @ 5.83%. The CIT(A)’s detailed discussion to this effect reads as under:- Assessment Year 2012­13

1. This appeal is instituted against the order dated 28.03.2014 under section 147 of the Income Tax Act, 1961 ( the Act) for the A.Y 2012­13

passed by the then DCIT, Circle­53, Kolkata (A) at present DCIT, Circle­26, Kolkata. 2. The return of income for the A.Y 2012­13 was filed on 24.03.2013 declaring a total income of Rs. 23,46,550/­. The appellant is engaged in the business of manufacture and processing of leather and trading of leather chemicals.. Income was finally assessed at Rs. 2,73,68,120/­. 3. The appellant has taken following grounds of appeal:

1.For that the Assessing Officer was quite unjustified by disallowing purchases of Rs.2,50,21,568/­ as bogus purchases though the supporting evidences were given to the Assessing Officer during the course of scrutiny.

4. For that the appellant craves leave to add/alter/amend/any other ground/grounds/on or before the hearing of the appeal to add further elucidation to any or all of the grounds which may be submitted on or before the hearing of “the appeal.

Essentially speaking the appellant aggrieved against the disallowance of purchase of Rs.2,50,21,568/­ as bogus purchase.

4. The A.O has found that the appellant has made purchase from the following four parties:

The A.O has observed that these concerns are being run by professional Hawala operators. Notice u/s 133(6) issued to all the four parties came back unserved by the Notice Server. Summon u/s 131 also could not be served as these parties were not available at their respective addresses.

During the course of appellate proceedings the Ld. AIR of the appellant argued . that the entire purchases from these parties are genuine and further since the entire purchases were lying in stock at the end of the year, therefore, it would not affect the trading result of the appellant. Therefore, no disallowance can be made. Remand report was called from the A.O..

SI. No. Name of party Amount 1 M/s. A.H Traders, 6, Ram Lochan Mullick 59,61,280/­ Street, 2nd Floor, Kolkata­73 2. M/s. Shree Enterprises, 711A, Grant lane, 38,78,160/­ 2nd Floor, Kolkata­12. 3. M/s. R.K. Trading, 3B, Sagar Dutta Lane, 1,09,37,264 Kolkata­73. 4. M/s. J.K. Traders, 75, Ph ears lane, Kolkala­700073. 42,44,864/­ During the course of assessment proceedings, the assessee was given ample opportunity to prove the genuineness of transactions/purchases but the assessee failed to do so. Summon were issued to all four parties on 03.03.2014 to produce the evidences but it was found that none of the parties existed and accordingly they were un­served. Thereafter, on 24.03.2014, the assessee himself submitted a copy of his ledger account as appearing in the alleged books of Shree Enterprises, J.K. Traders, R.K. Trading 86 A.H. Traders along with other documents.

The documents submitted by the assessee during the assessment proceedings had confirmed the fact that it had indulged in obtaining fake bills of Raw Hide purchases from these four parties as none of them had the requisite permission under the Sales Tax Act/V.A. T Act to deal in Raw Hides.

Now the assessee, in the appellate proceedings is making a plea that they were not financial transactions but trading transactions. This is a concocted story fabricated by the assessee as never before the AO, the assessee had given this argument. Further to prove this fact, if all the challans produced by assessee are looked into, it would reveal that they entail transaction referring to claim of return of the hides given to them for treatment post the date of survey ie 22/01/2013 i.e. M/s. Chien Hsing Tannery in the month of March 2013 which points at an afterthought strategy. The assessment proceeding was going in the month of March, 2014 and the assessee had submitted its final reply on 14103/2014 while challans are dated 09/03/2013 which precedes the date of reply. Thus, he had ample opportunity to submit it before AO. But the said facts were never produced before the AO during the course of assessment proceedings. Thus, it is clear that it is an afterthought and assessee has made a concocted story. Also if the entity to which assessee claims to have returned the finished hide is bogus as per ITI's report dated 04103/2014 (copy enclosed), the question remains' unanswered as to whom he has returned the said material.

Further, the perusal of the contention of the assessee at the appellate stage shows that the assessee has put forward a new contention which is entirely different from what has been submitted before the Assessing Officer. The enquiry at the assessment level had proved that the alleged purchase was nonexistent. Thus, any claim with regards to purchase and sale from these parties in the nature of job work and purchase and sale" which are not entered in the books of accounts cannot be said to be authentic as they are not authenticated by the party with which the assessee claims to have entered into transaction of that nature.

The A.O has further in the remand report on 26.04.2016 stated that despite giving several opportunities the appellant could not produce these parties.

Before the AD the appellant had furnished full particulars of the purchases made which inter alia included name, addresses, confirmation of the suppliers. Copies of the invoices together with the challans evidencing actual supply of raw hides had been impounded by the AO and accordingly even today these documents are in the possession of the Department and therefore, the appellant is unable to furnish copies of the same for your kind consideration.

The appellant furnished copies of the ledger accounts with confirmation obtained from the four suppliers. The appellant also furnished the sales tax registration numbers of these four parties.

The invoices bearing appellant's name and address along with VAT number were issued by the suppliers. Appropriate VAT liability levied by the suppliers as per their respective State VAT laws was discharged by the appellant.

The AO was wrong in invoking section 68 of the Act because the transactions with the parties in question were not financial transactions but trading transactions. Monies owed to such parties are in the course of trade and business and these are not financial transactions. In the circumstances the provisions of section 68 could not be invoked in the present case.

The above view has been enunciated by the Special Bench of ITAT, Delhi in the case of Majoj Aggarwal Vs DCIT (113 !TD 377). In the decided case the ITAT held that purchases are in the nature of business expenditure and therefore the amount credited on account of purchases is not a cash credit.

The appellant submits that the AO erred in invoking provisions of section 68 with reference to purchases made in the course of business and consequently the addition of Rs. 2, 50, 21, 5681­ made u/s 68 was legally untenable and thus deserves to deleted in full.

Without prejudice the appellant submits that in aggregate 33,300 pieces of raw hides were purchased by the appellant from four parties on the understanding that after the hides were processed and the finished leather was produced the same would be resold to same parties. In substance therefore the transaction was more in the nature of barter. In the course of assessment the appellant had furnished before the AO the details of the sales made to the same four parties during the next financial year. The details furnished in the course of assessment thus established that the raw hides which the appellant had sourced from the said four parties remained in its stock on 31st March 2012. Out of the hides supplied by the parties in the month of February 2012 finished leather was processed and thereafter sold to the same four parties in the succeeding assessment year. The appellant submits that it effectually functioned as processor of the hides for the four parties. The appellant purchased raw hides from them. These raw hides were then processed and converted into finished leather which was subsequently sold back to them partially.

Accordingly the overall profit derived from these transactions was integral part of the net profit disclosed in the Profit & Loss account for the succeeding financial year. In the light of the foregoing documentary evidences and jurisdictional facts, M/s. Chien Hsing Tannery it is submitted that the AO grossly erred in alleging that the purchases made from the suppliers were made with the objective of unilaterally inflating the expenses and thereby reduce the taxable income when the facts on record showed that the entire material purchased was lying in stock with the appellant at the close of the relevant previous year.

In the impugned order the AO principally alleged that the appellant had made bogus purchases to inflate its purchases so as to reduce its profits. It is submitted that the allegation suffered from apparent & fundamental infirmity. It is contrary to the jurisdictional facts available on record. The appellant has furnished the comparative statement of purchases and sales made to same four parties as well the value of finished leather retained. From the above tables it can be seen that the transactions with these four parties yielded profit over the years which formed part of the Profit & Loss account for the subsequent AY 2013­14. If the AO's allegation is believed to be true that the appellant had made bogus purchase, then no prudent person would declare profit on the alleged bogus purchases and pay taxes thereon. Such a proposition defies common logic & rationality. Hence the AD's allegation that bogus purchases were accounted to inflate expenses and thereby reduce profits is ex­facie incorrect and contrary to the facts on record.

Even otherwise it is submitted that the entire addition has been made by the AO without taking into consideration the simple basic fact that in arriving at the total income for A. Y. 2012­13 the appellant had not claimed deduction for even one rupee out of the alleged cost of purchase of Rs. 2,50, 21,568/­.

It shall be noted that although the cost of purchase (inclusive of VAT) debited to the Profit and Loss account was Rs.2,50,21,568/­, the corresponding value credited in the P&L a/c by way of closing stock of 33,000 pieces was Rs.2,62,08,813/­. It shall thus be noted that the appellant had not claimed deduction for the disputed purchases of Rs.2,50,21,568/­ in arriving at taxable income for the relevant AY 2012­13 .

We submit that the disallowance of Rs. 2,50, 21,568/­ has effectively resulted in double addition of the same amount.

Reference in this regard is invited to the decision of the Ahemedabad Bench of Income Tax Appellate Tribunal in the case of ACIT Vs. J.B. Exports (ITA No.2126/Ahdl2008) dated 30.10.2014.

The ITAT further held that since the sales/closing stock corresponding to the purchases had not been disputed by the AD and the profit, if any, arising there from had been assessed to tax, the AD erred in treating the purchases to be bogus.

In the above decision the ITAT, Ahemdabad relied on the judgement rendered by another coordinate Bench in an earlier case of Toraram B Sharma ( & 2291/Ahd/2004).

In the above judgement the Tribunal extensively explained the law governing addition on account of bogus purchases. The ITAT observed that where the alleged bogus purchases have been correspondingly sold and / or is included in the closing stock then there is no effect as far as the profit of the assessee is concerned. It was explained that if the purchases is held to be bogus and eliminated from the debit side then as a corollary the corresponding sales/closing stock out of such purchases shall get eliminated as well; in such a situation the overall effect on the profits shall be neutral/NIL. The Tribunal therefore held that no addition on account of bogus purchases was warranted on such count. The ITAT held that only when the Revenue establishes that the purchases were menant to inflate the expenses and / or the corresponding sales value/closing stock was suppressed that one could infer and/make addition on account of bogus purchases. The aforesaid judgement of the Ahemdabad Tribunal was upheld by the Gujarat High Court in its judgement in Tax Appeal No. 1344 & 1355 of 2008 dated 09102/2010.

Attention is further invited to another decision of the Gujarat High Court in the case of CIT vs. Bholanath Poly Fab (P) Ltd. (40 Taxmann.com 494).

Reference is further made to the decision of the ITAT, Mumbai in the case of DCIT Vs. Rajeev G. Kalathil (ITA No. 6727IMuml2012) dated 20.08.2014.

I have perused the assessment order, submission of the appellant and the remand report submitted by the A.O. I have also perused the survey report and the discrepancy found in the A. Y 2013­14 in the case of the appellant. It cannot be denied that the appellant has made purchases of Rs.2,50,21 ,568/­ from the above four parties and these purchases are not verifiable. Notice u/s 133(6) could not be served nor summon u/s 131 could be served, nor the appellant could produce these M/s. Chien Hsing Tannery parties. However, the materials were remaining in the closing stock as on 31.03.2012. Therefore, it would not have any impact on the trading result of the appellant. The Ld. A/R of the appellant has given voluminous case laws on this issue in support of the case of the appellant. Therefore, I am in opinion that no addition on account of purchase from these parties is warranted.

However the fact remains that (a) the appellant has shown purchase from parties which are bogus/not verifiable (b) explanation given by the appellant that the hide supplied by these parties have been processed after more than 9 months from the date of purchase looks to be specious as hide can hardly be kept unused for a period of 9 months.

( c) In A. Y. 2013­14 many discrepancies were found during survey proceedings which are mentioned in my order (supra).

In view of the above I am in opinion that the books of accounts of the appellant are not reliable and it deserves to be rejected. The G.P of the appellant may be estimated as in A.Y. 2013­14 at 5.83%. The A.O is directed to make the addition. Accordingly the addition for bogus purchases amounting to Rs. 2,50,21,568/­ would be substituted by the GROSS PROFIT addition by estimating the GP at 5.83%.

3. We have given our thoughtful consideration to the rival contentions. Mr. Robin Choudhury, Addl. CIT/ld.DR/the Revenue vehemently emphasizes during the course of hearing that the Assessing Officer had rightly disallowed the assessee’s purchases made from 4 parties namely, M/s. A.H Traders, M/s. Shree Enterprises, M/s. R.K Trading and M/s. J.K Traders, since the same could not be traced despite various notices issued to them in the course of scrutiny. The assessee on the other hand strongly supports the CIT(A)’s findings under challenge restricting the impugned addition to profit estimation @ 5.83% only. We find no merit in Revenue’s grievance as canvased in the instant issue. The assessee is an individual engaged in manufacturing, processing, M/s. Chien Hsing Tannery trading in leather and leather chemicals. He had placed on record the relevant documents in support of his impugned claim to have purchased the material in issue from these four parties. His corresponding actual stock/sales of the impugned purchases is not in dispute at the Revenue’s behest The CIT(A) appears to have rejected the books and estimated the taxpayer’s G.P @ 5.83% in these peculiar facts only. We find that assessee’s G.P ratio right from A/ys. 2008-09 to 2012-13 read 6.73%,10.38%, 5.42%, 3.97%, 4.58% and 5.16% respectively in succeeding A/y 2013-14, formed basis for the CIT(A) to disallow the profit element coming to 5.83% in issue. Hon’ble apex court’s decision in N.K Proteins V/s DCIT (2017) 250 TAXMANN 0022, hon’ble Gujarat high court in (2015) 58 taxmann.com 44 Vijay Proteins Ltd V/s. CIT also disallowed only portion of unverifiable purchases case in similar facts and circumstances. The Revenue has quoted this tribunal’s co-ordinate bench’s decision in (2015) 154 ITD 849( Kol.Trib) Debasish Banerjee V/s. ITO disallowed the entire purchases on account of assessee’s failure in reconciling difference between purchases as debited in trading account and purchases as per TCS certificate(s). We find that the same is not applicable in the given facts and circumstances since there is no reconciliation issue involved before us. We therefore affirm the CIT(A)’s findings restricting the impugned disallowance to the extent estimated profit element in issue.

1. 1. Appellant/Department: ACIT, Cir-26(1), Kolkata Aaykar Bhawan Dakshin, 2 Gariahat Road(South), Kolkata-68.

2. Respondent/Assessee: M/s. Chien Hsing Tannery, Kolkata Leather Complex, Zone-5, Plot No. 424, Bantala, 24 PGS (S), Pin-743502.. 3..C.I.T(A).- 4. C.I.T.- Kolkata.

5. CIT(DR), Kolkata Benches, Kolkata.