ITO 25(3)(2), MUMBAI vs. KAUSHIK KUMAR SUMANLAL VAKHARIA, MUMBAI

We shall first take up the appeal in A.Y. 2008-09, wherein the following grounds of appeal have been raised:

The facts in brief are that the assessee is engaged in the business of trading in ferrous and non-ferrous metal and alloy steel. During the assessment proceedings, the Assessing Officer called for the details of sales, purchases, debtors, creditors, expenses, etc., which were furnished by the assessee. The Assessing Officer during the course of assessment proceedings observed that the assessee has made purchases from M/s. Dharnendra Associates of Rs.1,38,29,815/- which was outstanding for payment to the said party at the year end. The Assessing Officer, in order to verify the genuineness of the purchases, issued notice u/s. 133(6), dated 18.10.2010. However, the said party denied the transaction with the assessee. The Assessing Officer confronted the assessee with the fact and asked as to why the entire amount should not be treated as unexplained purchases. The assessee replied the Assessing Officer, vide letter dated 01.12.2010, and furnished the copies of purchase bills, ledger account copies of said parties and copies of bank statements showing payment made to the parties during the accounting period 2008-09 and 2009-10. The assessee also furnished an affidavit dated 06.12.2010, which is reproduced by the Assessing Officer in para 4.5 of the assessment order. Finally, the Assessing Officer after observing that the assessee has made purchases through bearer cheques and thus belied the assertion of the assessee that payments were made by account payee cheques and, therefore, the Assessing Officer added the entire amount to the income of the assessee by framing assessment vide order dated 28.12.2010 passed u/s. 143(3) of the Act.

The learned CIT(A) partly allowed the appeal of the assessee after considering various contentions raised by the assessee before the appellate authority by observing as under:

The learned DR argued before us that the first appellate authority has completely overlooked the verification carried out by the Assessing Officer, which revealed l the purchase bills to be bogus and, therefore, no purchases by the assessee from the said parties has been carried out as is evident from the fact that the so called supplier has denied to have carried out any transaction with the assessee. He, therefore, contended that the order of the CIT(A) should be set aside and that of the Assessing Officer be restored.

The learned AR, on the other hand, submitted that the assessee has, in fact, made purchases from these parties and the same were ultimately sold by the assessee. The learned AR supported the order of the CIT(A) on the ground that even if the ratio laid down by the various Benches of the Tribunal, directing the addition to be sustained @12.5% of the bogus purchases, even then the addition would be Rs.17,25,000/- whereas in the present case, the CIT(A) has sustained the addition to the tune of Rs.19,03,381/- The learned AR submitted that learned CIT(A) has analyzed the gross profit for four years viz. 2004-05 to 2007-08 and applied the highest rate, which was in F.Y. 2005-06 i.e. 0.744% and, thus, partly allowed the appeal of the assessee thereby sustaining the addition of Rs.19,03,381/-. The learned AR prayed that since the CIT(A) has taken a very balanced view of the whole scenario and passed a well-reasoned order, the same may kindly be affirmed.

Having heard rival submissions, we find that in this case assessee has made purchases to the tune of Rs.1,38,29,815/ from has made purchases from M/s. Dharnendra Associates, which were found to be non-genuine by the Assessing Officer as the said party had denied to any transactions with the assessee. In defence, the assessee furnished before the Assessing Officer copies of purchase bills, ledger account copies of said parties and copies of bank statements showing payment made to the parties during the accounting period 2008-09 and 2009-10. However, the Assessing Officer was not satisfied with the explanations and added the entire amount to the income of the assessee. On appeal, the learned CIT(A) reduced the addition to Rs.19,03,381/- by applying the highest gross profit rate during the previous year i.e. @ 0.744% of the total turnover. We have considered the facts of the case as also the decisions of the co-ordinate Benches taking a view that in case of non-genuine purchases the addition should be sustained from 2% to 12.5%. We find that though the Assessing Officer has considered the purchases as non-genuine, has not disputed the sale of material. Under these facts, we are of the view that the order passed by the CIT(A) confirming the addition of Rs.19,03,381/- is quite reasonable and does not require any interference.

Coming to the appeal in wherein the grounds raised by the Revenue read as under:

The issue raised in ground no.1 is against the deletion of addition of Rs.3,31,690/- out of various expenses by the CIT(A), as made by the Assessing Officer on account of non-verification of expenses comprising of conveyance expenses, hall majuri expenses, office expenses and tour - travelling expenses. The facts in brief are that the AO observed from the profit and loss account of the assessee’s proprietary concern, the assessee has debited expenses to the tune of Rs.33,16,902.38/-. The AO called upon the assessee to furnish documentary evidence in the form of vouchers/bills, registers, agreement, etc., in support of the claim of expenses for verification. However, the assessee failed to furnish any details thereof before the AO. He therefore disallowed an amount of Rs.3,31,690/- being 10% of these expenses for want of proper verification and added it to the income of the assessee. The CIT(A) deleted the addition on the ground that the AO in the assessment proceedings has not found any defect in the books of account or bills and vouchers.

The learned DR while relying heavily on the assessment order, submitted that the books of account, bills/vouchers substantiating the claim of expenses were not produced and, therefore, the AO has rightly made the adhoc disallowance @10% of the expenses. The DR therefore, requested the assessment order to be restored and the impugned order be dismissed on the issue.

The learned AR, on the other hand, prayed before the Bench that the order of the CIT(A) should be affirmed.

We have heard rival submissions and have carefully perused the material available on record. We find that the learned CIT(A) has deleted the adhoc disallowance after calling for a remand report and found a categorical finding by the AO as to the verification of various expenses on the basis of books of account, bills/vouchers produced by the assessee. Under these circumstances, we do not find any reason to interfere with the order of the CIT(A) and are inclined to uphold the same.

The issue in ground no.2 relates to the deletion of the addition of Rs.50,00,344/- on account of low rate of gross profit. The Revenue has agitated that the said deletion has resulted in the reduction of gross profit to Rs.19,03,381 instead of Rs.25,63,721/-, which was voluntarily offered by the assessee.

The facts in brief are that the AO observed from the Trading & Profit and Loss account that the assessee has included interest income and commission income in the gross profit and thus the gross profit rate was shown at 2.25%. He further observed that if interest and commission income is excluded, then the gross profit of the assessee comes to Rs.25,63,721/- which is 1.36%, which is considerably low as compared to gross profit shown by other traders in similar trading in Mumbai. He, accordingly, issued show case notice dated 12.09.2011 to furnish complete details of purchases. The AO observed that the gross profit in the similar trade ranges from 4% to 6% and, accordingly, applied the gross profit rate of 4% to the total sales of the assessee, which worked out to Rs.75,64,065/- and since the assessee had shown gross profit of Rs.25,63,721/- added the balance of Rs.50,00,034/- to the total income of the assessee.

In the appellate proceedings, the learned CIT(A) allowed the appeal of the assessee after considering the arguments of the assessee, which has been incorporated in the appellate order in para no.7.6. The learned CIT(A) directed the AO to apply the gross profit @0.744% on the basis of his order in A.Y. 2008-09. But the said action of the CIT(A) resulted in the gross profit being reduced to Rs.19,03,381/- as against Rs.25,63,721/- shown by the assessee at 1.36%. We also find that the said anomaly has been rectified by the CIT(A) by passing an rectification order u/s. 154.

The learned DR contended before us that the order of the CIT(A) has reduced the gross profit of the assessee even below the amount shown by the assessee himself. The gross profit after appeal effect would come to Rs.19,03,381/- whereas the assessee suo moto has shown Rs.25,63,721/-, which comes to 1.35% of the turnover. Therefore the order of the CIT(A) must be reversed and that of the AO should be restored.

The learned AR, on the other hand, submitted that the CIT(A) realising the anomaly in his order passed rectification order u/s. 154 rectifying the mistake and therefore, there is no force in the arguments of the learned DR that the order of the CIT(A) has reduced the gross profit than that declared by the assessee.

We have heard the rival contentions and perused the records carefully. The counsel of the assessee has stated that the anomaly which has committed by the CIT(A) reducing the gross profit even below the gross profit as declared by the assessee has been corrected by passing a rectification order. Thus under the facts and circumstances of the facts are of the considered view that since the matter has been rectified the grievance of the revenue if redressed and require no interference at our end. The ground raised by the revenue is rendered infructuous by the rectification carried out by the ld CIT(A).

In the result, the appeal of the revenue are dismissed.