LOKESH H JAIN,MUMBAI vs. ITO 14(3)(2), MUMBAI

The aforesaid three appeals by assessee are directed against the separate order of ld. Commissioner of Income–tax (Appeals)-29, Mumbai dated 09.03.2016 for Assessment Year 2009-10, 2010-11 & 2011-12. In all appeals, the assessee has raised the identical grounds of appeal, therefore, all appeal were clubbed, heard and are decided by common order for the sake of brevity. With the consent of parties, the appeal for Assessment Year 2009-10 was treated as lead case. In Assessment Year 2009-10, the assessee has raised the following grounds of appeal:

We have heard the ld. Authorized Representative (AR) of the assessee and ld. Departmental Representative (DR) for the Revenue and perused the material and the documents placed before us. At the outset of hearing, the ld. AR of the assessee submits that he is not pressing Ground No. 1 relates to re-opening of assessment under section 147 of the Act. Considering the submission of ld. AR of the assessee, Ground No.1 of the appeal is dismissed as not pressed.

Ground No.2 relates to confirming the addition of Rs. 25,32,234/- on account of estimated profit on unexplained purchases. The ld. AR of the assessee submits that the addition is solely based on the information received from the Sale tax Department is not sustainable. The suspicion of highest degree cannot take place of evidence. The assessee made the genuine purchases from all the parties. All the purchases were made through account payee cheques, which are duly reflected in the statement of account of the assessee. The mere fact that the supplier’s name appeared in the list of hawala dealers of Sale tax Department and that the assessee is unable to produce them does not mean that purchases are bogus, when the payment are made through banking channels. The assessing officer has not made any independent inquiry. The sale of the assessee was not disputed. The books of account of assessee were not 3 ITA No. 3632 to 3634 Mum 16 - Lokesh H. Jain rejected. The books of account of the assessee dully Audited. The addition sustained by ld. Commissioner (Appeals) is highly exorbitant. The ld. AR for the assessee furnished the following details of Gross Profit (GP), consistently shown, vis-à-vis total turnover from AY 2007-08 to 2013-14.

The ld. AR further submits that the total capital of the assessee is only Rs.13,17,110/-. The assessee during the financial year made total purchases of Rs. 2,83,12,219/- and total sales of the assessee is of Rs.2,90,37,779/-. The assessee has already shown GP at the rate of 2.41%.

On the other hand, the ld. DR for the Revenue supported the orders of authorities below. The ld. DR for the Revenue argued that the Investigation Wing of the Income-tax Department made full-fledged enquiry. The parties from whom the assessee has shown the purchases are bogus Hawala dealers. The hawala dealers are indulged in issuing bogus bills without delivery of any material or goods. During the assessment proceedings the assessing officer issued notice under section 133(6), which were returned back with the remark “not claimed” or no information was received from the parties in respect of the transactions. The assessee obtained accommodation bills only in order to inflate the expenses and to bring down the profitability in order to avoid the tax. The ld. DR for the Revenue prayed for dismissal of the appeal.

We have considered the rival submission of the parties and have gone through the orders of authorities below. The assessee has shown the total purchases of Rs. 2,02,57,433/- from all three impugned/ alleged bogus parties. We have noted that during the assessment proceeding the assessing officer issued notice under section 133(6) as per the details furnished by assessee. The notices sent to the parties were returned back with the remark ‘not claimed’. The enquiry was also conducted through inspector. The assessing officer asked the assessee to produce the parties. 5 ITA No. 3632 to 3634 Mum 16 - Lokesh H. Jain The assessee could not produce the parties. The assessee made his submission dated 8th November 2013 and contended that the purchases of assessee are not bogus. The all purchases made by assessee are entered in the books of assessee in regular course of business. There is no dispute about the sale of the assessee. The contention of assessee was not accepted by the assessing officer. The assessing officer concluded that the assessee could not produce the lorry receipt to prove that these goods have been received by from the suppliers. The assessing officer also concluded that the assessee has recorded some sale in the books of account which might have been purchased from the grey market without bills and to regularize such purchases in the grey market, the assessee might have taken accommodation bills from the said parties for the purchase of a specific material. The assessing officer also concluded that the goods available on the grey market with bill and by cash at comparatively on lesser prices. On the basis of his observation the assessing officer made the addition on the basis of peak of credits in the ledger accounts of all three parties. The assessing officer worked out the peak credit in respect of all 3 parties at Rs. 86,22,252/-. Before the ld. Commissioner (Appeals) the assessee urged similar contention. The ld. Commissioner( Appeals) on the basis of decision of Hon’ble Gujarat High Court in case of CIT versus Simit P. Sheth (356 ITR 0451) held that once sales is accepted by assessing officer, the very basis of purchases cannot be questioned. The ld. Commissioner 6 to 3634 Mum 16 - Lokesh H. Jain (Appeals) further concluded that the entire purchases price could not be disallowed but only they profit element embedded in such purchases could be added to the income of the assessee. On the basis of his of the observation the learned Commissioner restricted the addition at the date of 12.5% of the alleged bogus purchases.

We have noticed that the AO not rejected the sales of the assessee, nor statement of accounts maintained by assessee was rejected. We are of the considered opinion that under Income Tax Act only real income can be taxed by the Revenue. We may further note that even in cases where the whole transaction is not verifiable due to various reasons, the only taxable is the taxable income component and not the entire transaction. The Hon’ble Bombay High Court in the case of “CIT vs. Hariram Bhambani” in of 2013 decided on 04.02.15 held that the Revenue is not entitled to bring the entire sales consideration to tax, but only the profit attributable on the total unrecorded sale consideration alone can be subject to income tax. We have further noticed that neither the AO nor the Ld. CIT(A) examined the gross profit ratio or net profit ratio of assessee for previous year and in subsequent years. After considering the facts and rival contentions of the parties, we are of the opinion that in order to fulfill the gap of revenue leakage the disallowance of reasonable percentage of impugned purchase would meet the end of justice. During the hearing of the case the ld. DR for the revenue has not disputed the applicable rate of 7 ITA No. 3632 to 3634 Mum 16 - Lokesh H. Jain VAT @ 4% on the purchases of assessee. Thus, considering the peculiarity of the case, we are of the opinion that disallowance made on account of bogus purchases in the present case, if restricted to 5% of the impugned/ disputed purchases would be sufficient to meet out the possibility of revenue leakage. Therefore, we direct the assessing officer to restrict the disallowance to 5 % (five percentages) of the impugned/bogus purchases. Hence, this ground of appeal