INCOME TAX OFFICER, WARD-3(2), KALYAN, MUMBAI vs. PARAG DINESH SHAH, MUMBAI

The addition made by the AO in respect of bogus purchases made from hawala dealers, having sustained by Ld CIT(A) partially, both the parties are in appeal before us. While the assessee seeks further relief, the revenue is agitated by the relief granted in all these three years.

We heard the parties and perused the record. The assessee is a trader in Hardwares and electrical items. Pursuant to the information received from the Sales tax department of Government of Maharashtra that certain dealers are indulging in providing only accommodation bills without actually supplying materials and upon noticing that the assessee has purchased goods from some of such hawala dealers during the three years under consideration, the AO reopened the assessments of all the three years. During the course of assessment proceedings, the assessee furnished copies of purchase bills and payment details. He submitted that he collects materials from these dealers and supplies them to his customers. The AO issued notices u/s 133(6) of the Act, but they were returned back unserved. The assessee could not furnish confirmation letters from the suppliers nor could he produce them before the AO. Further the assessee also did not maintain stock register. Under these circumstances, the AO rejected the book results and disallowed entire purchases as detailed below:- Asst. Year 2009-10 - 13,67,740/- Asst. Year 2010-11 - 89,48,422/- Asst. Year 2011-12 - 1,35,74,421/-

Before Ld CIT(A), the assessee made detailed submissions contesting the additions made. The assessee submitted that the AO should not have made the additions on the basis of self serving statements given by the alleged hawala dealers. It was further contended that the assessee is having low rate of net profit and also furnished financial details of the past and subsequent

The Ld CIT(A) noticed that the assessee could not furnish confirmation letters nor could he produce the suppliers before the AO. Further the AO noticed that the assessee has not also maintained stock register. The Ld CIT(A) also noticed that the AO has made the above said additions after rejecting the books of accounts. Under these set of facts, the ld CIT(A) chose to estimate the Net profit @ 8% on the whole of sales reported by the assessee in these three years. This was done by Ld CIT(A) by taking cue from the provisions of sec. 44AD of the Act. Accordingly the Ld CIT(A) estimated the net profit of the assessee in these three years @ 8% of the Sales. After giving set off of net profit already declared by the assessee, the Ld CIT(A) sustained addition to the extent of Rs.3,29,323/-, Rs.9,17,914/- and Rs.14,51,020/- in AY 2009-10, 2010-11 and 2011-12 respectively. The addition sustained by Ld CIT(A) worked out to 24%, 10.25% and 10.68% of the value of alleged bogus purchases in the above said three years respectively.

Both the parties are aggrieved.

We notice that the Ld CIT(A) has upheld the rejection of books of accounts and accordingly proceeded to estimate the net profit of the three years. We notice that the Ld CIT(A) has taken support from the provisions of sec. 44AD of the Act and accordingly estimated the profit at 8%. In our view, the approach of Ld CIT(A) cannot be found fault with, since he has estimated the profit of the assessee after rejecting the book results.

The Ld D.R submitted that the method adopted by Ld CIT(A) has given substantial relief to the assessee. Since a particular method has been adopted by Ld CIT(A), which is one of the recognised methods of estimating income, we do not find fault with the approach adopted by Ld CIT(A).

The Ld A.R submitted that the Ld CIT(A) has adopted the N.P rate of 8% in all these three years. He submitted that the highest N.P rate of the assessee was only 4.83% in AY 2007-08 and the average N.P rate of the assessee is only around 4%. Accordingly he submitted that the rate of 8% adopted by Ld CIT(A) is on the higher side. He further submitted that the Tribunal, in the case of Shri Ratnaram K Choudhary (ITA No.2584 & 2585/Mum/2017 dated 20-06-2017) has sustained addition in the case of dealer of hardwares at 6% of value of bogus purchases. He submitted that, if the N.P rate is adopted at 6% of the sales, then the addition shall work out to 11.67%, 6.37% and 6.29% respectively in the three years, which corresponds to the addition sustained by the Tribunal in the above said case.

We heard the rival contentions and perused the record. We notice that the assessee has not maintained stock register and hence the factum of sale of items out of purchases made from hawala dealers does not stand proved. In the cases, where the stock is reconciled, the Tribunal is sustaining the addition on the estimated profit made by the assessee in the bogus purchases. Hence, in our view, the assessee cannot take support of the decision of the Tribunal rendered in the case of Ratnaram K Chourdhary (supra). However, considering the average rate of net profit declared by the assessee, we are of the view that 8% estimated by Ld CIT(A) is on the higher side. Accordingly we modify the orders passed by Ld CIT(A) and direct the AO to estimate profit of the assessee in all these three years by adopting N.P rate of 7% and compute the disallowance accordingly.

In the result, the appeals of the assessee are partly allowed and the appeals of the revenue are dismissed. Order has been pronounced in the Court on 29.8.2018.