DCIT, CC- 19, NEW DELHI vs. SHARP MINT LTD., NEW DELHI

“In the instant case, it is observed that the purchases were actually made but not from the party from whom it was claimed to have been made and instead purchased from grey market without proper billing or documentation. Thus, the purchases' were bogus in a manner that purchases were made from the parties other than those mentioned in the books of account. That being the position, on the basis of principles laid down by the judicial authorities from time to time, entire purchase price cannot be disallowed, but only the profit element embedded in such purchases to be added to the income of the assessee. Then, the next question is that what should be the fair profit rate out of the bogus purchases which should be added back to the income of the assessee. It is noticed that in during the search assessment years, the assessee company and other prominent companies engaged into the similar business as that of assessee company have earned the gross profits between 12 to 15 percent. Accordingly in the interest of revenue, in order to realize maximum G.P. ratio of 15 percent, certain percentage of purchases of assessee which are to be bogus need to be disallowed. After considering all facts and circumstances as discussed in above paragraphs, it is concluded that 25 % of bogus purchases/inflated purchase form part of profit element embedded in such purchases. Accordingly, 25% of such purchase (Rs.15,69,49,898/-) is added to the total income of assessee u/s 37 (1) of the Income Tax Act, 1961.”

“14. Conclusion : In the given facts & circumstances of the case, it is observed that 14.1 On the issue of M/s Aster Commodities being bogus/paper entity, following observations are summed up: (i) Sh Joginder Singh prop M/s Aster Commodities is regularly assessed to tax having valid PAN, UP VAT TIN and is registered with UP APMC to do agriculture products procurement & sale through Mandis. M/s Aster Commodities is an existing entity, who had made purchases made from Farmers through its various collection centres & MCX authorised dealers for making trading sales to the appellant as well as other parties. Apart from it, M/s Aster Commodities is acting as C & -F agent of the appellant (as well as other parties) for purchases made by the appellant from MCX portal and MCX authorised dealers. Sh Joginder Singh prop M/s Aster Commodities had explained it in his statement u/s 133A on 7.4.2017 and had executed affidavit dated 25.12.2019 confirming purchase / sale transactions made with M/s Sharp Mint Ltd as C&F Agent and on trading account. He had reconfirmed these transactions vide letter dated 12.3.2021 filed in response to summons issued by this office. The statements recorded during survey on 7.4.2017 of all the connected persons and Sh Jogender Singh confirm that M/s Aster Commodities is involved in the business of Mentha oil, doing procurement from farmers and selling it to various parties. The handwritten impounded registers of one collection centre, other related documents and sale/purchase bills of MCX dealers also confirm the activities of M/s Aster Commodities. The books of accounts in tally have been impounded from his Auditor in subsequent survey on 12.4.2017. He had produced the supporting documents of all collection centres and MCX dealers purchases in response to the summons on 12.3.2021 and these documents have been verified in the presence of AO for which report of the AO is on record. It had been observed that M/s Aster commodities is maintaining all hand written centre wise records of Form 6R, daily purchase registers, daily stock registers, Mandi Tax receipts, Copies of sales invoices, Form XXI of UP VAT, Mandi Gate Pass, transport bilties etc. for all the assessment years under consideration. These records were test checked with certain purchases of the appellant with all the documents in chain from purchase to sales by M/s Aster Commodities, which shows that all the primary records were properly maintained. M/s Aster Commodities had filed

4 to 1093/Del/2021 copies of its UP VAT assessments for AY 2012-13 to 2017-18, wherein the sales made on account of C & F activities as well as trading activities had been reflected. Mentha oil is a sensitive commodity in UP and the UPVAT department keeps a strict watch on its movement. There were 5 surveys on M/s Aster Commodities during the AYs 2012-13 to 2017-18 and the survey assessments made by M/s UP VAT department do mention the presence of purchase/sale/stock registers, presence of stock, presence of testing & measuring instruments, which proves that M/s Aster Commodities is involved in the business of Mentha Oil. After going through the process of farmer purchases, recording of various entries in various registers/Forrns, check & balances of various Govt agencies like APMC, UPVAT, obtaining final permission of Mandi Gate Pass for transportation of material; payment of taxes, recording of truck number entries in various documents etc., I am of the opinion that it is not possible to manage so much documentation involving different government agencies without doing actual purchase/sale of material. The purchases from MCX dealers have very strong audit trail and again involves various documentation & delivery procedures for sales. The MCX dealers purchases/sales made by M/s Aster Commodities are duly verifiable independently from the audit trails what is the price of purchase like who had made the payment for purchases, who had lifted the stock from MCX authorised warehouse, from where stock had been lifted, where the material had been despatched etc./ (ii) The AO had analysed Tally data of M/s Aster Commodities with its audited results filed to arrive at certain conclusions relating to stocks/sales/sales to appellant etc. Each of the observations of the AO had been discussed in above para. It is observed that the AO had made wrong comparison of figures with different bases of incomparable data. Some of the tally accounting entries appear to be incomplete on account of C &-F activities in certain years. The cash withdrawn from the bank by M/s. Aster Commodities were for making farmer purchases as is evident from Form 6R produced/impounded. There was no stock found during survey, as the MCX purchases stock is always at MCX authorised warehouse and stocks of farmer purchases are at respective collection centres. The centre visited by the survey team. had no stock as per its stock register impounded and as per statement of Shri Jogender Singh, the last purchase . transaction at this centre was on 21.1.2017 and last sale transaction at this centre was on 22.1.2017, after which the stock at this centre was nil as per the impounded register from this centre. Thus, there may be issues relating to reconciliation of Tally data which have been analysed by comparisons of incomparable data. Further the appellant cannot interfere with the accounting process of M/s Aster Commodities and the discrepancies, if any, in the maintenance of financial data of M/s Aster Commodities had to be acted upon in his case. The records of the appellant are complete in all respects for the purchases made from/through M/s Aster Commodities. All the discrepancies pointed by the AO and discussed in the above para are subject to reconciliation of accounts of M/s Aster Commodities and cannot lead to automatic conclusion that it is a bogus entity involved in only providing sales bills. The facts mentioned at para (i) above and the fact that 5 to 1093/Del/2021 • M/s Aster Commodities was searched subsequent to earlier search on the appellant in 2014 where the existence & activities of M/s Aster commodities were accepted in the assessment orders, as well orders of CIT(A) for AYs 2012-13 to 2014-15, made in the case of the appellant. • The assessments of M/,? Aster Commodities have been completed u/s 143(3) by the AO for AYs 2014-15 & 2017-18 (after proper verification of books & records) and all its sales/purchase activities have been held to be genuine. • The primary records relating to sales/purchases have all been produced by M/s. Aster Commodities on 12.03.2021 prove that M/s. Aster Commodities is involved in actual sale/purchase/C & F activities. (iii) The AO had accepted the part existence and activities (for MCX portal purchases of the appellant made through it) of M/s Aster Commodities and held it as bogus for other activities on the same set of facts, in the same assessment orders, without bringing on record any rationale for doing so. 14.1.1 The AO had alleged that M/s Aster Commodities is a bogus party/entity. It is observed that all the statements, documents impounded, documents seized in earlier search on M/s Aster Commodities, earlier assessments of the appellant made u/s 153A for AY 2012-13 to 2014-15, documents maintained by M/s Aster Commodities, UP VAT order, assessments of M/s Aster Commodities u/s 143(3) etc. point that M/s Aster commodities had been an existing entity involved in actual purchase/sales of Mentha oil etc. It had supplied Mentha to the appellant as C & F agent as well as trading supplier. There is no evidence brought on record by the AO to counter all these facts and documents. In my opinion, the DDIT/AO did not make enough efforts to reach Mr Jogender Singh prop M/s Aster Commodities and reconcile his financial affairs with his books of accounts. The DDIT/AO had done half baked analysis of tally data of M/s Aster Commodities with comparisons of incomparable data having different bases and without proper understanding the whole process of different kinds of sales made by it, particularly with reference to the. purchases of the appellant from it. It is further observed that • The AO had accepted the existence and activities of M/s Aster Commodities w.r.t MCX portal purchases made by it through C & F activities of M/s Aster Commodities. • The AO had accepted the MCX dealers purchases & its price, made by the appellant through similar process, routed through other C & F agent M/s Rishi Chemical, but had concluded that these purchases through M/s Aster Commodities are bogus, without bringing any adverse material on record to support his contention. All these purchases are independently verifiable, but no effort was done in this direction either by the DOIT or the AO.

6 to 1093/Del/2021 • The farmers purchase of M/s Aster Commodities are all documented, which were test checked and found to be in order. Here also in my opinion, there were inadequate efforts on the part of DOIT/ AO to reach Mr Jogender Singh - in spite of vast powers conferred by the statue and point specific defects in the maintenance of its records & financial recording of transactions. Even this exercise could not have affected the appellant unless there were credible evidences of leading to conclusion of it being a paper entity. 14.1.2 It is submitted that Mr Jogender Singh was summoned u/s 131 of the IT Act to produce its records and submissions on certain points. He had attended on 12.3.2021 with the records of purchases/sales/stock & other documents as per the report of the AO reproduced above and these records were test checked with the corresponding records of the appellant w.r.t its purchases made from M/s Aster Commodities and were found to be in order. The purpose of this exercise was to verify whether the proper primary records of purchases and sales have been maintained by M/s Aster Commodities, to reconfirm its activities as pointed by various other evidences & records as the allegation of the AO was that it is a bogus entity not involved in actual activities. No efforts were made for reconciliation of its financials as there is no specific discrepancy pointed by the AO either in quantity of material or ledger accounts etc. for sales made by M/s Aster Commodities to the appellant. Otherwise also any discrepancy in financial data of M/s Aster Commodities is to be acted upon in his case and not the case of the appellant, who had recorded all the purchase transactions of M/s Aster Commodities in its books of accounts as per the invoices issued by M/s Aster Commodities. 14.1.3 Further the AO had alleged that although bills have been issued by M/s Aster Commodities, but the appellant had procured material from grey market. The AO had not brought even a single instance of purchases made by the appellant from grey market or any other source against the purchases shown from/through M/s Aster Commodities to support his allegation. On the other hand, M/s Aster Commodities is maintaining all the records, books of accounts, assessed under VAT etc to prove the activities undertaken by it. There was no such allegation w.r.t purchases made by the appellant from M/s Aster Commodities in the search on 20.1.2014 and even consequent assessment/appellate order also. The assessment of M/s Aster Commodities made for AY 2017-18 had confirmed the fact of actual sales made by it in trading as well as C & F accounts after verification of books/documents. It is strange that the AO is alleging the purchases of Rs 800 Cr (including the ones made directly by the appellant from MCX authorized dealers) to be from grey market unknown sources, without bringing any evidence on records and ignoring the fact that all the purchases from M/s Aster Commodities have been accepted in concluded assessments u/s 153A for AYs 2012-13 to 2014-15. Thus this allegation of the AO is based on surmises & conjectures and is not based on any evidence on record.

7 to 1093/Del/2021 14.1.4 In view of the above discussion and on evaluation of various evidences on record, it is held that M/s Aster Commodities is not a bogus/paper entity as alleged by the AO, but is a real entity, actually involved in trading and C & F activities of Mentha oil etc. All the purchases made by the appellant from/through M/s Aster commodities have been made by it as per the records of the appellant and there is not any other source for such purchases. 14.2 On the issue of inflation of purchases @25% of purchases made by the appellant through M/s Aster Commodities, the observations are summarized as under: 14.2.1 The MCX authorised dealers purchases are made by the appellant directly from all India players and all the payments have been made by the appellant through banking channels. The purchases are dispatched from Barabanki authorised MCX warehouse by M/s Aster commodities. M/s Aster commodities bills these sales at the same price as the procurement price of the appellant from MCX authorised dealers and any difference in prices is settled through debit/credit notes issued by the appellant at the end of financial year. The AO had accepted. purchase price of purchases made by the appellant from MCX portal and these MCX dealers purchases made by the appellant but routed through other C & F agent M/s Rishi chemicals at Bareilly, but doubted these sales routed through M/s Aster Commodities, without assigning any particular reasons for doing so. The MCX dealers purchase prices made by the appellant through its two C & F agents M/s Rishi chemicals and M/s Aster Commoditeis are comparable as discussed above. These transactions have complete independent verifiable audit trail of transactions. 14.2.2 The sale prices of purchases made by M/s Aster commodities from MCX dealers and supplied to the appellant as trading sales are also comparable with the MCX dealers purchases made by the appellant directly and supplied through above two C & F agents. Further these transactions also have complete verifiable independent audit trail of transactions. 14.2.3 The farmers purchases made by the appellant from M/s aster commodities also have comparable prices with the own collection centres of the appellant at UP & Bihar as discussed above. 14.2.4 The AO had alleged that the appellant might have made purchases in grey market with unaccounted money. There is no evidence of purchases from grey market or utilization of any unaccounted money for purchases from alleged grey market or any evidence of receipt of any cash from M/s Aster Commodities. Hence, this allegation is not backed by any evidence of any such instance brought on record and had been made by the AO in a casual manner. Further the AO had alleged that taxes might have been saved by the appellant in such grey market purchases. It is observed that the trading as well as C & F sales of M/s Aster Commodities are all Mandi Tax/UPVAT/CST paid, which are the only taxes on this commodity. This allegation is again based on presumption and ignores the real documents wherein taxes duly paid have been reflected.

14.2.5 The purchase prices of the appellant from M/s Aster Commodities had been accepted in its assessments of the appellant completed u/s 153A for AY's 2012-13 to 2014-15 and there is no new evidence on record to negate these findings.

14.2.6 The AO had estimated the inflation in purchase price of purchase made from/through M/s Aster Commodities @25% and had presumed the GP of the industry in the range of 12-15% in making such estimate. It is pertinent to mention over here that the appellant had submitted the comparative Industry GP with data of companies before the AO to show that it is showing one of the highest GP in the Industry, however the AO had presumed the GP of Industry in the range of 12%- 15% without any reference of comparative industry & its financials. Further after making the additions by the AO, the GP of the appellant for various AY's is as under:

Table - 12: Comparison of G.P before & after addition by the AO Particulars Assessment Year 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 Turnover 14,055,824,832 20,994,632,258 14,444,302,232 15,298,246,726 16,390,274,880 19,732,530,820 (Net)(Rs.) Gross Profit 1,192,910,825 1,357,674,924 1,889,583,294 1,491,303,463 1,365,932,668 1,612,153,171 (Rs.) Gross Profit 8.49% 6.47% 13.08% 9.75% 8.33% 8.17% % Additions 39,237,475 273,995,872 202,557,021 320,413,253 769,083,768 396,070,572 made (Rs.) GP after 1,232,148,300 1,631,670,796 2,092,140,315 1,811,716,716 2,135,016,436 2,008,223,743 additions (Rs.) GP% after 8.77% 7.77% 14.48% 11.84% 13.03% 10.18% additions

Even this observation of the AO that inflation @ 25% of purchases from M/s. Aster Commodities would push the G.P of appellant between 12% - 15% is based on presumptions and not facts. Thus, the AO's estimation of inflation @25% of purchase price is also not supported by any data, logic and is based on presumptions only.

14.2.6 Even the AO has commented in the assessment orders as under (for reference -at page no. 49 of assessment order for A.Y. 2012- 13):

"The assessee company has shown the purchases from impugned seller party at the prevailing market rate/price charged by other regular dealers.”

Thus, the AO had accepted that the purchase prices as per bills of M/s. Aster Commodities are comparable to other purchases of the appellant.

14.2.7 In view of the discussion made in various para of this order and summarized above; it is held that 9 to 1093/Del/2021 (i) The allegations of purchase by the appellant from grey market and inflation @250/o in such purchase prices billed by M/s Aster Commodities is based on presumptions, conjunctures and surmises, without a single evidence on record and are hereby rejected. (ii) M/s Aster commodities is an existing entity engaged in the real trading and C & F activities. (iii) The purchase prices of the appellant from M/s Aster commodities ate comparable with its other purchase prices from corresponding purchase sources like MCX dealers/ Farmers. Accordingly, the addition made by the AO considering inflation @ 25% of purchases made from M/s Aster Commodities in various years as per col 2 of Table-3 above are hereby deleted and these grounds of appeal are allowed for AY 2012-13 to 2017-18.”

9. Ld. Counsel of the assessee, on the other hand, relied upon the order of the ld. CIT (A). He further informed that in assessee’s own case for AYs 2008-09 to 2012-13, ITAT vide order dated 11.07.2023 has deleted the additions for bogus purchases.

10. Upon careful consideration, we find that AO has made the addition on estimate basis. AO has himself stated that it cannot be said that assessee had not made purchases but, according to the AO, purchases were made from parties different than the parties entered in the books of account. On this account, AO has made addition for bogus purchases @ 25% of the addition is permissible on the basis of surmise and conjecture. When corresponding sales have been accepted, disallowance for bogus purchase is not sustainable. Further, ld. CIT (A) vide his elaborate order has dealt with all the issues raised by the AO in his assessment order and has come to the conclusion that the addition on account of bogus purchases is not sustainable. We do not find any infirmity in the well reasoned order of ld. CIT (A). We further note that ITAT in assessee’s own case in AYs 2012-13 to 2017-18 vide order dated 11.07.2023 has deleted the addition on bogus purchases and expenses by concluding as under :-

“10. Thus, once the CESTAT has held the purchases made by four Jammu bases entities to be genuine, the entire case of the Revenue based on the investigation carried out by Central Excise Department, Jammu would fall flat. It is further relevant to observe, while deciding the appeals filed by the Revenue in case of M/s. Jai Ambay Aromatics, one of the four Jammu based entities from whom the assessee had purchased raw materials, the Tribunal in and Ors., dated 15.07.2021 has upheld the decision of the first appellate authority in deleting the additions made by the Assessing Officer on account of bogus purchases. Thus, once, the CESTAT and the Tribunal have held the purchases made by the four Jammu based entities to be genuine, the corresponding sales effected by them to the assessee have to be accepted as genuine.

do not find any infirmity in the order of the ld. CIT (A) and we uphold the same.

Order pronounced in the open court on this 12th day of January, 2024.