MANEK METAL INDUSTRIES,MUMBAI vs. INCOME TAX OFFICER WARD 19(2)(3), MUMBAI

The Assessing Officer (“AO”) vide order dated 13/03/2015 passed under section 143(3) read with section 147 of the Act disagreed with the submissions of the assessee and held that the assessee has not furnished relevant documentary evidence in respect of receipt of the material claimed to have been purchased from the alleged parties. Further, the assessee neither produced the parties from whom the purchases were claimed to be made for verification nor furnished addresses of these parties but simply furnished copies of ledger accounts in the books of the assessee, purchase bills and assessee’s bank statement showing the payment made through the bank. The ITAs No.4276 & 4278/MUM/2024 (A.Ys. 2009-10 & 2011-12) 4 AO held that payment through account payee cheque itself is not sacrosanct, in a case where the genuineness of the transaction is in doubt. The AO referred to various judicial pronouncements, wherein it has been held that in cases of non-existent parties from whom the purchases are shown to have been made, only part of such purchases can be disallowed, in the cases where the corresponding sales are treated as genuine, or alternatively the profit embedded in such sales can only be brought to tax. Accordingly, by applying the profit margin of 25% on the non-genuine purchases of INR 1,68,62,010, the AO made an addition of INR 42,15,753 to the total income of the assessee.

The learned CIT(A), vide impugned order, dismissed the appeal filed by the assessee and upheld the addition made by the AO. Being aggrieved, the assessee is in appeal before us.

We have considered the submissions of both sides and perused the material available on record. In the present case, pursuant to the receipt of information from the DGIT(Investigation), Mumbai, proceedings under section 147 of the Act were initiated in the case of the assessee on the basis that the assessee is a beneficiary of bogus purchase bills amounting to INR 1,68,63,010. Accordingly, in order to verify the genuineness of the transaction, the AO directed the assessee to produce the party and prove the genuineness of the purchases made from the said parties. In response, the assessee submitted the copies of ledger account, purchase bill and bank statement reflecting payments.

As evident from the record, the AO also made independent enquiry by issuing notices under section 133(6) of the Act to the concerned parties. However, these notices were returned unserved. Further, the assessee failed to produce any document to substantiate the mode of receipt of the goods and to establish that the assessee has received actual delivery of goods from the alleged parties. Further, the assessee also could not coordinate the purchases with the corresponding sales. However, the AO following the judicial pronouncements, wherein it has been held that in cases of non-genuine purchases, only part of such purchases can be disallowed, in cases where the corresponding sales are treated as genuine, restricted the disallowance on account of non-genuine purchases to 25%. Thus, it is evident that in the present case, the AO only doubted the purchases from the alleged bogus parties in the absence of documentary evidence and the entire sales are not in dispute. We find that before the lower authorities, the assessee was neither able to produce the parties nor could furnish the documents as directed by the AO. Even before us, no such details are available on record. Therefore, from the material available on record it is evident that the assessee has failed to prove the genuineness of the purchases made from the supplier. Thus, it appears to be a case of bogus bills arranged from the aforesaid entities and materials purchased from somewhere else at a lower cost. Thus, we are of the considered view that a reasonable disallowance of the purchases would meet the possibility of revenue leakage.

As regards the quantification of the profit element embedded in making such bogus/unsubstantiated purchases by the assessee, we find that the ITAs No.4276 & 4278/MUM/2024 (A.Ys. 2009-10 & 2011-12) 6 Hon’ble Jurisdictional High Court in PCIT v/s M. Haji Adam & Co. (ITA number 1004 of 2016 dated 11/2/2019) held that the addition in respect of bogus purchases is to be limited to the extent of bringing the gross profit rate on such purchases at the same rate as of other genuine purchases. Thus, respectfully following the aforesaid decision of the Hon’ble Jurisdictional High Court in M. Haji Adam & Co. (supra), we set aside the impugned order passed by the learned CIT(A) and restore the matter to the file of the jurisdictional AO with the direction to restrict the addition as regard the bogus purchases by bringing the gross profit rate on such bogus purchases at the same rate as that of the other genuine purchase. We further direct that if the gross profit rate on bogus purchases is higher than the other genuine purchases and the same has already been offered to tax by the assessee then no further addition be made. No order shall be passed without affording the assessee a reasonable opportunity of hearing. Accordingly, the impugned order is set aside and the grounds raised in the assessee’s appeal are allowed for statistical purposes.

In the result, the appeal by the assessee for the assessment year 2009- 10 is allowed for statistical purposes. ITA No. 4278/Mum./2024 Assessee’s appeal – A.Y. 2011-12

Since similar grounds have already been adjudicated in the assessee’s appeal for the assessment year 2009-10, our findings/conclusions rendered therein shall apply mutatis mutandis to the present case. Accordingly, the ITAs No.4276 & 4278/MUM/2024 (A.Ys. 2009-10 & 2011-12) 7 impugned order is set aside and the grounds raised in the assessee’s appeal are allowed for statistical purposes.

In the result, the appeal by the assessee for the assessment year 2011- 12 is allowed for statistical purposes.

To sum up, both appeals by the assessee are allowed for statistical purposes. Order pronounced in the open Court on 06/12/2024