MUBARAK HUSSAIN SHAIKH,MUMBAI vs. INCOME TAX OFFICER, WARD 26(3)(4), MUMBAI

At the outset, the learned Counsel for the assessee stated that he has instructions from the assessee not to press this issue of reopening. Accordingly, the issue of reopening is dismissed as withdrawn.

The issue on merits is as regards to the order of CIT(A) confirming the action of the AO in adding 25% of bogus purchases as profit of the business.

Briefly stated facts are that the assessee is engaged in the business of processing of Iron washers of various types. The AO received information from DGIT (Investigation), who in turn received information from Sales Tax Department, Mumbai that the assessee has made purchases from hawala parties, as listed in hawala dealers by the Maharashtra Sales Tax Department who are providing bogus bills of purchase amounting to Rs. 59,89,565/- as admitted by these hawala dealers in their deposition before the authorities. The same reads as under: - ““Sl Name of party Amount No.

Ajinkya Multi Trade Pvt. Ltd 120001 2. Siddhivinayak Steel 178853 3. Tara Enterprises 1440965 4. Universal Enterprises 967565 5. Surat Tube Corporation 130130 6. Shriti Enterprises 1391258 7. Revati Steel Traders 183092 8. Deepak Steel & Tube Traders 335501 9. Laxmi Trading Co. 342200 Total 5989565 5. On verification of purchases, the AO require the assessee to produce parties and in the absence of the same, the AO issued notices under section 133(6) of the Act to the above parties. But the said notices were returned with the remark that ‘left’ or ‘not known’. As the assessee could not produce the evidence regarding transportation of goods or movement of goods, the AO was of the view that these are bogus purchase for inflation of purchase by obtaining accommodation entries. Accordingly, he disallowed 25% of bogus purchases as profit and added to the return income of the assessee. Aggrieved, assessee preferred the appeal before CIT(A), who confirmed the action of the AO by observing in Para 3.3.15 as under: -

I have heard the rival contentions and gone through the facts and circumstances of the case. I find that the assessee is engaged in the business of procession of Iron washers of various types. It is a fact that the assessee is unable to establish the transportation of goods purchased by it. Even the parties from whom the assessee is obtained accommodation entries are not examined as they were not available at the given address. It means that the assessee has only obtained accommodation bills without actual purchasing the goods. The assessee had purchased the material from grey market avoiding all the payment of Vat and also at lower rate. It means that the assessee has earned a higher profit on these bogus purchases. Accordingly, I am of the view that the assessee might have made profit at the rate of 10%. In similar circumstances, Hon’ble Gujarat High Court in the case of CIT vs. Smith P. Seth (2013) 356 ITR 451 (Guj) restricted the disallowance at 12.5% of the bogus purchases by estimating the profit rate at 12.5%. I am of the view that assessee is engaged in the business of procession of Iron washers, which give little profit. Accordingly, I estimate the profit rate at the rate of 10% and direct the AO to compute the income after applying the profit rate at the rate of 10%. Appeal of the assessee is partly allowed.

In the result, the appeal Assessee is partly allowed.