MALCHAND D. CHOUDHARY,MUMBAI vs. INCOME TAX OFFICER 26(2)(2), MUMBAI

I heard the parties and perused the record. The assessee is a manufacturer of all types of packing material and paper rolls. Consequent to the information received from the Sales tax department, it came to the notice of the revenue that the assessee has made purchases to the tune of Rs.26,78,563/- and Rs.13,59,586/- during the years relevant to the assessment years 2009-10 and 2010-11 respectively from the parties, who were listed out by the Sales tax department as hawala dealers, i.e., they have provided only accommodation bills without actually supplying the material. During the course of assessment

Before Ld CIT(A), the assessee pleaded for deletion of the disallowance of purchases by submitting that he has maintained stock register for the receipt and issue of materials. The Ld CIT(A) confirmed the order passed by AO in 2009-10, wherein the AO had disallowed 25% of the value of alleged bogus purchases. In AY 2010-11, the Ld CIT(A) sustained disallowance to the extent of 25% of the alleged bogus purchases and also 25% of the liability treated as ceased.

The Ld A.R submitted that the assessee has reconciled the receipt and issue of materials in AY 2009-10. He further submitted that the assessee has declared G.P rate of around 21% from AY 2004-05 onwards. He has declared G.P rate at 21.21% and 28.65% respectively in AY 2009-10 and 2010-11. Accordingly he submitted that the profit estimated @ 25% is too high and the same would result in abnormal addition. He further submitted that the addition made u/s 41(1) is not warranted when the liability still exists and further the outstanding amount is part of very same transaction of purchases. He further submitted that 3 Shri Malchand D. Choudhary the AO cannot make addition of both purchases and corresponding creditors balance. On the contrary, the Ld D.R submitted that the assessee has failed to produce the suppliers before the AO.

I agree with the contention of the Ld A.R that AO was not right in making addition of both purchases and corresponding creditors balance, because both relate to same transaction of purchase only. Accordingly I set aside the order passed by Ld CIT(A) in respect of addition made u/s 41(1) of the Act in AY 2010-11 and direct the AO to delete the addition made by him u/s 41(1) of the Act.

In respect of addition relating to bogus purchases, I notice that the Ld CIT(A) has sustained addition to the extent of 25%. I notice that the assessee has been declaring G.P rate @ 21% in the earlier years. In AY 2009-10, the assessee declared G.P rate at the same level and in AY 2010-11, he has declared G.P rate @ 28.65%, i.e., at higher level. The assessee has also reconciled the receipt of issue of materials in AY 2009-10. Other things being equal, the booking of bogus purchases would have reduced the G.P rate in the normal circumstances. Hence, under these set of facts, I am of the view that the addition sustained @ 25% of value of alleged bogus purchases is on the higher side in both the years under consideration. Accordingly I modify the order passed by Ld CIT(A) on this issue in both the years under consideration and direct the AO to sustain addition to the extent of 12% of the value of alleged bogus purchases. In my view, the same would meet the ends of justice in both the years.

In the result, both the appeals filed by the assessee are partly allowed. Order has been pronounced in the Court on 21.2.2018.