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Income Tax Appellate Tribunal, MUMBAI BENCH “E”, MUMBAI
Before: Shri Saktijit Dey & Shri G Manjunatha
Date of hearing 23-01-2018 Date of pronouncement 31-01-2018 O R D E R Per Bench, AM : These cross appeals filed by the assessee as well as the revenue
2 Scientific Devices (Bombay) Pvt Ltd are directed against the common order passed by the CIT(A)-2,Thane dated 31-01-2017 for the assessment years 2010-11 & 2011-12. Since facts are common and identical issues are involved, for the sake of convenience, these appeals were heard together and are disposed of by this common order.
The brief facts of the case are that the assessere company engaged in the business of manufacture of process control instruments and rota meters, oil consumption meters and various scientific devices. The assessee has filed its return of income for the assessment years 2010- 11 & 2011-12 on 06-10-2010 and 29-9-2011, respectively. The case has been reopened u/s 147 on the basis of information received from investigation wing which stated that the assessee is one of the beneficiaries of bogus purchase bills issued by suspicious / hawala dealers as per the list prepared by Maharashtra Sales-tax department.
Subsequently, the case has been selected for scrutiny and notices u/s 143(2) and 142(1) of the Act were issued. In response, authorized representative of the assessee submitted various details, as called for.
During the course of assessment proceedings, the AO noticed that the assessee has purchased materials from certain parties, who were listed in the list of hawala / suspicious dealers prepared by Maharashtra Sales- tax department. Those parties, in their statements, admitted that they have not actually delivered any goods, but have merely provided the bills
3 Scientific Devices (Bombay) Pvt Ltd and refunded back cash to the buyers after deducting their commission.
The details of purchases made from such parties are as under:-
Sr.No. Name of the party AY 2010-11 AY 2011-12 1 M/s Sunny International 51,480/- 18,73,361 2 M/s Triveni Metal India 5,16,462/- 4,81,419 3 M/s Osian Steel Impex 18,27,174/- 4 M/s Subham Steel Impex 5 M/s Maruti Impex 17,04,894 6 M/s Registhan Metal (India) 7,08,693/- 7 M/s Apollo Metals 7,08,328 8 M/s Choksi Brothers 2,17,717 9 M/s Harshil Ferroment Pvt Ltd 12,95,772
In view of the above fact, the AO called upon the assessee to furnish necessary evidence to justify purchases from the above parties.
In response to notices, the assessee has filed purchase bills alongwith payment proof for such purchases and submitted that merely because third party informations reveal that the parties are involved in providing accommodation entries, purchases supported by valid evidence cannot be considered as bogus. The AO, after considering relevant submissions of the assessee and also taking into account information received from Investigation Wing observed that though the assessee has filed certain details to justify purchases from the above parties, failed to furnish further evidence in the backdrop of clear findings of the sales- tax departments that those parties are involved in providing accommodation entries and this fact has been confirmed in the 4 Scientific Devices (Bombay) Pvt Ltd statement given before the sales-tax authorities. The assessee also failed to file any other evidences including transport bills, delivery challans and goods inward receipt except furnishing purchase bills and payment proof. Therefore, he opined that purchases from the above parties are bogus in nature and hence, made addition u/s 69C of the Income-tax Act, 1961 towards total purchases made from the above parties.
Aggrieved by the assessment order, assessee preferred appeal before CIT(A). Before the CIT(A), the assessee has challenged reopening of assessment u/s 147 on the ground that the AO has reopened the assessment without there being any independent and valid reason coupled with any income chargeable to tax had escaped assessment. Insofar as addition made by the AO towards bogus purchases, the assessee has reiterated its submissions made before the AO to argue that its purchases are supported by valid purchase bills and payment for such purchases has been made through proper banking channel. The AO in the absence of any incorrectness as to books of account maintained by the assessee or made out a case of sales outside the books of account considered purchases from the above parties merely on the ground that they were appearing in the list of suspicious / hawala dealers prepared by the Maharashtra Sales-tax department. The CIT(A), after considering relevant submissions of the 5 Scientific Devices (Bombay) Pvt Ltd assessee and also by relying upon certain judicial precedent rejected ground raised by the assessee challenging validity of reopening of assessment on the ground that the AO has valid reasons for reopening of assessment which is evident from the fact that the information received from investigation wing clearly establishes the fact that the assessee is one of the beneficiaries of bogus purchase bills issued by certain suspicious / hawala dealers prepared by the Maharashtra Sales- tax department. Insofar as addition made towards bogus purchases u/s 69C, the CIT(A), after analyzing the raw material consumption details and gross profit declared by the assessee in the past and subsequent years determined gross profit on the basis of gross profit declared by the assessee for the assessment year 2013-14 and worked out addition sustained towards bogus purchases for both the assessment years. The relevant portion of the order of the CIT(A) is extracted below:-
“7.13 Considering the above facts and in view of the decision of the Hon. Delhi High Court _ in the case of CIT Vs. Jansampark Advertising and Marketing (p) Ltd, it is also an obligation on on credits, which were not men of the means, hence run away immediately after action of the Sales Tax Dept. As per norms the genuine parties will never run away on account of such action. The payments claimed to have been made in subsequent years, in spite of having sufficient balance on the dates of purchases. The appellant could not produce proof regarding mode of payments, made in subsequent years. It is difficult to believe that these hawala parties were selling goods on credits for several lakhs, that to when they could not pay their negligible VAT liability and run away from the town. In support of these findings, the few copies of ledger accounts of these hawala parties are enclosed herewith, for ready reference. 7.15 In compliance, the Ld. AR could not offer any valid explanation for not making any payments to these parties and also failed to offer proper reasons, for fall in the GP rate vis-a-vis excess consumption of raw-material, with credible documents, as compared to A.Y.2013-14. This clearly establishes the fact that the 6 Scientific Devices (Bombay) Pvt Ltd appellant had suppressed its profit by inflating his hawala purchases, which are not open for verification. 7.16 From the above chart it is seen that the appellant is capable of harvesting GP @ 48.44% in AY 2013-14 from the same set of business and with the same management. If the GP for AY 2013-14 is adopted, after rejecting the accounts u/s. 145(3) of the Act, in these years, then the resultant suppressed GP is worked out at Rs 11,I9,546/-(5,83,09,680/- x 1.92/100) and Rs 33,76,0257- (7,92,49,413/- /- x 4.26/100), respectively. In this regard, I would like to place my reliance on the ratio laid down by the following courts - // is held by the Hon 'ble Supreme Court in the case of H M Esufali H M Abdulla 90 ITR 271 (SC) that if the estimation made by the Assessing Authority is a bonafide estimate and based on a rationable basis, the fact that there is no good proof in support of that estimate is immaterial. Apex court has farther held in the case ofM/s. Kanchwala Gems Pvt. Ltd vs JCIT 288 ITR 10 (SC) that it is well settled that in a best judgment assessment, there is always a certain amount of "guess worfc\ The Hon'ble Supreme Court, in the case of CIT v. Calcutta Agency Ltd. (SC) 19 ITR 191 and Lakshimaratan Cotton Mills Co. Ltd. v. CIT (SC) 73 ITR 634, has held that in order to claim that an expenditure falls u/s 37(1) of the Act, the burden of proving the necessary facts in that connection is on the assessee and not on the Department. Similarly, the Apex Court, in the case of Lakshminarayan Madan Lal v. CIT (SC) 86 TTR 439 and in the case of Swadeshi Cotton Mills Co. Ltd. v. CIT 63 7.17 Since the suppressed GP of Rs 11,19,5467- and Rs 33,76,0257-, in these years, is more than 25% of bogus purchases, i.e. Rs 5,98,7797- & Rs. 17,61,0467-, therefore, the disallowance to the extent of suppressed GP i.e. Rs 11,19,5467- & RS.33,76,0257-, as against total disallowance of Rs 23,95,1167- & Rs.70,44,1847-, is hereby sustained and balance disallowance of Rs 12,75,5707- & Rs 36,68,1597-, respectively, is deleted. All the grounds of appeal are partly allowed.”
5. Aggrieved by the order of the CIT(A), the assessee as well as the revenue are in appeal before us. 6. The Ld.AR for the assessee submitted that the Ld.CIT(A) erred in confirming addition towards alleged bogus purchases from certain parties on the basis of estimation of gross profit on total turnover by taking into account gross profit declared by the assessee for the assessment year 2013-14 by totally deviating from the issue of bogus purchases addition made by the AO u/s 69C of the Income-tax Act, 1961. The AO has made addition towards 100% bogus purchases,
7 Scientific Devices (Bombay) Pvt Ltd whereas the CIT(A) has gone on a different footing by estimation of gross profit on total turnover which is not at all relevant to sustain addition made by the AO towards bogus purchases. The assessee has produced valid details to justify purchases from the above parties whereas the AO has gone only on the basis of information received from sales-tax department without conducting further enquiries with regard to the correctness of purchases from the above parties which is evident from the fact that the AO has not carried out any kind of investigation about the claim made by the assessee with necessary evidences. The Ld.AR further submitted that the AO has rejected books of account u/s 145(3) without any finding as to incorrectness of books of account or sales made outside the books of account. In the absence of any finding as to incorrectness of books of account, rejection of books of account u/s 145(3) is incorrect and addition towards total purchases from above parties is baseless. The CIT(A), without appreciating the facts has sustained addition by estimating gross profit on total sales which is incorrect.
The Ld.DR, on the other hand, submitted that the Ld.CIT(A) was erred in allowing partial relief to the assessee without appreciating the fact that the assessee has failed to justify purchases from above parties in the backdrop of clear findings by the sales-tax department that those parties are hawala operators involved in providing accommodation
8 Scientific Devices (Bombay) Pvt Ltd entries without any actual business activity. The Ld.DR further submitted that the Ld.CIT(A) was erred in relying upon certain judicial precedents including the decision of Hon’ble Supreme Court in the case of Kachwala Gems vs CIT 288 ITR 10 (SC) as the fact of those cases are not at all relevant to decide the issue before the CIT(A) insofar as bogus purchases is concerned. The Ld.DR further submitted that the assessee could not produce primary evidence like octroi receipts, delivery challans, etc. to prove the genuineness of the purchases.
Therefore, the AO was right in appreciating the facts gathered during the course of assessment proceedings as well as affidavits filed by the entry providers before sales-tax authorities to make addition towards purchases from the above parties and his order should be upheld.
We have heard both the parties, perused the material available on record and gone through the orders of authorities below. The AO disallowed purchases from certain parties on the ground that those are involved in providing accommodation entries without there being any actual delivery of goods. According to the AO, the information collected during the course of assessment proceedings coupled with enquiries affidavits filed by the entry providers before sales-tax authorities clearly prove that the assessee is not able to justify purchases from above parties except furnishing purchase invoices and payment proof. Mere furnishing of purchase bills and payment proof would not sufficient to 9 Scientific Devices (Bombay) Pvt Ltd justify purchases from above parties in the backdrop of clear findings by the sales-tax department that they are involved in providing accommodation entries. The entry providers also admitted before the sales-tax department that they actually issued bogus purchase bills without actual delivery of goods and returned cash back to the parties after retaining nominal commission. It is the contention of the assessee that it purchases are supported by valid documents and merely because third party information says that the parties are involved in providing accommodation entries, purchases from above parties cannot be considered as bogus. The assessee further contended that the AO has not pointed out any discrepancy in books of account or made out any case of sales outside the books of account. In the absence of any incorrectness in books of account or stock details, rejection of books of account u/s 145(3) and addition towards bogus purchases is incorrect.
Having heard both the sides and considered material available on record, we find that the AOs main allegation is that the parties appeared in the list prepared by the sales-tax department as hawala / suspicious dealers, who were indulging in issuing bogus purchase bills. The AO has not conducted any independent enquiry about the genuineness of purchases. On the other hand, the assessee has furnished various details to justify purchases from the above parties including purchase bills and payment proof. However, failed to furnish further evidences like
10 Scientific Devices (Bombay) Pvt Ltd lorry receipts and delivery challans to further strengthen its case to justify purchases from the above parties in the backdrop of clear findings by the sales-tax department. Under these circumstances, we are of the considered view that it is difficult to accept the arguments of the assessee that the purchases from above parties are genuine in nature and supported by valid evidences.
Having said so, let us examine what is required to be done in case of bogus purchases where the AO has made addition towards alleged bogus purchases only on the basis of third party information without conducting any independent enquiry. Various Courts and Tribunals have considered the issue of bogus purchases and depending upon the facts of each case, estimated net profit of 12.5% to 25%. The Hon’ble Gujarat High Court in the case of Vijay Proteins Ltd vs CIT (2015) TMI 828 (Guj High Court) under similar set of facts has upheld estimation of net profit of 15% on bogus purchases. The Hon’ble Gujarat High Court in the case of CIT vs Simit P Sheth 56 ITR 451 (Guj) has held that no uniform yardstick could be applied to estimate net profit because of various nature of risk involved in various types of business and net profit depends upon facts of each case. The ITAT, Mumbai Bench in a number of cases have taken a consistent view and estimated net profit of 12.5% on bogus purchases. The sum and substance of ratios of the decisions of Courts and Tribunals are that in the case of bogus
11 Scientific Devices (Bombay) Pvt Ltd purchases only profit element embedded in bogus purchases needs to be taxed but not the total alleged bogus purchases. Therefore, we are of the considered view that the AO was erred in making 100% addition towards alleged bogus purchases u/s 69C of the Act. The CIT(A), without appreciating the facts has gone on a different footing and estimated gross profit by adopting assessment year 2013-14 gross profit to sustain the addition made by the AO towards alleged bogus purchases.
Coming to the case laws relied upon by the Ld.DR. The Ld.DR relied upon the case of Hon’ble Supreme Court in the case of NK Proteins Ltd vs CIT (2017)-TIOL-23-SC-IT. We have gone through the case law relied upon by the Ld.DR with the facts of the present case and find that in the case before the Hon’ble Supreme Court, the facts are entirely different inasmuch as the department has gathered various information including unsigned cheque books and bills during the course of survey. Under these circumstances, the Hon’ble Supreme Court came to the conclusion that once purchases are considered as bogus, then addition should be made for total purchases and not for net profit embedded in such purchases. In this case, the assessee has filed various details to justify purchases. Though the AO has made addition on the basis of information received from sales-tax department failed to make any further enquiries in the light of evidences filed by the assessee 12 Scientific Devices (Bombay) Pvt Ltd to ascertain genuineness of purchases. Therefore, we are of the considered view that the case law relied upon by the Ld.DR is not applicable to the facts of present case. In this view of the matter and considering the ratios of the case laws discussed by us, we direct the AO to estimate net profit on total alleged bogus purchases at 12.5% for AYs 2010-11 and 2011-12.
The assessee has challenged reopening of assessment u/s 147 for both the assessment years. During the course of hearing the Ld.AR for the assessee submitted that he did not want to press the ground of reopening of assessment. Therefore, the ground raised
by the assessee challenging reopening of assessment for both the assessment years is dismissed as not pressed.
13. In the result, appeals filed by the assessee for both the assessment years are partly allowed and appeals filed by the revenue for both the assessment years are dismissed.
Order pronounced in the open court on 31st January, 2018.