DCIT 5(1)(2), MUMBAI vs. CREATIVE PERIPHERALS & DISTRIBUTION P. LTD, MUMBAI

The present appeal filed by the revenue is directed against the order passed by the CIT(A)-20, Mumbai, dated 14.10.2016, which in itself arises from the order passed by the A.O under Sec. 143(3) r.w.s.

Briefly stated, the assessee company which is engaged in the business of dealing in computer peripherals and other electronic items had filed its return of income for A.Y 2009-10 on 30.09.2009, declaring total income of Rs.1,35,46,240/-. On the basis of information received from the Sales tax department through the Director General of Income tax (Investigation), Mumbai, that the assessee had made bogus purchase of Rs.1,01,67,848/- during the year under consideration from the following parties:

During the course of the assessment proceedings the assessee was called upon to substantiate the genuineness and veracity of the purchase transactions which were claimed to have been made from the aforementioned parties. However, the details placed on record by the assessee to prove the genuineness of the purchase transactions under consideration did not find favour with the AO. Still further, as the A.O despite best of his efforts could not obtain the confirmations from the aforementioned parties in exercise of his powers under P a g e | Deputy Commissioner of Income Tax Vs. M/s Creative Peripherals & Distribution Pvt. Ltd. Sec.133(6) of the Act, therefore, he called upon the assessee to produce them for necessary examination. Despite specific directions, the assessee not only failed to produce the aforementioned parties, but also did not place on record any documentary evidence which could prove to the hilt the genuineness of the purchases claimed to have been made from the aforementioned parties. The A.O observed that the assessee in order to prove the authenticity of the purchase transactions under consideration could only produce invoices, delivery challans, bank statements, purchase orders and stock register pertaining to the purchases claimed to have been made from two of the aforementioned parties viz. (i) Shreeji Nakodji Impex; and (ii) Siva Mani Traders Pvt. Ltd. However, no such details in respect of the third party viz. M/s Keligare were placed on record. The A.O after perusing the invoices/delivery challans and other documents as were furnished by the assessee with him was however not inspired as regards the genuineness of the same for the following reasons:

It was further observed by the A.O that as none of the aforementioned parties could be located, hence it could safely be concluded that neither the said parties were genuine nor any purchases were made by the assessee from them. On the basis of his aforesaid deliberations, the A.O being of the view that the assessee had failed to discharge the onus as was cast upon it to substantiate on the basis of clinching evidence the genuineness and veracity of the purchase transactions under consideration, thus disallowed the entire P a g e | Deputy Commissioner of Income Tax Vs. M/s Creative Peripherals & Distribution Pvt. Ltd. purchases of Rs.1,01,67,848/- claimed by the assessee to have been made from the aforementioned parties.

Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) after deliberating on the facts of the case was persuaded to subscribe to the view of the A.O that the assessee had not made any genuine purchase from the aforementioned parties but had only obtained accommodation entries from them. However, the CIT(A) relying on certain judicial pronouncements was of the view that the addition in the hands of the assessee was liable to be restricted only to the extent of the profit element involved in making of such bogus purchases by the assessee from the open/grey market. The CIT(A) in the backdrop of his aforesaid conviction restricted the addition to the extent of G.P Rate of 6% on the value of the bogus purchases of Rs.1,01,67,848/- and resultantly sustained the addition to the extent of Rs.6,10,071/-.

The revenue being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. Departmental Representative (for short ‘D.R’) at the very outset of the hearing of the appeal submitted that the CIT(A) had on the basis of a non-speaking order restricted the addition to the extent of 6%. It was submitted by the ld. D.R that as the assessee had failed to substantiate the genuineness and veracity of the purchases which were claimed to have been made from the aforementioned parties, thus the A.O had rightly disallowed the entire value of the impugned purchases of Rs.1,01,67,848/- while framing the assessment. Alternatively, it was submitted by the ld. D.R that even if the addition was liable to be restricted only to the extent of the profit element, the same as held by the Hon’ble High Court of Gujarat in the case of Simit P. Sheth (2013) 356 ITR 451 (Guj) should not have been less than 12.5% of the P a g e | Deputy Commissioner of Income Tax Vs. M/s Creative Peripherals & Distribution Pvt. Ltd. aggregate value of such bogus purchases. Per contra, the ld. Authorized Representative (for short ‘A.R’) relied on the order of the CIT(A).

We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record. We are of the considered view that though it remains as a matter of fact that the assessee could not substantiate its claim of having made the purchases of the goods under consideration from the aforementioned parties viz. (i) Shreeji Nakodji Impex; (ii) Sivamani Traders Pvt. Ltd; and (iii) Keligare, but the fact that the receipt of the goods under consideration as recorded by the assessee in its stock register that was produced during the course of the assessment proceedings had not been dislodged or disproved by the revenue, substantially proves that the assessee was in actual receipt of the same. Still further, the fact that the payments claimed by the assessee to have been made vide cheques to the aforementioned parties towards purchase consideration of the goods, in the absence of anything to the contrary having been brought on record by the revenue to prove that the said money had found its way back to the pocket of the assessee, also evidences the fact that the assessee had made the purchase of the goods under consideration, though not from the aforementioned parties, but from the open/grey market. We thus, are of the considered view that as the sales of the assessee had not been dislodged by the A.O, therefore, as observed by us hereinabove, it can safely be concluded that the assessee had made purchases of the goods under consideration. In the backdrop of our aforesaid observations it can safely be concluded that as the assessee had purchased the goods under consideration from the open/grey market, thus the addition in its hands was liable to be restricted only to the P a g e | Deputy Commissioner of Income Tax Vs. M/s Creative Peripherals & Distribution Pvt. Ltd. extent of the profit element involved in making of such purchases. We thus, in terms of our aforesaid observations are of the considered view that the CIT(A) had rightly restricted the addition in the hands of the assessee to the extent of the profit element involved in making of such bogus purchases by the assessee. However, we are unable to persuade ourselves to accept the quantification of the profit element as carried out by the CIT(A) in respect of the impugned purchase transactions. We find that the CIT(A) had restricted the addition to the extent of the gross profit rate of 6% as was shown by the assessee in its regular books of account for the year under consideration. We are of the considered view that the profit element involved in procuring of the goods at a lower/concessional rate by an assessee by saving on VAT etc. cannot be determined by adopting the regular gross profit rate of the assessee. We find that the Hon’ble High Court of Gujarat in the case of CIT Vs. Simit P. Sheth (2013) 256 ITR 451 (Guj) after deliberating at length on the profit element that would be involved in making of purchases by an assessee from the open/grey market, had adopted the same at 12.5% of the aggregate value of such bogus purchases. We are oblivious of the fact that in the absence of supporting documentary evidence the determination of the discounted price at which the goods would have been procured by an assessee from the open/grey market, as in comparison to the price for which the same would be available in the regular market and booked by the assessee in its books of account, would have to be subjected to a process of estimation. We are of the considered view that in all fairness the extent of inflation of the purchase price by the assessee by procuring bogus purchase bills from the aforementioned parties, as held by the Hon’ble High Court of Gujarat in the case of Simit P. Sheth (supra), can safely be taken at 12.5%. We thus, set aside the order of the CIT(A) and sustain the addition to the extent of 12.5% of the