INCOME TAX OFFICER-25(1)(2), MUMBAI vs. SHAILESH R. PATEL, MUMBAI

In this appeal the only grievance of the Revenue is that the CIT(A) erred in restricting the disallowance to 12.50% of the total unexplained purchases of Rs.42,11,015/- instead of assessing the entire gross amount of purchases.

At the time of hearing, it was noted that none appeared on behalf of the assessee nor any application for adjournment has been placed before us inspite of notice of hearing being served upon the assessee. Therefore, we proceed to dispose-off the appeal ex-parte qua the respondent assessee after hearing the Ld. Departmental Representative on merits in terms of Rule -25 of Income Tax (Appellate Tribunal) Rules, 1963.

At the of hearing the Ld. Departmental Representative pointed out that the assessee is a trader in stationery items and the assessment was reopened on account of information received from the Sales Tax Department of Maharashtra to the effect that assessee had effected purchases of Rs.42,11,015/- from parties who were treated as Hawala operators i.e. the parties who were issuing accommodations bills and not effecting actual sales/purchases. In the ensuing assessment the assessee relied upon the copy of invoices, bank statements etc. to contend that it had actually effected the purchases from the concerned parties and also made payment thereof. The Assessing Officer was guided by the information received from Sales Tax Department of Maharashtra and considered purchases to the extent of Rs.42,11,015/- as unexplained income. The CIT(A) has since affirmed the decision of the Assessing Officer in principle, but on the quantification of the addition, he relied upon the judgment of the Hon’ble Gujarat High Court in the case of CIT vs. Simit P. Sheth, 356 ITR 451(Guj). The CIT(A) noted that even if the stated purchases are found to be unexplained, but there was no material to show that the corresponding sales shown by the assessee were also bogus. According to the CIT(A) in such a case the material must have been purchased by the assessee though not from the stated parties because otherwise the corresponding sales could not be effected and the same have not been doubted by the Assessing Officer. Under these circumstances, the CIT(A) restricted the addition to 12.50% of the amount of purchases following the ratio of the Hon’ble Gujarat High Court in the case of Simit P. Sheth (supra).

Before us, the Ld. Departmental Representative relied upon the judgment of the Hon’ble supreme Court in the case of N.K.Proteins Ltd. vs. DCIT in SLP(Civil) No.769/2017 dated 16/01/2017 to contend that the entire amount of purchases be assessed to tax and not merely the profit element of such purchases as done by the CIT(A).

Having considered the stand of the Ld. Departmental Representative as also the orders of the authorities below, in our view, the conclusion drawn by the CIT(A) is fair and apt having regard to the facts and circumstances of the case and does not require any intervention from our side. No doubt, the CIT(A) accepted the plea of the Assessing Officer that the purchases in question were unexplained. The CIT(A) noted that assessee was a trader of goods and that the sales corresponding to the stated material purchases have been accepted, as there was no material available with the Assessing Officer to the contrary. In this background, the CIT(A) relied upon the ratio of the Hon’ble Gujarat High Court in the case of Simit P. Sheth(supra) to contend that the profits of business in such a situation could not be ascertained without deducting the cost of purchases from the sales. Before us, the findings of the CIT(A) have not been assailed on the basis of any cogent reasoning and, therefore, the same are hereby affirmed, which are based on judgment of the Hon’ble Gujarat High Court in the case of Simit P. Sheth(supra). In so far as the reliance placed by the Ld. Departmental Representative on the judgment of Hon’ble Supreme Court in the case of N.K.Proteins Ltd.(supra) is concerned, the same in our view is not attracted to the facts of the present case, inasmuch as, in the case before the Hon’ble Supreme Court evidence was unearthed in course of search which showed bogus transactions, whereas in the instant case, the entire discussion in the assessment order reveals that the case of the Assessing Officer is fully resting on the information received from the Sales Tax authorities of Maharashtra and there is no independent material or evidence to demonstrate that the specific transactions in question were bogus. Notably it is one thing to treat the expenses as unexplained or unsubstantiated and another to treat the same as bogus or sham. For the latter to prevail, positive evidence has to be lead with regard to the specific transactions, which is absent in the present case. Under these circumstances, in our view, the reliance placed by the Revenue in the case of N.K.Proteins Ltd.(supra) is not justified and that the CIT(A) made no mistake in sustaining the addition equivalent to 12.50% of the unexplained expenses of purchases instead of gross amount of purchases. In view of the above, the order of the CIT(A) is affirmed and the Revenue fails in its appeal.

In the result, the appeal of the Revenue is dismissed.