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Income Tax Appellate Tribunal, MUMBAI BENCH “H” MUMBAI
Before: SHRI C.N. PRASAD & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the revenue. The relevant assessment year is 2011-12. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-17 [in short ‘CIT(A)’], Mumbai and arises out of the assessment order u/s 143(3) r.w.s. 147 of the Income Tax Act 1961, (the ‘Act’).
The grounds of appeal
read as under:
1. Whether on the facts and circumstances of the case and in the law the Ld. CIT(A) is justified in not upholding the total disallowance of alleged purchases ignoring the fact that assessee is one of the beneficiary of non-genuine transactions carried out with hawala dealers? 2. 'Whether on the facts and circumstances of the case and in the law the Ld. CIT(A) is justified in not upholding the total disallowance of alleged purchases ignoring the fact that AO has made the addition after carrying out necessary inquiries?
3. Whether on the facts and circumstances of the case and in the law the Ld. CIT(A) is justified in not upholding the total disallowance of alleged purchases while in para 11 of his order the Ld. CIT(A) has held that the assessee was unable to substantiate its purchases from the suppliers who had already been established as hawala dealers by the Sales Tax Department (Govt of Maharashtra) and Investigation Wing of the Department.
4. Whether on the facts and circumstances of the case and in the law the Ld.CIT(A) is justified in not upholding the total disallowance of alleged purchases ignoring the fact that hawala parties have given the statement on oath regarding their modus operandi?
5. Whether on the facts and circumstances of the case and in the law the Ld. CIT(A) is justified in directing to restrict the disallowance to 12.5% of the alleged purchases whereas it is clearly proved that the said purchases are non-genuine and therefore needs to be fully disallowed?
6. The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the A.O. be restored.
3. The assessee filed its return of income for the assessment year (AY) 2011-12 on 29.09.2011 declaring total income of Rs.1,59,51,458/-. The assessee is basically engaged in the business of construction, infrastructure, repairs etc.
In a nutshell, the facts of the case are that the Assessing Officer (AO) received information from the Investigation Wing of the Income Tax Department that the assessee was having transaction of Rs.4,57,20,006/- from parties who were engaged in hawala transactions. During the course of assessment proceedings, the AO issued notice u/s 133(6) to the concerned parties to verify the purchases. However, the notices were returned back as unserved by the postal authorities. Also, during the course of assessment proceedings, the AO asked the assessee to produce these parties before him to ascertain the genuineness of purchases. However, the assessee failed to produce them. In response to a query raised by the AO to explain as to why the purchases from the above parties should not be held as bogus, the assessee submitted the copy of ledger accounts, sales invoices towards materials purchased from the parties along with account confirmations of some parties. It was the submission of the assessee before the AO that the payments have been made by cheque and the purchases are genuine. However, the AO was not convinced with the above explanation of the assessee. The AO referred to the investigation report prepared by the Sales Tax Department, Government of Maharashtra and the statement of the concerned persons providing accommodation entries. As the assessee failed to furnish the requisite evidence in the form of payment of VAT by the alleged supplier, evidence of goods held as per the stock register of the concerned suppliers, the AO made an addition of the full amount of Rs.4,57,20,006/-.
Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) observed that if the purchases are bogus but direct sales are proved, the assumptions are that the purchases were made from unknown parties and the AO can apply a profit rate to determine the tax liability of the assessee. The Ld. CIT(A) held that in the instant case, the assessee had inflated its expenses by taking bogus bills of purchases from the hawala dealers. Thus considering the facts and circumstances of the case, the Ld. CIT(A) relied on the judgment of the Hon’ble Gujarat High Court in the case of Simit P. Sheth (2013) 356 ITR 451 (Guj) and directed the AO to restrict the disallowance to 12.5% of such purchases of Rs.4,57,20,006/-.
Before us, the Ld. DR submits that the Ld. CIT(A) should not have restricted the disallowance to 12.5% of such bogus purchases of Rs.4,57,20,006/- because the assessee was unable to substantiate before the AO its purchases from the suppliers who had already been established as hawala dealers by the Sales Tax Department, Government of Maharashtra. It is submitted by him that the addition of Rs.4,57,20,006/- made by the AO be confirmed. 6. On the other hand, the Ld. counsel of the assessee submits that the department has not found fault on the sales made by the assessee. Also it is stated by him that the payments to the concerned parties have been made by cheques only. Thus the Ld. counsel supports the order passed by the Ld. CIT(A).
We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. During the course of assessment proceedings, the AO had issued notice u/s 133(6) to the alleged parties in the address given by the assessee in order to verify the purchases. However, the said notices were returned as unserved by the postal authorities. The assessee failed to produce the said parties before the AO. On the other hand, we find that the assessee had submitted copies of ledger accounts of the disputed parties, sales invoices of some of the disputed parties. Also it is the contention of the assessee that payments have been made to the concerned parties by cheques only. In the case of Simit P. Sheth (supra), the Hon’ble Gujarat High Court has held that where purchases were not bogus but were made from parties other than those mentioned in the books of account, not entire purchase price but only profit element embedded in such purchases can be added to income of the assessee. That being the position, not the entire purchase price but only the profit element embedded in such purchases can be added to the income of the assessee. The Hon’ble High Court referred to a similar view taken in the case of CIT vs. Vijay M. Mistry Construction Ltd. [2013] 355 ITR 498 (Guj) and CIT vs. Bholanath Poly Fab (P) Ltd. [2013] 355 ITR 290 (Guj). Thus in the facts and circumstances of the case, the Ld. CIT(A) has rightly directed the AO to restrict the disallowance to 12.5% of such bogus purchases of Rs.4,57,20,006/-.