M. B. SERVICES,MUMBAI vs. INCOME TAX OFFICER WARD 26(2)(2), MUMBAI

The issue raised is that the ld. Commissioner of Income Tax (Appeals) erred in sustaining 100% of the addition amounting to Rs.10,25,048/- on account of bogus purchases.

M. B. Services 3. Brief facts of the case are that the assessee is a firm engaged in the business of civil construction. The brief facts of the case are that the Assessing Officer had received information from Sales Tax Department through O/o DGIT (Inv.), Mumbai that during the year under consideration, the assessee had obtained entries of bogus purchases through the hawala parties thereby claiming to have incurred expenditure, which are not genuine. The names of the persons who have obtained the bogus bills from such Hawala billers alongwith the transaction details of each person has also been received by the Assessing Officer. The Sales Tax Authority displayed the names of these hawala dealers on the website of Sales Tax Department of Maharashtra Government, who have only issued bills without any delivery of goods.

During the course of assessment proceedings, the Assessing Officer issued show cause notice to the assessee asking the assessee to produce the aforesaid parties along with its books of accounts for verification & to prove the genuineness of the alleged transactions by the copies of purchase bills, delivery challans substantiating receipt of material claimed to be purchased from the parties, freight invoices, octroi, transportation bills, copy of the Ledger account of the alleged parties, stock register, bank account details reflecting the details of the payments made to the alleged parties etc. Vide the aforesaid show cause notice, it was stated that if the assessee is not able to explain the genuineness of the purchase by producing the alleged parties with their books of accounts/documentary evidences as stated above, the amount involved will be treated as M. B. Services bogus purchase and will be added to the total income of the assessee for the year under consideration.

However, the Assessing Officer observed that the assessee has produced only copy of invoices and bank statements highlighting the payments made but did not produce his Stock Register, Statement showing movement of stock, delivery challans, mode of transportation used for delivery of goods with evidences. The Assessing Officer observed that no clinching evidence could be produced by the assessee in his favour. Further the Assessing Officer observed that the assessee had failed to produce the aforesaid parties for disposition before him. It was also observed that the assesses could not effectively rebut the allegation regarding the genuineness of bills on record and hence the rate of goods as mentioned in each bills could not be established. Therefore, in order to verify the genuineness of the purchases, the Assessing Officer issued notice u/s.l33(6) of the IT Act to the above parties calling for certain information, on the address provided by the assessee. However, the Assessing Officer observed that the said notice was returned by the postal authorities unserved as these parties were not found available on the given address. Further enquiries conducted also revealed that these parties had not existed on the address mentioned in the bills.

The Assessing Officer observed that enquiries were conducted in the cases of alleged dealers, mentioned supra, by the Sales Tax Authorities and statements were also recorded wherein it was admitted by these parties that they were not doing any business and were engaged only in providing bills without actual delivery of goods. Therefore in M. B. Services view of the above facts and in the absence of any details filed by the assessee, the Assessing Officer observed that the assessee had failed to produce the suppliers or any material evidence despite granting enough opportunities to prove contrary to the suppliers disposition before the Sales Tax Authorities. The Assessing Officer held that it is a settled law that onus lies on the assessee to prove the genuineness of any expenditure which is claimed as deduction in computing its taxable income which the assessee had foiled to discharge.

In view of the above facts and circumstances of the case, the Assessing Officer observed that the assessee has failed to prove the genuineness of purchases from these parties and therefore these purchases are bogus and non-genuine. Accordingly the Assessing Officer added 100% of the total alleged bogus purchases amounting to Rs.10,25,048/- to the total income of the assessee.

Upon the assessee’s appeal, the ld. Commissioner of Income Tax (Appeals) confirmed the addition.

Against the above order, the assessee is in appeal before the ITAT.

I have heard the ld. Departmental Representative and perused the records. None appeared on behalf of the assessee. An adjournment petition has been received on behalf of the assessee claiming that the Chartered Accountant is not well. However, it is noted that no power of attorney is on record and the issue relating to bogus purchase has been dealt with by the ITAT in number of cases. Hence, I proceeded to adjudicate the issue by hearing the ld. Departmental Representative and perusing the records.

As regards merits of addition, I find that credible and cogent information was received in this case by the assessing officer that certain accommodation entry provider/bogus suppliers were being used by certain parties to obtained bogus bills, assessee was found to have taken accommodation entry/bogus purchase bills during the concerned assessment year from different parties. Based upon this information assessment was reopened. The credibility of information relating to reopening has been confirmed by the learned CIT(A) and by ITAT as above. Furthermore it is noted that in such factual scenario Assessing Officer has made the necessary enquiry. The issue of notice to all the parties have returned unserved. Assessee has not been able to provide any confirmation from any of the party. Assessee has also not been able to produce any of the parties. The necessary evidence for transportation of goods have not been provided by the assessee. In this factual scenario it is amply that assessee has obtained bogus purchase bills. Mere preparation of documents for purchases cannot controvert overwhelming evidence that the provider of these bills are bogus and non-existent and there is no cogent evidence of transportation of goods. The sales tax Department in its enquiry have found the parties to be providing bogus accommodation entries. The assessing officer also issued notices to these parties at the addresses provided by the assessee. All these notices have returned unserved. Assessee has not been able to produce any of the parties. The assessing officer has noted that there is no cogent evidence of the provision of goods.

Hence purchase bills from these non-existent the/bogus parties cannot be taken as cogent evidence of purchases, in light of the overwhelming evidence the revenue authorities cannot put upon blinkers and accept these purchases as genuine. This proposition is duly supported by Hon’ble Apex Court decision in the case of Sumati Dayal 214 ITR 801 and Durga Prasad More 82 ITR 540. In the present case the assessee wants that the unassailable fact that the suppliers are non-existent and thus bogus should be ignored and only the documents being produced should be considered. This proposition is totally unsustainable in light of above apex court decisions.

In these circumstances learned departmental representative has referred to Hon’ble Gujarat High Court decision in the case of Apex Appeal No. 240 of 2003 in the case of N K Industries vs Dy CIT, order dated 20.06.2016, wherein hundred percent of the bogus purchases was held to be added in the hands of the assessee and tribunals restriction of the addition to 25% of the bogus purchases was set aside. It was expounded that when purchase bills have been found to be bogus 100% disallowance was required. The special leave petition against this order along with others has been dismissed by the Hon’ble Apex Court vide order dated 16.1.2017.

I further note that Hon’ble Rajasthan high court has similarly taken note of decisions of the apex court on the issue of bogus purchases in the case of CIT Jaipur vs Shruti Gems in of 2009. The Hon’ble High Court has referred to the M. B. Services decision of CIT Jaipur vs. Aditya Gems, D. B. in of 2008 dated 02.11.2016, wherein the Hon’ble Court had inter alia held as under:

Upon careful consideration I find that sales in these cases are not doubted. When sales are not doubted, 100% disallowance for bogus purchase is not sustainable as per the decision of the Hon’ble jurisdictional High Court in the case of Nikunj Eximp Enterprises (in writ petition no 2860, order dt. 18.6.2014). However, the facts of that case were different inasmuch as sales were to the Government department. However the facts and circumstances of the present case indicate that assessee has engaged into dealings in the grey market. Dealings in the grey market give the assessee various savings at the expense of the Exchequer. Hence, on the overall consideration of facts and circumstances and following the decision of Hon’ble Gujarat High Court in the case of CIT vs Simit P. Sheth [2013] 356 ITR 451 (Guj.) I hold that a disallowance of 12.5% of the bogus purchase would meet the end of justice. Accordingly, I modify the order's of authorities below and direct that the disallowance in this case should be restricted to 12.5% of the bogus purchase.