ALOK GOENKA,MUMBAI vs. INCOME TAX OFFICER 17(1)(1) FORMERLY INCOME TAX OFFICER WARD-13(1)(2), MUMBAI

This appeal has been preferred by the assessee against the order dated 05.10.2017 passed by the Ld. Commissioner of Income Tax (Appeals)-28, Mumbai, for the assessment year 2010-11, whereby the Ld. CIT (A) has dismissed the appeal filed by the assessee against assessment order passed u/s 143 (3) of the Income Tax Act, 1961 (for short ‘the Act’).

Brief facts of the case are that the assessee engaged in the business of trading in chemical items, filed its return of income for the assessment year under consideration declaring the total income of Rs. 19,42,990/-. Since, the case was selected for scrutiny, notice u/s 143 (2) and 142 (1) were issued. In response to the said notices, the authorized representative of the assessee appeared before the AO and submitted the details called for. During the assessment proceedings, the AO received information from the Sales Tax 2 Assessment Year: 2010-11 Department, Maharashtra to the effect that assessee had obtained bogus purchase bills from three bogus entities i.e. Shreeji Enterprises, Pratik Trading Company and Shree Ganesh Trading Company amounting to Rs. 17,50,580/-. Accordingly, summon under section 131 of the Act was issued and statement was recorded. On perusal of the documents furnished by the assessee and on basis of statement of the assessee it was noticed that the assessee had obtained bogus bills from the aforesaid bogus entities without actually purchasing the goods from them. Accordingly, the AO asked the assessee to show cause as to why the amount of bogus purchases should not be added to the total income. The assessee only submitted the ledger copy pertaining to purchase of Zinc Chloride from M/s Shree Ganesh Trading and M/s Pratik Trading Company and party-wise summary. The assessee also contended that payments were made through banking channels and submitted that the all purchases were genuine. However, the AO rejected the contention of the assessee and added the entire amount of bogus purchases to the income of the assessee holding the transaction bogus.

Further, the assessee had debited an amount of Rs. 17,56,191/- under the head miscellaneous expenditure. The assessee was accordingly asked to substantiate the said expenditure. Since, the assessee failed to produce documentary evidence to prove the genuineness of expenses claim, the AO made ad hoc disallowances of 10% of the miscellaneous expenditure claimed by the assessee. After making the aforesaid addition, the AO determining the total income of the assessee at Rs. 38,68,630/- as against the return income of Rs. 19,42,990/-.

In the first appeal, the Ld. CIT (A) confirmed the additions made by the AO and dismiss the appeal by passing ex-parte order as the appellant assessee did not appear before the Ld. CIT (A) despite service of notices. Against the said order, the assessee is in appeal before the Tribunal.

The assessee has challenged the impugned order by raising the following effective grounds:- 1) In the facts and circumstances of the case and in law, the Commissioner of Income Tax (A) erred in confirming the impugned additions on an ex-parte basis without considering the same on merits. Without prejudice to the above and alternatively: a) “In the facts and circumstances of the case and in law, the Assessing Officer erred in adding Rs. 17,50,580/- as alleged Bogus purchases being 100% of the total purchases amounting to Rs. 17,50,580/- which has been further wrongly confirmed by the learned Commissioner of Income Tax (A). i) Even though the payment for purchases is made from the books by A/C payee cheques and cannot be termed as non-genuine even though the same has been fully allowed by the jurisdictional Mumbai Tribunal in recent case of Rajeev M Kalathil 6727/M/12, Ganpatraj A Sanghavi [ITA No. 2826/Mum/2013], Ramesh Kumar & Co. Appeal No. 2959/Mum/2014, Deepak Popatlal Gala [ITA No. 5920/M/2013], Ramila P Shah [ITA No. 5246/M/13], Paresh Gandhi [ITA No. 5706/M/2013], Hiralal Chunilal Jain [ITA No. 4547/M/14], Tarla Shah [ITA No. 5295/Mum/2013] and M/s Imperial Imp. & Exp [ITA No. 5427/MUM/2015], Shivshankar R. Sharma, [ITA No. 5149/Mum/2014 & 4260/Mum/2015], Govind Rathod [ITA No. 439/MUM/20156], Shri Mahesh K.Shah Shri Sanjay Dhokad [ITA No. 929/Mum/2015, Manohar and Anita Kanda [ITA No. 4693-97/Mum/2016], Bigwin Paper Distributors Pvt. Ltd. [ITA No. 5293- 97/Mum/2016], Shri Sanjay Dhokad 2010-11 [ITA 4 Assessment Year: 2010-11 NO. 5243/Mum/2013] and Hi Rock Construction Co. [ITA No. 960/Mum/2015] Jeetendra Devnani [5426/Mum/2015] Geolife Organics [ITA No. 3699/M/16] and M/s Steel Line (India) [ITA Nos. 1321 to 1323/M/16]. ii) Only on the basis of the information on the website www.mahavat.gov.in about 3 suspicisous dealers whose copy of statement recorded were not furnished to the appellant. iii) As alleged Bogus purchases without appreciating the fact that no addition can be made if the suppliers are not traceable as per the judgment of the Bombay High court. iv) Thereby treating the same as alleged Bogus purchases even though the payments were made by A/C Payee Cheques from the disclosed bank accounts. v) Without affording the Appellant and opportunity of cross examining the suppliers u/s 131 and without issuing notices u/s 133 (6) to the aforementioned suppliers. vi) Without rejecting the books of accounts u/s 145 93). 2. In the facts and circumstances of the case and in law, the Assessing Officer erred in disallowing Miscellaneous Expenditure amounting to Rs. 1,75,161/- on the adhoc basis, i.e. (10% of the total expenditure amounting to addition of Rs. 1,75,161/-).

Before us, the Ld. counsel for the assessee submitted that the impugned order is bad in law as the additions have been confirmed without hearing the assessee. The Ld. counsel further contended that the information and the statement recorded by the Sales Tax Department was not supplied to the assessee. As per the decision of the Hon’ble Bombay High Court addition cannot be made only on the ground that the suppliers are not traceable. Moreover, the payments were made through banking channels. The AO has not rejected the books of account. So far as the second ground is concerned the Ld. counsel submitted that the Ld. CIT (A) has wrongly confirmed the addition of 10% of the total miscellaneous expenditure claimed by the assessee on ad-hoc basis @ 10%.

On the other hand, the Ld. Departmental Representative (DR) submitted that since the assessee has failed to discharge the burden to prove the genuineness of transaction, the AO has rightly made the addition in question. Further since the assessee did not appear before the Ld. CIT (A) during the appellate proceedings despite the sufficient opportunities given by the Ld CIT(A) , the Ld. CIT(A) has rightly confirmed the addition made by the AO on account of bogus purchases. So far as the miscellaneous expenditure is concerned, the 6 Assessment Year: 2010-11 Ld. DR submitted that assessee has failed to produce any documentary evidence to substantiate the claim, therefore, the AO has rightly made disallowance of 10% of the total amount of expenses claimed by the assessee. Since, the assessee did not appear before the Ld. CIT (A) despite service of notices, the Ld. CIT (A) has rightly passed the order ex-parte and confirmed the disallowance on the basis of material on record after due application of mind. Hence, there is no infirmity in the order of the Ld.CIT (A) to interfere with the same.

We have heard the rival submissions and gone through the relevant material on record. The grievance of the assessee is that the Ld. CIT (A) has wrongly confirmed 100% addition amounting to Rs.17,50,580/- on account of bogus purchases made by the assessee during the previous year. Though, the assessee has contended before the AO as well as before us that the purchases are genuine. However, we do not find any merit in the contention of the assessee as the evidence on record is not sufficient to prove the genuineness of the purchases. On the other hand, since, the AO has not rejected the sale, it can be inferred that the assessee had made purchases in the grey market and evaded the VAT and other taxes applicable during the relevant period. Since, it has been established that the assessee has not purchased the material from the parties mentioned in the books of account, the assessee is required to pay the tax on the profit element embedded in the purchases in question. Keeping in view, the nature of the business of the assessee, we hold that addition 100% of the total bogus purchases is not justified.

The Hon’ble Gujrat High Court in CIT vs. Simit P. Seth 356 ITR 451(Guj) has upheld the decision of the ITAT and sustained the addition 12.5% of the total bogus purchases holding that only profit element embedded in such purchases can be added to income of the assessee. Hence, applying the ratio laid down by the Hon’ble Gujarat High Court in the aforesaid case, we modify the order of the Ld.CIT (A) and restrict the addition to 12.5% of the total 7 Assessment Year: 2010-11 amount of bogus purchases. The AO is directed to make addition of 12.5% of the total amount of bogus purchases to the income of the assessee.

So for as the second ground of appeal is concerned, we notice that the AO has made disallowance of 10% of the total amount of miscellaneous expenses claimed by the assessee holding that the assessee has submitted head-wise expenditure under head Miscellaneous expenditure however, again claimed the miscellaneous expenditure of Rs.69,997/-and failed to explain the same. We further notice that most of the payments have been made by cheques. Moreover, it is not the case of the revenue that the said expenses are not genuine. Since, the AO has pointed out that the assessee has not explained the claim of Rs. 69,997/-made as miscellaneous expenditure, there is no justification of making disallowance of 10% of the total expenditure claimed by the assessee that too without assigning any reason. We therefore, sustain the addition of Rs 69,997/- out of the total expenses claimed under the head ‘miscellaneous expenditure’, in respect of which the assessee has failed to give any explanation. We accordingly direct the AO to make addition of Rs. 69,997/- only and to allow the remaining expenses.