DCIT CEN CIR 1(4), MUMBAI vs. ARYA SHIP BREAKING CORPORTION, MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद"य लेखा लेखा सद"य सद"य, राजे"" सद"य राजे"" राजे"" केकेकेके अनुसार राजे"" अनुसार अनुसार- PER RAJENDRA, AM- अनुसार Challenging the order dated 23/03/2016 of the CIT(A)-47,Mumbai,the Assessing Officer (AO) has filed present appeal.Assessee-company,engaged in the business of trading in steel items,filed its original return on 12/10/2010 u/s. 139.Subsequently,a revised return of income was filed on 18/06/2012 ,declaring total income at Rs.67,00,202/-.Assessment was completed, u/s.143(3) r.w.s. 153A of the Act,vide order,dated 27/03/2014,determining total income of the assessee at Rs.22.38 crores. 2.First ground of appeal is about restricting addition to the extent of average gross profit of 3 previous years as against addition of Rs.21.39 crores made by AO on account of peak credit of bogus purchases.During the assessment proceedings,the AO found that a search and seizure action was carried out in Arya Group of companies,that the group entities were book -ing bogus expenditure by obtaining non genuine purchase bills/accommodation entries from one Pramod Kumar Singh (PKS) and entities managed by him namely M/s. Siddivinayak Steel (SS); M/s.Asian Steel (AS), M/s. Chanchal Tube Corporation (CTC) and M/s. Suraj Tube Corporation (STC), that it had made bogus purchases bills from 14 different entities amounting to Rs.24.52 crores. He directed the assessee to substantiate the purchases by producing ledger confirmation bills etc. After considering the submission of the assessee he held that assessee had obtained bogus purchase bills, that PKS was the middle man for arranging bogus bills and providing non-genuine purchase bills to Arya Group. He referred to statement of PKS recorded during search proceedings and held that the assessee was unable M/s. Arya Ship Breaking Corporation to prove the genuineness of the purchases. He added peak purchases of Rs.21,39, 28, 613/- to the total income of the assessee.

2.1.During the appellate proceedings the First Appellate Authority after referring to various case laws held that AO had accepted the sales of the assessee,that the purchase sale co- relation was not controverted by the AO, that no discrepancy in the stock was pointed out. Considering various other factors she held that the primary reason behind availing the bogus bills was to save GP on the rate. Considering the fact that the average GP rate for the last 3 years was 1.77%.The FAA upheld the disallowance to the extent of 1.77% of peak purchases.

2.2.Druing the course of hearing before us, it was brought to our notice that in the case of M/s. M.P. Recycling Co.Pvt. Ltd.,one of the sister concerns of the assessee,identical issue was deliberated upon by the Tribunal (ITA/6385/Mum/2016 AY 2009-10, dated 7/2/2018). We are reproducing relevant portion of above order which reads as under:- “2.First ground of appeal is about restricting the addition on account of bogus purchases from Rs. 1.70 crores to Rs. 12.06 lakhs. During the search proceedings, it was found that the assessee had booked bogus expenditure by obtaining bogus purchase bills/accommodation entries from various entities, including Pramod Kumar Singh(PKS),Sidhi Vinayak Steel, Asian Steel, Chancal Tube Corporation and Suraj Tube Corporation.He directed the assessee to substantiate the purchases by producing Ledger confirmations,bills, Lorry receipts, delivery challans etc. After considering the explanation filed by the assessee, the AO held that sufficient evidences existed to show that the assessee had made bogus purchases, that the statements of PKS were recorded on 28/02/2011 wherein he had admitted that bogus bills were issued to various parties by him and his associated concerns, that assessee was one of the beneficiaries of bogus bills, that the sales tax Department had identified PKS as provider of bogus invoices, that enquiries were carried out by deputing the inspector in that regard, that the inspector had reported that the parties from whom purchases were shown to be made by the assessee were not available at the given addresses, that notices issued under section 133 (6) calling for information from those parties had been returned unserved in most cases,that the proprietor of one of the suppliers had admitted that the purchases shown by the group companies were paper transactions, that bogus purchases were introduced in the books of accounts to reduce profit,that the assessee was unable to prove the genuineness of the purchases.Finally, he added back be purchase of Rs. 1.70 crore to the total income of the assessee,while completing the assessment. 2.1.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA) and made elaborate submissions and relied upon several case laws. After considering assessment order and the submissions of the assessee, she held that the sales tax Department had put of lists of parties who were found to be engaged in issuing bogus bills without actual sale of goods, that the tribunal and the honorable High Court said dealt with the issue of bogus purchases and the consequential effect thereof. The FAA recorded the various theories propounded by the judicial forums and referred to the cases of Nikunj Eximp Enterprises Private Limited(IT Appeal No.5604 of 2010 dtd.17.12.2012),Babulal C Borana,M K Brothers(163 ITR 249),Bholanath Poly Fab (355 ITR 290),Simit P Sheth(356 ITR 451) and Rajeev G Kalathil(51taxmann.com 514).She further held that the AO had accepted the sales made by the assessee,that purchase sale correlation had not been controverted by the AO,that no discrepancy in the stock was pointed out, that the payments made for the purchases were routed through banking channels, that the extracts of the statements from the parties who responded to notices issued under section 133 (6) did not provide any information to support the allegation of bogus purchases,that the primary impetus behind availing bogus bills was to save on the GP rate, that the average GP rate of the assessee for the past three years was 7.09%. Considering the facts on record is and the judicial pronouncements disallowance made by the AO was upheld to the extent of 7.09% of the peak purchases. - M/s. Arya Ship Breaking Corporation 2.2.Before us,the Departmental Representative(DR)supported the order of the AO and stated that notices issued u/s.133(6)remained unserved,that the assessee had not produced the parties before the AO.The Authorised Representative(AR)relied upon the order of the FAA. 2.3.We have heard the rival submissions and perused the material before us.We find that while deciding the appeal,the FAA had referred to the judgments and orders of various High Courts and the Tribunal.After logically analyzing the principles emerging from the judgments/orders,she applied them to the facts of the case.So,in our opinion,there is no defect in her approach. One of the basic and fundamental principal of accountancy and taxation jurisprudence is that without purchases there cannot be any sale.If sales are accepted by the AO or if the books of accounts are not rejected by him on account of non genuine sales,then existence of purchases cannot be denied.In such a situation,it becomes a case of ‘purchase from bogus parties’ and not a case of ‘bogus purchases’,as explained by the Hon’ble Gujarat High Court. We are now reproducing the facts of the case of Bholanath Poly Fab(supra).In that matter the assessee,for the AY.2005-06,was found to be engaged in the business of trading in finished fabrics.The AO held that purchases worth Rs. 40,69,546/- were unexplained and disallowed the expenditure claimed by the assessee and computed the total income of Rs. 41,10,187/-. In so far as the question of bogus purchases was concerned, the Tribunal concurred with the Revenue’s views that such purchases were made from bogus parties. The Tribunal noted that the AO had issued notices to all the parties from whom such purchases were allegedly made. Such notices were returned unserved by the postal authorities with the remark that the addresses were incomplete. The inspector deputed by the Income-tax Department also could not find any of the parties available at the given addresses. The assessee was unable to produce any confirmation from any of the parties. Though the assessee had claimed to have made payment by account payee cheques, upon verification, it was found that the cheques were encashed by some other parties and not by the supposed sellers. However, the Tribunal was of the opinion that though the purchases might have been made from bogus parties, the purchases themselves were not bogus. The Tribunal adverted to the facts and data on record and came to the conclusion that the entire quantity of opening stock, purchases and the quantity manufactured during the year 2005-06 were sold by the assessee. Therefore, the purchases of the entire 1,02,514 metres of cloth were sold during the year 2005- 06. The Tribunal, therefore, accepted the assessee’s contention that the finished goods were purchased by the assessee, though not from the parties shown in the accounts, but from other sources. The Tribunal was of the opinion that not the entire amount, but the profit margin embedded in such amount would be subjected to tax. On appeal the Hon’ble Court held as under: ….. whether the purchases themselves were bogus or whether the parties from whom such purchases were allegedly made were bogus was essentially a question of fact. The Tribunal having examined the evidence on record came to the conclusion that the assessee did purchase the cloth and sell the finished fabrics. Therefore, as a natural corollary, not the entire amount covered under such purchases, but the profit element embedded therein would be subject to tax. We would also like to refer to the judgment of Simit P Seth(supra).In that case the assessee was engaged in the business of trading in steel on wholesale basis.During the course of the reassess -ment proceedings for the year 2006-07,the AO noticed that some of the suppliers of steel to the assessee had made their statements on oath to the effect that they had not supplied the steel to it,but had only provided sale bills. In turn, they were receiving a small commission. The AO concluded that the total purchase of Rs.41,04,903/-cumulatively made from the three parties were bogus.He thus treated such purchases as bogus purchases and added the entire amount of Rs. 41,04,903/-to the gross profit of the assessee. He also rejected the books of account and estimated the assessee’s business profits at Rs. 5 lakhs.The FAA held that the assessee had made purchases from other parties in the open market. Therefore, he retained 30% of the purchases cost as the probable profit of the assessee and educed the additions from Rs.41,04,903/- to Rs. 12,31,471/- and deleted the balance of Rs. 28,73,432/-. While doing so, he deleted the addition of Rs. 5 lakhs as made by the AO,on the ground that the addition on account of bogus purchases had already been made. The Tribunal was of the opinion that 12.5% of the disputed purchases should be retained in the hands of the assessee as business profits.On appeal, the Hon’ble High Court held as under:

…….the Commissioner (Appeals) believed that the purchases were not bogus but were made from the parties other than those mentioned in the books of account. That being the position, not the entire purchase price but only the profit element embedded in such purchases could be added to the income of the assessee. In essence, the Tribunal only estimated the possible profit out of purchases made through non-genuine parties. The M/s. Arya Ship Breaking Corporation estimation of rate of profit return must necessarily vary with the nature of business and no uniform yardstick could be adopted. In the case before us,the assessee is not a wholesale trader of steel,but is a manufacturer of steel items.It had purchased and used steel from the parties,who have not issued bills.In other words,PKS and others from whom the assessee has claimed to have purchased steel,had not supplied goods to it.But consumption of steel has not been questioned-rather sales have been accepted as it is.Unlike the matter of Bholanath Poly Fab(supar)it is not a case where the cheque issued by the assessee have been encashed by unknown persons.At least the AO has not alleged that.Considering the above,it can safely be said that it is a case of purchases made from non -genuine parties and not a case of bogus purchases.The FAA had adopted a formula to determine possible profit out of purchases made from unknown suppliers.In our opinion,there is no legal or factual infirmity in her order.No hard and fast rules can be applied in such cases.The rate of profit would vary from business to business and case to case.So,we are not interested in interfering with her order.Confirming the same,we decide first ground of appeal against the AO.

Considering the above,we hold that there is no need to interfere with the order of the FAA as it does not suffer from any legal or factual infirmity.We dismiss Ground of appeal No.1 raised by the AO.

3.Second Ground of appeal is with regard to deleting the addition of Rs.32.15 lakhs being commission @ 1% on total bogus purchases. It was brought to our notice that identical issue was decided by the Tribunal in the case of M/s. M.P. Recycling Co. Pvt. Ltd .(supra), one of the sister concerns of the assessee, identical issue was deliberated upon by the Tribunal (ITA/6385/Mum/2016 AY 2009-10, dated 7/2/2018) we are reproducing relevant portion of above order which reads as under:- “3.Next ground of appeal is about addition of Rs. 1.70 lakhs on account of commission expenses. The AO observed that for availing bogus bills the assessee would have incurred commission expenses at the rate of 1%, that payment and receipt of commission was confirmed by the statements of various parties recorded during such. Considering the rate of commission in the trade, the AO estimated commission at the rate of 1% and added back and amount of Rs. 1, 70, 223/-. 3.1.Before the FAA,the assessee argued that addition was based purely on estimate without any evidence of incurring of such expenditure by the assessee, that no incriminating material suggesting payment of commission was found/seized during the search proceedings. The FAA, after considering the available material held that estimated commission expenses could not be upheld. After considering the above we are of the opinion that the FAA had rightly held that no ad hoc disallowance can be made without relying upon any cogent material. Confirming her order,we dismiss second ground,raised by the AO.” Considering the above, we dismiss Ground of appeal No.2 raised by the AO. As a result, appeal filed by the AO stands dismissed. फलतः िनधा"रती अिधकारी "ारा दािखल क" गई अपील नामंजूर क" जाती है. Order pronounced in the open court on 16th May, 2018. आदेश क" घोषणा खुले "यायालय म" "दनांक 16 मई, 2018 को क" गई । (अमरजीत "सह / Amarjit Singh ) (राजे"" / Rajendra) "याियक सद"य / JUDICIAL MEMBER लेखा लेखा लेखा सद"य लेखा सद"य सद"य / ACCOUNTANT MEMBER सद"य मुंबई Mumbai; "दनांक/Dated : 16 .05.2018. Jv.Sr.PS.