PRABHAT GUPTA,MUMBAI vs. ITO CIR 27(2)(5), MUMBAI

PER AMARJIT SINGH, JM:

1. The assessee as well as the revenue have filed the above mentioned appeals against the different order passed by the Commissioner of Income Tax (Appeals)-38, Mumbai [hereinafter referred to as the “CIT(A)”] relevant to the assessment year 2011-12. 532/M/2017:-

2. The assessee as well as revenue have filed the above mentioned appeals against the order dated 03.10.2016 passed by the Commissioner of Income Tax (Appeals)-38 Mumbai, [hereinafter referred to as the “CIT(A)”] relevant to the assessment year 2011-12.

3. The assessee has raised the following grounds:-

“1. The order passed by the Ld. CIT(A)-38, Mumbai(hereinafter referred to as the Ld. CIT(A) is bad in law and on facts.

2. Reassessment is bad in law and void ab inito: 2.1 The Ld. CIT(A) erred in upholding the reassessment order passed by the Assessing Officer which is bad in law and void ab initio as it is based on conjectures and surmises without there being concrete reason that the income has escaped the assessment. 2.2 The Ld. CIT(A) failed to consider the plea of the Appellant that the notice for initiating reassessment proceedings was issued by AO on 15 February, 2013 whereas the assessing officer received information from the CIT-21 regarding the alleged purchases vide letter dated 26th February, 203 which goes to show that the Assessing Officer did not have reasons to believe that income has escaped assessment and initiated proceedings merely on reason to suspect. 2.3 The Ld. CIT(A) erred in upholding the reassessment order without appreciating that the Assessing Officer had passed 798/M/17 A.Y. 2011-12 a vague order for rejecting the objections raised by the Appellant and the said order was not even a speaking order as per the principles laid down by the Supreme Court in the case of GKN Drivershafts (India) limited. 3 Re: Disallowance of 6^amounting to Rs.4,27,338/- in respect of certain purchases alleged to be bogus in nature. 3.1 The Ld. CIT(A) grossly erred in making a disallowance of 6% in respect of purchases amounting to Rs.4,27,338/- alleged to be bogus in nature based on the information received the Sales Tax Department, without considering the strong evidence and details submissions given by the appellant. 3.2 The Ld. CIT(A) partly upheld the disallowance made by the Assessing Officer without appreciating that the non- payment of VAT by the seller should nor form the basis of disallowance of genuine purchases. 3.3 The Ld. CIT(A)grossly erred in disallowing 6% of the alleged purchases which is arbitrary and has no basis, even when the evidence s and records submitted by the appellant as well as the corresponding sales to the alleged purchases were not disputed and were duly accepted by both the Assessing Officer and the Ld. CIT(A). 3.4. The Ld. CIT(A) grossly erred in upholding part disallowance of the Assessing Officer without appreciating that the Assessing Officer did not grant an opportunity to the appellant for cross examining the party as was requested upon by the appellant at the time of assessment proceedings. Without prejudice to the above, the amount of disallowance ought to be restricted to 1.9% being the gross profit margin earned by the appellant during the assessment year. 4 Disallowance of 10% amounting to Rs.13.447/- in respect of businesss expenses treating them as personal in nature. 4.1 The Ld. CIT(A) grossly erred in upholding the disallowance made on estimation basis by the AO in respect of business expenses at 10% of the total expenditure amounting to Rs.13.447/- treating them to be personal in nature without any specific evidence.

5. The appellant craves leave to add to, alter, amend or withdraw all or any of the foregoing grounds of appeal at or before the hearing of this appeal.” 798/M/17 A.Y. 2011-12

4. The revenue has raised the following grounds.:-

“1. On the facts and circumstances of the case the Ld. CIT(A) erred in deleting the addition of Rs.66,94,962/- on account of bogus purchases.

2. On the facts and circumstances of the case, the Ld. CIT(A) erred in not considering the fact that the assessee was unable to prove the genuineness of the purchases and has failed to produce the hawala parties for examination before the AO despite having been given the opportunity and time to do so.

3. On the facts and circumstances of the case, the Ld. CIT(A) failed to appreciate the fact that the details furnished by the assessee are of the nature of secondary evidence and no primary evidence in the form of producing the relevant parties has been filed to prove the genuineness of the purchase.

4. The Ld. CIT(A) has failed to appreciate the finding of the Assessing Officer that the purchases have been made out of undisclosed income and the same remained unexplained which required to be added u/s 69C of the I.T. Act.

5. On the facts and circumstances of the case, the Ld. CIT(A) erred in sustaining the addition to the extent of Rs.4,27,338/- by taking the GP @ 6% of the bogus purchases of Rs.71,22,300/- not considering the facts that the entire purchases are bogus.

6. The appellant prays that the order of the CIT(A) on the above grounds be reversed and that of the Assessing Officer be restored.

7. The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary.”

5. The brief facts of the case are that the assessee filed his return of income for the A.Y. 2011-12 on 27.09.2011 declaring total income 798/M/17 A.Y. 2011-12 to the tune of Rs.8,09,528/-. The return was processed u/s 143(1) of the I.T. Act. Thereafter, an information was received from DGIT(Inv.), Mumbai which was forwarded by virtue of letter no. CIT-21/H.Qrs/Sales Tax Infor/2012-13 26.02.2013 in which it was conveyed that the assessee has taken the accommodation entries from various parties without any actual dealing, the assessee received the accommodation entries from the following 9 parties.:- S no. Name of the bill provider Tin No. Amount 1 Hariom Traders 27840642014V 8,05,194 2 Macos Iron and Steel Pvt.. 27430732692V 110,25,635 3 Dhiren Mercantile Pvt. 27450680107V 11,60,730 Ltd 4 Supreme Enterprise 27500257887V 8,20,895 5 Revika Trade Impex 27730562486V 4,90,776 Private Limited 6 Prayan Trading Company 27740535951V 5,06,766 7 P.K. Trading Company 27830258239V 5,87,192 8 Vitarag Trading Company 27830385697V 4,90643 9 Sampark Steels 27170360840V 12,34,469 71,22,300 6. The statement of above mentioned parties were recorded by the Sales Tax Department in which they admitted that they were providing accommodation entries to the assessee. The above facts ITA. No.532/M/17 798/M/17 A.Y. 2011-12 speaks that there was an inflation of expenditure resulting in escapement of income to the extent of Rs.71,22,300/- for the A.Y. 2011-12 in the case of assessee. Thereafter, the notice u/s 148 of the Act was issued and served upon the assessee. In pursuance of notice, the assessee filed the return of income which he had already filed earlier on 24.09.2011. Thereafter, notice u/s 143(2) of the Act dated 22.08.2013 and notice u/s 142(1) of the I.T. Act. 07.10.2013 were issued and served upon the assessee. The reason of reopening was communicated vide letter dated 22.08.2013. The assessee is a proprietor of M/s. Sumeet Steel Traders which is engaged in the business of Trading of TMT Bars, Steel Etc. During the year under consideration, the assessee has declared the profit of Rs.9,16,182/- speculation profit of Rs.10685/- and donation of Rs.62500/- and the total income from business was to the tune of Rs.9,29,367/-. The assessee has declared income from other sources amounting to the tune of Rs.158 after availing deduction u/s 80CCF and u/s 80C of Rs.1,20,000/- total income to the tune of Rs.8,09,525/-. The assessee showed the gross profit of Rs.26,24,615/- ratio @ 1.90% and net profit of Rs.9,16,182/- i.e., showing net profit ratio 0.66% on total turnover of Rs.13,80,45,604/-. The gross profit and net profit ratio declared in immediately preceding year was at Rs. 25,95,237/- i.e., 1.645% and Rs.515571/- i.e., 0.32% on total turnover of Rs.157694151/- respectively. During the course of assessment proceeding the matter of controversy is in connection with the 798/M/17 A.Y. 2011-12 reopening of the case and on merits and the Assessee contested the matter by providing the documents available with him but the Assessing Officer was not satisfied, therefore, the bogus purchase to the tune of Rs.71,22,300/- was added to the income of the assessee. The assessee filed an appeal before the CIT(A) who restricted the claim of the assessee to the extent of 6% of the bogus purchase. The assessee was not satisfied, therefore, filed the present appeal before us. However, the revenue has also filed an appeal in which the contention of the revenue is that whole addition of bogus purchase is liable to be added to the income of the assessee. ISSUE NO.1& 2:- 7. Under this issue the assessee has challenged the validity of the notice issued u/s 148 of the I.T. Act. The Ld. Representative of the assessee has argued that the Assessing Officer received the information from Sales Tax Department vide letter dated 26.02.2013 and notice u/s 148 of the Act was issued and served upon the assessee on 15.02.2013 which clearly speaks that there was no reasons at the time of issuance of the notice u/s 148 of the Act to invoke the proceeding, therefore, the condition u/s 148 of the Act was not satisfied, hence, the notice u/s 147/148 of the Act is wrong against law and facts and is liable to be set aside in view of the law settled in GKN Driveshafts (India) Ltd. Vs. DCIT (2003) 259 ITR 19 (SC), Hemant Traders Vs. ITO (2015) 375 ITR 167 (Bombay) and CIT 798/M/17 A.Y. 2011-12 Vs. Kurban Hussain Ibrahimji Mithiborwala (1971) 82 ITR 821 (SC). However, on the other hand the Ld. Representative of the Department has refuted the said contentions and argued that the AO was having knowledge earlier before issuance of notice, therefore, the notice u/s 147 of the Act is not bad in law. In view of the argument advanced by the Ld. Representative of the parties and perusing the record, we noticed that the Assessing Officer issued the notice u/s 148 of the Act dated on 15.02.2013 in which the Assessing Officer subscribed the information received the DGIT(Inv.), Mumbai forwarded to the AO vide letter no. CIT-21/H.Qrs/Sales Tax Infor/2012-13 dated 26.02.2013. In view of the said information the case of the assessee was reopened u/s 147 of the Act. The facts have been narrated in the said notice which lies at page no. 1 to 3 of the paper book which speaks about the issuance of notice u/s 148 of the Act on dated 15.02.2013. The Assessing Officer was not having any information at that time because the Assessing Officer received the information from DGIT(Inv.), Mumbai vide letter dated 26.02.2013. When the Assessing Officer was not having any information as on 15.02.2013, therefore, it is strange in which circumstances, the Assessing Officer issued the present notice on the information received through letter dated 26.02.2013 as on date 15.02.2013. The personal knowledge of the Assessing Officer could not be the ground to invoke the proceeding u/s 147/148 of the I.T. Act. Therefore, in the said circumstances the noticed doesn’t seems to be legal. It is held by 798/M/17 A.Y. 2011-12 Hon’ble Supreme Court in the case of CIT Vs. Kurban Hussain Ibrahimji Mithiborwala (1971) 82 ITR 821 (SC) that the notice issued for any invalid reason makes the proceeding void an without jurisdiction. We also find support of law in GKN Driveshafts (India) Ltd. Vs. DCIT (2003) 259 ITR 19 (SC), Hemant Traders Vs. ITO (2015) 375 ITR 167 (Bombay). Since the notice is not justifiable and is not in accordance with law, therefore, we set aside the notice u/s 147/148 of the Act. Accordingly, this issue is being decided in favour of the assessee against the revenue. . ISSUE NO.3:- 9. Under this issue the assessee has challenged the addition confirmed by CIT(A) @ 6% of the bogus purchase. The Ld. Representative of the assessee has argued that the Assessing Officer has raised the addition on the basis of the information received by the DGIT(Inv.), Mumbai in connection with the purchase from 9 parties total to the tune of Rs.71,22,300/- but the evidence adduced by assessee has not been considered by the AO as well as CIT(A), therefore, the order passed by the CIT(A) is wrong against law and facts and is liable to be set aside. It is also argued that that in the year of consideration the gross profit ratio of the assessee was @ 1.90% and in the immediate prescribing year the gross profit was @ 1.645%, therefore, at the time of assessing the profit embedded in the bogus purchase the ratio @ 2% is liable to be considered in the interest of 798/M/17 A.Y. 2011-12 justice. In support of this contention the Ld. Representative of the assessee has placed reliance upon in law settled in Vijay Protein Vs. CIT 58 ITT 458 (Ahd) and CIT Vs. Simit P Sheth 356 ITR 451 (Gujrat High Court). It is also argued that the non service of notice in view of provision u/s 133(6) of the Act nowhere effect the claim of the assessee when the claim of the assessee has duly been proved on record by adducing sufficient evidence on record. In support of this contention the Ld. Representative of the assessee has placed reliance upon law settled in CIT Vs. M/s. Nikunj Eximp Enterprises P. Ltd. 2016 taxman.com 171 (Bombay High Court). On the other hand, the Ld. Representative of the Department has refuted the said contention and argued that the whole bogus purchase is required to be added to the income of the assessee. We have heard the argument advanced by the Ld. Representative of the parties and perused the record. The Assessing Officer reopened the case of the assessee on the basis of the information received from DGIT(Inv.), Mumbai by virtue of letter dated 26.02.2013. The said letter conveyed the transaction of 9bogus parties with the assessee. It is alleged that the purchase of the assessee from the said party is bogus in nature. The Assessing Officer issued the notices to the said parties but the notices u/s 133(6) of the Act were not served. However, the Assessing Officer also tried to serve the notice through Tax Inspector but the parties were not found at the given address. Thereafter, the Assessing Officer raised the whole addition of purchases as income of the assessee.On appeal, 798/M/17 A.Y. 2011-12 CIT(A) has confirmed the said addition to the extent of 6% of the bogus purchase. On appraisal of both the orders we noticed that the Assessing Officer as well as CIT(A) nowhere took into consideration the evidence adduced by the assessee. It is to be seen what was the evidence given by assessee during the proceeding in connection with above mentioned 9 parties. The evidence which has been given by the assessee is being discussed below party-wise.