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Appellant by : Shri Suman Kumar (DR) Respondent by : Shri Ketan N. Gada (AR) Date of Hearing : 29.05.2018 Date of Pronouncement : 29 .05.2018 Order under section 254(1) of Income–tax Act PER PAWAN SINGH, JUDICIAL MEMBER;
This appeal by Revenue and Cross Objection by assessee are directed against the order of ld. Commissioner of Income-Tax (Appeals)-25, [ld.
CIT(Appeals)], Mumbai dated 29.12.2015 for Assessment Year 2009-10, which in turn arises from the assessment order passed under section 143(3) r.w. section 147 dated 25.03.2014. The assessee has raised the following grounds of appeal:
C.O. 267/M/2017 Manoj Shantilal Mehta
1. "On the facts and circumstances of the case the Ld. CIT(A) erred in deleting the peak credit disallowance of Rs.1,65,65, 711/ - on account of bogus purchases and accepting the GP of the assessee for estimating the profit margin on bogus purchases of Rs.3,85,50,436/ -, when the GP of the assessee was no longer reliable in view of the high amount of bogus purchases, and in view of the Hon'ble High Court judgment in the case of CIT Vs. Smit P Sheth relied upon by the Ld.CIT(A), where the Hon'ble High Court restricted the disallowance to 12.5% of the bogus purchases". 2. "On the facts and circumstances of the case the Ld.CIT(A) erred in deleting the addition of Rs.1,58,44,820/- made u/s. 69C of the Act on account of Hawala purchases, without appreciating the fact, that the assessee had failed to produce bills, vouchers and other documentary evidences in support of his claim. The ld. CIT(A) erred in estimating the profit from hawala purchases on the basis of G.P. of the assessee instead of peak credit disallowance made by the Assessing Officer, as even the basic onus of producing bills of purchases, ledger accounts, transport bills, delivery challans was not fulfilled by the assessee". 3. "On the facts and circumstances of the case the Ld. CIT(A) erred in reducing the addition by applying the disclosed GP. rate of 1.87% while the higher GP. rate ought to have been applied as the purchases were bogus. 4. “The appellant prays that the order of the CIT(A) on the above grounds be reversed and that of the Assessing Officer be restored".
In Cross Objection, the assessee has raised the following grounds of appeal:
1. The Ld. Assessing officer erred in objecting the order of Ld. CIT (A) contention of deleting the disallowance of Rs.1,65,65,711/- on account of bogus purchases and accepting the G.P. of the assessee for estimating the profit margin.
2. Without prejudice to the above the Ld. Assessing Officer's erred in stating that bills of purchases, ledger accounts, transport bills, delivery challan were not fulfilled by assessee. However, all the documents were submitted vide letter date 28.01.2014, 04.02.2014 and on 14.02.2014 during the assessment proceedings and also to Ld. CIT (A) at the time of appeal submissions. 3. The Hon'ble High Court judgement in the case in CIT vs. Smith P. Seth relied upon by the Ld. CIT (A) to infer that, not the entire purchase price but only profit element embedded in such purchases can be added to the income of the assessee and not the quantum of the estimated Gross Profit.
C.O. 267/M/2017 Manoj Shantilal Mehta
The Respondent pray that the order of the Ld. CIT (A) on the above grounds be restored and that of the assessing officer be reserved.
Brief facts of the case are that the assessee is a Proprietor of M/s Divankur Steels, engaged in the business of trading in Iron & Steel. The assessee filed his return of income for Assessment Year 2009-10 on 30.09.2009 declaring total income of Rs. 3,64,544/-. A survey under section 133A was conducted on 22.01.2013. During the survey, it was found that assessee made purchases from parties who have declared as a bogus party by Sales Tax Authority of State Government. The assessee, when confronted with the information gathered in survey stated that he would not be able to produce the parties as purchases were made through brokers and the cheques were handed over to the brokers. On the basis of information gathered in the survey, the assessment was re-opened under section 147.
Notice under section 148 was served on the assessee. In response to the notice, the assessee contended that return already filed on 30.09.2010 be treated as return in response to the notice under section 148. The Assessing Officer proceeded to make the reassessment proceeding. During the assessment, notice under section 133(6) was issued to the parties in order to verify the genuineness of purchases. The notice of the following parties were issued:
1 N.B. Enterprises 53,66,200 2 Adinath Trading 21,62,893 3 Sambhav Sales Corporation 35,50,513 4 Rumeet Enterprises 98,89,238 5 Zenith Enterprises 13,64,752 3 C.O. 267/M/2017 Manoj Shantilal Mehta
6 J.B. Interlink 73,76,658 7 Jindal Steel Corporation 78,57,714 8 Revika Trade Impex P. Ltd. 14,82,468 Total 3,83,50,436/-
4. No information or response was made by the parties in response to the notice under section 133(6). The assessee was asked to produce the parties in order to verify the identity of the parties and genuineness of the purchases. The assessee failed to produce the parties. The assessee contended that they have made the genuine purchases from the parties and which are duly accounted in the books of account. The purchases have been entered into stock-register and subsequently sold and correspondence sale appeared as a party of sale turnover. Gross Profit (GP) earned on these transactions has been offered to tax. The payments to the parties were made through Account Payee Cheque, in case purchases are disallowed, it will amount to double taxation as corresponding sale and profit has already been offered for tax. The assessee requested the Assessing Officer to issue notice under section 131. The Assessing Officer took his view that the assessee has not furnished evidence related with delivery challan, transport bill and that by making payment through Account Payee Cheque is not sufficient to prove the existence of the parties and the genuineness of the transaction. The Assessing Officer on the basis of peak of the cumulative outstanding of eight parties added the addition of Rs. 1,65,65,711/- under section 69C of the Act. On appeal before the ld. CIT(A) , the addition was restricted to 1.87% of the total 4 C.O. 267/M/2017 Manoj Shantilal Mehta purchases from these eight parties/impugned bogus parties. Therefore, only addition to the extent of Rs. 7,20,890/- was restricted and rest of the balance addition of Rs. 15,82,280/- was deleted. Therefore, aggrieved by the order of ld. CIT(A), the Revenue has filed the present appeal before us.
At the outset of hearing, the ld. AR of the assessee has not pressed the Cross Objection; therefore, considering the submission of ld. AR of the assessee, the Cross Objection of assessee is dismissed as not pressed. 6. We have heard the ld. Departmental Representative (DR) for the Revenue and ld. Authorized Representative (AR) of the assessee and perused the material available on record. The ld. DR for the Revenue submits that the ld. CIT(A) has wrongly restricted the addition to 1.87% of the total purchases. The assessee failed to substantiate the genuineness of the purchases. Despite giving sufficient opportunity to the assessee, the assessee failed to prove the parties and to substantiate the purchases by showing the proof of delivery challan of goods, transport bill etc. The assessee merely submitted that the material was purchased through brokers. The assessee has not given the details of broker. 7. On the other hand, the ld. AR of the assessee submits that the assessee made purchases from dealers by making payment through Account Payee Cheques. The assessee filed the document related with bank statement, showing the debit to the bank account of all the parties. The assessee also furnished the copy of purchase bill, bank statement, and Octroi receipt, 5 C.O. 267/M/2017 Manoj Shantilal Mehta reconciliation of stock statement to prove the purchases are genuine and not bogus. The Assessing Officer vide show-cause notice dated 13.04.2014 asked as to why the peak of the aforesaid purchases should not be treated as unexplained expenditure. The assessee explained vide his letter dated 21.03.2014. The Assessing Officer by ignoring the explanation added the addition of Rs. 1,65,65,711/- by applying peak credit. The ld. CIT(A) after considering the fact of the case and considering the Gross Profit margin as the assessee is Wholesaler in steel and iron, where margin is below 2%. The Assessing Officer has not disputed the sale of the assessee; the order passed by Assessing Officer is based on proper appreciation of the fact.
We have considered the rival submission of the parties and have gone through the order of authorities below. We have noted that the Assessing Officer made the re-opening on the basis of survey action carried out at the premises of the assessee on 22.01.2013 wherein it was found that assessee made purchases from parties who have been declared bogus by the Sale Tax Authorities. During the re-assessment proceedings the Assessing Officer issued notice under section 133(6) to verify the genuineness of the parties. None of the parties responded in response to the notice under section 133(6). Even, the assessee could not produce the parties for verification. The assessee contended that the purchases were made through broker. The name and address of the broker is nowhere disclosed by the 6 C.O. 267/M/2017 Manoj Shantilal Mehta assessee. The Assessing Officer by applying the peak of the cumulative purchases made the addition of Rs. 1,65,65,711/-.
We have noted that the addition made by Assessing Officer is about 43.19% of the alleged bogus purchases. Before the ld. CIT(A), the assessee contended that the purchases of the assessee are genuine. The assessee further contended that if the purchases are disallowed then it would amount to double taxation as profit has already been taxed. The assessee also reiterated the submission made before the Assessing Officer.
The assessee contended that the Gross Profit rate was 1.87%. The ld. CIT(A) on the basis of G.P. ratio restricted the addition to 1.87% of the alleged bogus purchases. We have noted that during the assessment proceeding, the assessee contended that G.P addition of 4% may be added on the alleged bogus purchases. In our view, the addition made by Assessing Officer on the basis of peak of cumulative outstanding of Rs. 1,65,65,711/- was on higher side. Similarly, the addition restricted by ld. CIT(A) is also on extremely on lower side.
We have noticed that neither the AO nor Ld. CIT(A) 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 7 C.O. 267/M/2017 Manoj Shantilal Mehta 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 the Ld. CIT(A) not examined the gross profit ratio or net profit ratio of assessee for previous year and in subsequent years. The ld. CIT(A) restricted the addition to 1.87% of the bogus purchases on the basis of gross profit ratio furnished by assessee. Considering the fact that assessee failed to produce broker, transport receipt, delivery challan. In our view, the addition sustained by ld. CIT(A) is on lower side. 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. The Hon’ble Bombay High Court in the case of “CIT vs. Hariram Bhambani” in ITA No.313 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. Thus, considering the peculiarity of the facts, that the assessee is dealing in steel and iron on which the VAT is applicable @ 4%, hence, we are of the opinion that disallowance made on account of bogus purchases be restricted to 4% of the impugned/ disputed purchases, 8 C.O. 267/M/2017 Manoj Shantilal Mehta instead of 1.8% which would be sufficient to fulfill the gap of revenue leakage. Hence, the grounds of appeal raised by Revenue are partly allowed.
In the result, the appeal of the Revenue is partly allowed and cross objection of the assessee is dismissed.