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Income Tax Appellate Tribunal, MUMBAI BENCH “C”, MUMBAI
Before: Shri Mahavir Singh & Shri G Manjunatha
Date of hearing 29-05-2018 Date of pronouncement 18-07-2018 O R D E R
Per G Manjunatha, AM :
This appeal filed by the assessee is directed against order of the CIT(A)-12, Mumbai dated 04-03-2016 and it pertains to AY 2009-10.
The assessee has raised the following grounds of appeal:-
1. On the fact and circumstances of the case as well as in Law, the Learned CIT(A) has erred in confirming the action of Learned Assessing Officer in reopening the assessment completed u/s. 143(3) of the Income Tax Act, 1961, without considering the facts and circumstances of the case.
2. On the fact and circumstances of the case as well as in Law, the Learned CIT(A) has erred in confirming the action of Learned Assessing Officer in rejecting the books of accounts u/s.145{3) of the Income Tax Act, 1961, without considering the facts and circumstances of the case. 3. On the fact and circumstances of the case as well as in Law, the Learned CIT(A) has erred in confirming the action of Learned Assessing Officer in making
2 ITA 3842/Mum/2016 an addition of Rs. 1,66,68,5827- u/s.69C of the Income Tax Act, 1961, on account of alleged bogus purchases (on the basis of peak theory), without considering the facts and circumstances of the case. v 4. On the fact and circumstances of the case as well as in Law, the Learned CIT(A) has erred in confirming the action of Learned Assessing Officer in making an addition on accOL5ntlof^suppression of Gross Profit of Rs. 3, 33, 3727- (being 2% of alleged bogus purchase' of Rs. 1,66,68,5827-), without considering the facts and circumstances of the case.”
The brief facts of the case are that the assessee company which is engaged in the business of manufacturing electro forged gratings, cable trays, ducts and earthing materials, filed its return of income for AY 2009-10 on 30-09-2009 declaring total income at Rs.1,39,00,742. The assessment has been completed u/s 143(3) on 14-12-2011 assessing total income at Rs.1,43,55,790. Subsequently, the case has been reopened u/s 147 of the Income-tax Act, 1961 for the detailed reasons recorded as per which income chargeable to tax had been escaped assessment on account of inflation of purchases by taking accommodation entries from suspicious / hawala dealers for Rs.1,66,68,582. Therefore, notice u/s 148 dated 04-03-2013 was issued. In response to the notice, assessee vide letter dated 3-04-2013 stated that original return filed u/s 139(1) on 30-09-2009 may be treated as return filed in response to notice u/s 148 of the Act. Thereafter, the case has been selected for scrutiny and notice u/s 143(2) of the Act was issued. In response to notices, the authorized representative of the assessee appeared from time to time and filed various details, as called
3 ITA 3842/Mum/2016 for. During the course of assessment proceedings, the AO noticed that the assessee is one of the beneficiaries of accommodation entries provided by suspicious / hawala dealers as per the list prepared by Sales-tax department. During the course of hearing, the assessee was provided the list of transactions with those parties who have confirmed to sales-tax department that they had provided accommodation entries.
The list contained the name of accommodation entry providers, quantum of transactions and financial year in which such transaction has been taken place. Therefore, called upon the assessee to explain as to why the purchase from those parties should not be treated as unexplained expenditure. In response to notice, the assessee, vide letter dated 15- 09-2013 submitted details of purchases from those parties along with name purchase bills and payment proof for such purchases to prove that purchases from those parties are genuine which are used in the manufacturing process. The AO, after considering relevant submissions of the assessee observed that though assessee has furnished proof of purchases by producing purchase bill and payment proof, on verification of details filed by the assessee, the purchase bills showed deficiency such as absence of vehicle details, proof of payment of octroi, ledger account of transporters, transported goods, etc. Therefore, determined the purchases made from the above parties for the 3 assessment years
4 ITA 3842/Mum/2016 starting from AY 2008-09 to 2010-11 and worked out peak balance of Rs.1,66,68,582. Since the assessee failed to prove purchases from the said parties with credible evidence and also the fact that the names of those parties are appearing in the list of hawala operators, made addition towards peak balance of Rs.1,66,68,582 u/s 69C of the Income- tax Act, 1961. Further, the AO also made addition on account of gross profit on bogus purchases @2% on peak credit and made addition of Rs.5,33,372.
Aggrieved by the assessment order, assessee preferred appeal before CIT(A). Before the CIT(A), the assessee has filed elaborate written submissions which has been reproduced at para 7.2 on pages 3 to 6 of Ld.CIT(A)’s order. The sum and substance of arguments of the assessee before the CIT(A) are that the purchases from the above parties cannot be considered as bogus when assessee has furnished purchase bills, payment proof and other evidences. The assessee further submitted that merely on the basis of statement of third parties, the purchases from the above parties cannot be considered as bogus, that too, without confronting the statement given by the parties to the assessee for its cross examination.
The Ld.CIT(A), after considering relevant submissions of the assessee held that the assessee failed to file any evidence to prove
5 ITA 3842/Mum/2016 purchases from the so-called parties with credible evidences in the backdrop of clear finding of the sales-tax department that they were involved in providing accommodation entries. Though, assessee filed purchase bills’ copies, such purchase bills are incomplete as vital information in respect of vehicle No. was missing in the purchase bills.
The CIT(A) further observed that the assessee has not maintained stock register which is confirmed by the Auditor in his tax audit report stating that they adopted stock in its financial statements as certified by the management without any stock register. Therefore, he opined that the assessee failed to justify purchases from the above parties and accordingly, sustained addition made by the AO towards bogus purchases. The relevant portion of the order of CIT(A) is extracted below:-
8 I have carefully perused the assessment order and considered the above submission made by the appellant . The appellant has argued that purchase bills never contain the details of transporter. I do not find merit in this argument. Invariably the purchase bill contains the details of transportation. If no such details are available in the purchase bills, then appellant should furnish all the purchase bills which contain such details and he would 'also invariable find that such details are mentioned in the bills. The appellant's argument is that it had discharged its primary onus by giving proof / evidence and hence no additions were called for merely on the basis of statement given by the third party before Sales Tax Department, without conducting any other investigation. The appellant's argument that in its case addition was made on the basis of statement only is found to be not tenable for the following reasons:- 1 The appellant has not maintained stock register. The auditor has placed the remark that due to complexity in production
6 ITA 3842/Mum/2016 stage quantitative details are not maintained by the firm as certified by the Director. This remark clearly indicates that only on the basis of certificate of director the appellant takes consumption figure and closing stock valuation. The appellant cannot prove from its record that the material is actually consumed. The appellant has submitted a two page statement vide paper book page no 2 & 3 and shown that the material is consumed. These two pages cannot proved that / - the materials were actually utilised. 2 The appellant submitted the bills but it is seen that the bills do not contain transport details. The appellant during appellate proceedings, submitted a work sheet prepared by Jayant Roadline and only on such work sheet the appellant tries to explain that the material were received. On that work sheet only signature only appears but other details such as who prepared it and corresponding bills of transportation were not attached. The work sheet does not mention from where goods were taken and to where goods were despatched. Therefore, it is held that the work sheet is not a reliable document. In the absence of direct evidence, I cannot hold that the appellant had discharged its onus to establish that the purchases are genuine. Accordingly, I do not find merit in the argument that the addition were made only on the basis of statement recorded by sales tax authorities. The appellant also submitted various case laws and argued that in those cases the Hon'ble ITAT has held that AO was not justified in making addition on the basis of statement given by the third party before Sale Tax Department. Such decision are respectfully followed, but in the instant case, the appellant is not able to discharge its onus to substantiate that the purchase are genuine from its own records. It is the appellant who has claimed that the purchases are genuine and accordingly onus is on the appellant to prove that the same has oeen actually consumed in its business.'1 The appellant has not established from its records that the material is actually transported to the destination of appellant's factory and that the impugned purchases were actually consumed. Accordingly, there is no merit in the appellant's argument that the additions were made merely on the basis of statement recorded. I do not find merit in such argument, .Hence it is respectfully held that the decisions referred to by the appellant are also not applicable in this case. In view of the above facts and circumstances of the case I do not find any infirmity in the rejection of books of accounts of the appellant by the AO.
7 ITA 3842/Mum/2016
On carefully perusal of the return of income and its schedule, it is seen that, the turnover of the appellant is Rs.88.27 cr. and gross profit is Rs.l4,73,06,931/- in percentage it works out at 16.68%%. If the bogus purchases of Rs.96,44,384/- for the yea under consideration are added to the GP, the new gross profit will be Rs.15,69,51,315/- and in percentage terms it will be 17.78%. It is seen that the GP of 17.78% is not unrealistic/ or unreasonable. Even the appellant in AY 2010-11 and A.Y. 2011-12 has shown GP of 18.34% and 18.43 % respectively. As far as peak theory is concerned I also do not find mistake in the AO’s working as no additions were made in subsequent years due to peak theory i.e. A.Y. 2010-11 and 2011-12. Accordingly, I do not find any infirmity in the assessment order. Hence, Ground of Appeal No.1 is dismissed.”
The Ld.AR for the assessee submitted tht the Ld.CIT(A) was erred in sustaining addition made by the AO towards purchases of Rs.1,66,68,582 u/s 69C, without appreciating the fact that the purchases are supported by valid evidences and the assessee has filed necessary evidences before the AO. The Ld.AR further submitted that the Ld.AO made addition towards bogus purchases by working out peak balance for last 3 financial years and also made addition of 2% GP on such purchases only on the basis of statement of third party without confronting such statements to the assessee for its rebuttal. The assessee has filed purchase bills and payment proof for such purchases; however, the AO has ignored all evidences filed by the assessee only on the basis of statement of those parties and also on the basis of non response by the parties to the notices issued by the AO u/s 133(6). The additions made by the AO is not based on any deficiency in 8 ITA 3842/Mum/2016 the books of account of the assessee that the books of account are not giving true and correct result of the assessee but purely on assumption and presumptions, therefore, the addition made by the AO should be deleted.
On the other hand, the Ld.DR strongly supported the order of the Ld.CIT(A). The Ld.DR further submitted that it is an admitted fact that the parties were appearing in the list of hawala operators prepared by sales-tax department and also those parties did not respond to the notices issued u/s 133(6). The assessee failed to file necessary evidences to prove purchases from the above parties, except filing purchase bills and payment proof. Therefore, the lower authorities were right in making addition towards purchases from the above parties and, therefore, their orders should be upheld.
We have heard both the parties and perused the materials available on record. The AO made addition towards bogus purchases on the basis of information received from sales-tax department that cetin parties were involved in providing accommodation entries without actual delivery of goods. The AO further observed that the assessee has shown to have purchases from the above parties. However, failed to file necessary evidences to prove purchases from the said parties in the backdrop of clear finding by sales-tax authorities and also that those
9 ITA 3842/Mum/2016 parties have not responded to the notices issued u/s 133(6). The AO has made addition towards bogus purchases by working out peak purchases of last 3 assessment years and determined addition of Rs.1,66,68,582. The AO also made addition of Rs.3,33,372 towards gross profit on alleged bogus purchases @2% on total purchases. It is the contention of the assessee that merely on the basis of third party statement, purchases from the above parties cannot be considered as bogus, more particularly, when assessee has filed purchase bills and payment proof for such purchases. The assessee further contended that the AO has made additions without recording any observations with regrd to the incorrectness in books of account. The AO neither gave any plausible reason for rejecting books of account and estimation of addition towards alleged bogus purchases from the above parties except stating that the names of those parties were appearing in the list of hawala dealers prepared by sales-tax department.
Having heard both the sides, we find that the AO has made addition solely on the basis of information received from sales-tax department ignoring evidence filed by the assessee in the form of purchase bills and payment proof for such purchases. It is an admitted fact that the assessee has filed necessary purchase bills to prove purchases from the above parties. Though, the purchase bills filed by the assessee did not 10 ITA 3842/Mum/2016 contain necessary information about the vehicle No. for transportation of goods, but that itself, cannot be a ground for the AO to take adverse inference on the purchases of the assessee when the assessee has filed certain basic evidences to prove the purchases. At the same time it is also an admitted fact that the assessee failed to file further evidence in the backdrop of clear findings from the sales-tax department that these parties are involved in providing accommodation entries. Further, the parties did not respond to the notices issued by the AO u/s 133(6) of the Act. Under these circumstances, it is very difficult to accept the arguments of the assessee that purchases from those parties are genuine in nature and also the version of the AO that purchases from those parties are fully bogus in nature. In such scenario what is needed to be considered for addition is whether total amount of such bogus purchases or only the profit element embedded in such purchases.
Various courts and Tribunals have taken a consistent view that in the case of bogus purchases, what is needed to be taxed is only profit element embedded in such purchases, but not the whole bogus purchases. The Hon’ble Gujarat High Court in the vase of Vijay Protiens Ltd vs CIT 2015 TMI 828 (Gujarat HC) has held that in the case of bogus purchases, profit element embedded in such purchases can only be added. In yet another case, in Simit P Sheth 56 ITR 451 (Guj), the 11 ITA 3842/Mum/2016 Hon’ble Gujarat High Court held that no uniform yardstick can be adopted for estimation of net profit on bogus purchases. The co- ordinate benches of ITAT, in a number of cases have taken a consistent view and directed the assessing officers to estimate 12.5% to 15% profit on alleged bogus purchases, depending upon facts of each case. In this case, the AO has adopted a different method for determination of addition u/s 69C towards bogus purchases. The AO has added peak amount of bogus purchases for the last 3 financial years and made addition of Rs.1,66,68,582. The AO further added 2% on alleged bogus purchases towards gross profit and determined addition of Rs.3,33,372.
Therefore, considering the facts and circumstances of the case and also consistent with the view taken by the co-ordinate bench in number of cases, we deem it appropriate to direct the AO to estimate 12.5% net profit on alleged bogus purchases including 2% net profit already estimated by the AO. Accordingly, we direct the AO to delete addition made towards peak amount of bogus purchases and direct him to estimate 12.5% net profit on total alleged bogus purchases. In the result, appeal filed by the assessee is partly allowed. 8.
12 ITA 3842/Mum/2016
Order pronounced in the open court on 18th July, 2018.