ITO 26(2)(1), MUMBAI vs. KEYUR SHAILESH SANGHVI, MUMBAI

As per the facts of the present case, the assessee is an individual deriving income from Trading in Chemicals Business. The return of income for AY 2009-10 was filed by the assessee on 29.09.11 declaring total income at Rs. 3,41,967/-. In this case, the assessments was reopened and notice u/s 148 dated 16.03.13 was issued and served on the assessee. The AO received information that the assessee indulged in the acceptance of bogus purchase from hawala entries to the tune of Rs. 46,81,352/- from ten parties and after recording reasons for reopening, the case was reopened for the year under consideration. Since it was found that assessee had made bogus purchases from ten parties and after serving statutory notices and considering the facts as Keyur Shailesh Sanghvi well as legal proposition, AO made additions to the tune of Rs. 46,81,352/- u/s 69C of the Act. Aggrieved by the order of AO, assessee preferred appeal before Ld. CIT(A) and Ld. CIT(A) after considering the case of both the parties allowed the appeal of the assessee and restricted the additions by applying 12.5% of GP on the alleged purchases of Rs. 46,81,352/- with a view to cover up all possible leakages of the revenue. Now before us, the revenue has preferred the appeal by raising the above grounds.

Ground No. 1 to 5. 3. All the above grounds raised by the revenue are inter connected and inter related and relates to challenging the order of Ld. CIT(A) in restricting the disallowance made by AO on account of bogus purchase by the assessee, therefore we thought it fit to dispose of the same thorough this common order.

Keyur Shailesh Sanghvi 4. We have heard both the counsels at length and we have also perused the material placed on record as well as the orders passed by revenue authorities. Before we decide the merits of the case, it is necessary to evaluate the orders passed by Ld. CIT(A). The Ld. CIT(A) has dealt with the above grounds raised by the revenue in para no. 4 of its order. The operative portion of the order of Ld. CIT(A) is contained in para no.

4. (4.2 to 4.2.20) of its order and the same is reproduced below:- 4.2 The second ground of appeal consisting of GOA Nos. 5 to 11 are regarding addition of Rs. 46,81,352/- made by the AO u/s 69C on account of suspicious purchases which are being taken together for consideration and decision. 4.2.1 The fact remains that on the basis of information/material supplied by the DGIT(Inv.), Mumbai and enquiries carried out in this regard, the AO summarized the purchases shown by the appellant in respect of the aforementioned 10 parties amounting to Rs. 46,81,352/-as being not genuine. 4.2.2 It was contended by the appellant that the impugned purchases are neither bogus nor in genuine and the purchases are made against invoices raised by the parties and that payments against the invoices had been made by account payee cheques. It was further contended that the Keyur Shailesh Sanghvi AO has not considered the stock statement showing opening balance, purchase, sales and closing stock. 4.2.3 I have carefully perused the submissions of the appellant and the assessment order passed by the AO for the year under consideration and it is observed that the AO has made independent enquiries at the premises of the alleged parties who were not found at the given addresses. The AO had issued notice under section 133(6) to these parties on the addresses provided by the assessee, however, the said notices were returned by the postal authority with the remarks "Not Known". Thereafter the AO asked the assessee to produce the alleged aforementioned parties along with the books of accounts to verify the claim of purchases made by him. However the appellant failed to produce the above parties for verification. Thereafter the AO after issuing show cause notice dated 10/03/2014 to the appellant in this regard made the aforesaid addition of bogus purchases. Therefore it is observed that the AO has made sufficient independent enquiries and has just not simply relied on the information provided by the Sales Tax Department. 4.2.4 The onus is on the appellant to produce the identity of the so called supplier and genuineness of transactions, when he has claimed the purchases to have been made from them. There is no concrete evidence produced by the appellant to prove delivery of goods through independent agency/third party in the case of the alleged purchases.

Keyur Shailesh Sanghvi 4.2.5 As the parties could not be traced at the given address and there is no confirmation of purchases that could be filed by the assessee at any time during the course of assessment and the appellate proceedings, it is held that the appellant has not been able to discharge his onus to prove the claim of such purchases as being genuine and bonafide. 4.2.6 Investigation done by the Department of Sales Tax had revealed the existence of non genuine (Hawala) transactions where there was no sale of goods and the tax invoice issuing dealer had merely issued tax invoices to the so called purchasing dealer in order to defraud the revenue. It was held that these are non genuine transactions involving fraud, collusion or connivance between so called selling and purchasing dealers. In view of the above, to summarise, the fact remains that the AO has made independent enquiries in this regard to prove the non-genuineness of the purchases, the contention of the AO is that the appellant has not been able to give any convincing or cogent explanation as to how these goods happened to come in his possession and also the fact remains that the above parties are declared as Hawala parties by the Sales Tax Department, therefore, the purchases of the appellant from these alleged parties are not established. 4.2.7 As could be seen, information was available before the AO as obtained through enquiry by the Departmental Authorities from the Sales Tax Department

Keyur Shailesh Sanghvi which demonstrated that certain parties including the suppliers from whom assessee claimed to have effected purchases are providing bogus bills & accommodation entries. Therefore, in the aforesaid context, the assessee was required to prove the genuineness of the purchases made from those parties. As could be seen, though the assessee submitted part details of purchase but he expressed his inability to produce the concerned suppliers before the AU. Though it may be a fact that payments to the concerned suppliers were made through cheques but at the same time the purchases made by the assessee from the concerned parties to certain extent remained unverifiable due to non production of those parties. Production of suppliers assumes importance in view of specific information with the Department that the concerned parties from whom the assessee claimed to have purchased the goods have actually admitted of providing accommodation entries & bogus purchase bills. Therefore, onus was on the assessee to satisfactorily prove that entire purchases are genuine. As the assessee has failed to fully prove the genuineness of the purchase, the entire claim of purchase, under the circumstances cannot be allowed. 4.2.8 It is seen from the assessment order that the AO had given sufficient opportunity to the assessee even after the notices u/s.133(6) were not served on the aforesaid questioned parties on the addresses made available by the appellant himself and the response thereof was considered by the AO before completing the assessment. Accordingly it

Keyur Shailesh Sanghvi cannot be said that the AU did not give reasonable opportunity of being heard to the assessee. 4.2.9 Further, the facts of the present case show that appellant could not produce either confirmation or the party from whom goods have been purchased by the appellant. The supplier in question has found to be engaged in providing bogus bills without actually dealing in goods as per the information provided by the Sales Tax authorities. However, this is also a fact that the sales of the appellant has not been doubted by the AU. Therefore, if sales are not doubted or proved non genuine by the AO, then the logical corollary is that the appellant has definitely made the purchases or else where from he could have affected the sales. Therefore, what is under dispute is the purchases from the above parties from whom bills have been taken and cheques have been issued. Therefore, the purchases of the appellant from the above parties are not established. Hence the purchases per se by the appellant could not be doubted as sales have not been doubted by the AO. 4.2.10 Further in the present facts and circumstances of the case, it is observed that the aforesaid purchases are supported by dubious bills with subsequent entries in the books of accounts and payment has been claimed to have been made by account payee cheques. The claim of the appellant that the payments have been made by the a/c payee cheque also does not make his claim as bonafide in view of the judicial pronouncement made by Hon'ble Keyur Shailesh Sanghvi Calcutta High Court in the case of CIT vs. Precision Finance Pvt. Ltd. 208 ITR 465 Cal. (1994). It was held that transaction through bank is not sufficient to prove a transaction as bonafide. Merely because the money is transferred through the bank account does not prove that the money is explained. It is essential to prove the creditworthiness of the persons or genuineness of the transactions. Merely furnishing of particulars is not enough. It was held that mere payment by account payee cheque is not sacrosanct nor can it make a non genuine transaction genuine. The ratio laid down in the case of Precision Finance is squarely applicable to the facts and circumstances in the present case of the appellant as well which is commensurate with the information received by the AG from the Investigation Wing. It is a fact that payment is made through banking channels but it is also a fact that on deposit of such money in these so called supplier's bank accounts cash is withdrawn on the same day or immediately thereafter. 4.2.11 The Appellant has contended that the AO has not rejected the books of accounts and has made the addition on account the alleged bogus purchases. The contention of the appellant is not found to be acceptable in view of the fact that the AO had issued the showcause notice on 10.03.20 14 and had categorically asked the assessee to produce the details of purchases made from the alleged parties alongwith their books of accounts to verify the claim of purchases made by the appellant and to produce Keyur Shailesh Sanghvi the parties for verification failing which the transactions would be treated as sham & the claim of corresponding expenses will be disallowed & added back. However, it is observed that in response to the above notice, the appellant had neither produced any details with respect to their ledger account in the books of the supplier parties duly confirmed by the parties nor had produced their bank statements wherein the payment made by the assessee for the transactions were reflected. Therefore in the absence of any cogent material, the purchases were not regarded as genuine purchases by the AO. 4.2. 12 Further, the contention of the appellant is also not found to be acceptable in view of the fact that in case of Bogus purchases it is vital to ascertain whether purchases were totally non-existent or were actually made but from grey market without proper billing instead of from parties from whom it was claimed to be puchascd. Oncc it is clear that puIchases were actually made then only the profit embedded in it and not price of bogus purchases could be added in the income of the assessee as held by several jurisdictional courts. The case laws referred by the appellant are distinguishable on facts. 4.2.13 In view of the above, to summarize, the fact remains that the AO has made independent enquiries in this regard to prove the non-genuineness of the purchases, the contention of the AO is that the appellant has not been able to give any convincing or cogent explanation as to how these goods happened to come in his possession and also Keyur Shailesh Sanghvi the fact remains that the above parties are declared as Hawala parties by the Sales Tax Department, therefore, the purchases of the appellant from these aforementioned parties are not established. 4.2.14 In the present facts and circumstances of the case, the case of the AO is that the appellant only took bills from the above parties to explain the purchases made albeit from open market. Identical issue came up before the Hon'ble High Court of Gujarat in the case of CIT vs. Bholanath Poly Fab Pvt. Ltd. Reported in 355 ITR 290 (GUJ). The assessee was engaged in the business of trading in finished fabrics. The AO disallowed purchases as bogus/unexplained. The CIT(A) confirmed the action of the AO. The issue was carried in appeal before the Hon'ble Tribunal which concurred with the finding of the revenue authorities below that such purchase was made from bogus parties. After adverting to the facts and data placed before it, the Hon'ble Tribunal noted that the entire cloth of 1,02,514 metres was sold during the year and therefore, accepted the assessee's contention that the finished goods purchased by the appellant may not be from the parties shown in the accounts but from other parties. In view of this, the Hon'ble ITAT was of the view that only profit margin embedded in such purchases would be subjected to tax. The Hon'ble Tribunal relied on its earlier decision in the case of M/S Saket Steel Traders vs ITO (ITA No. 2801/Ahd/2008 dated 20/05/2008) and also made reference Keyur Shailesh Sanghvi to the decision in the case of Vijaya Protein Vs CIT 58 lTD 428 (Ahd). On appeal by the department filed in the case of Bholanath Poly Fab Pvt. Ltd, the Hon'ble High Court dismissed the appeal and concurred with the findings of Hon'ble Tribunal that not entire purchase price but profit element embedded in such purchases wouldbe liable to tax. 4.2.15 In the case of CIT versus Kashiram Textile Mills (P) Ltd (2006) 284 ITR 61 (Gujarat) (High Court), it was held that section 69 of the IT Act is not applicable in the case of these purchases. The facts of this case were that the addition was made to the income of the appellant on the ground that the purchases were fictitious. The Tribunal found that details of closing stock were not disputed. There was no material on, record to conclude that besides the alleged fictitious purchases there were other purchases for the same materials under different invoices which could be reflected in the closing stock nor there was any material to show that the purchase price shown in the invoices was inflated or that a part of amount paid to the suppliers had come back to the appellant. Deletion of addition was held to be justified and it was held that the provision of section 69C cannot be made applicable in this case.

4.2.16 In the case of ACIT versus Kishen Lal Jewels (P) Ltd(2013) 33 Taxman 656 (Delhi Tribunal), it was held that to enable invocation of the provisions of section 69C, the AO needed to be in possession of some material indicating that the appellant had incurred expenditure on Keyur Shailesh Sanghvi purchases which had not been reflected in the books of account. Existence of such material with the AO, in fact, is the sine qua non for invoking section 69C. In the present case, the appellant had furnished all purchase as well as the sale bills, quantitative tally of stock for verification by the AO. 4.2.17 In case of Shri Totaram Sharma vs. ITO Ward-6(4), Ahmedabad (Cross appeal) & 229 1/AHD/2004, it was held by Tribunal that 1) The purchases made by the appellant from the relevant four parties, quantity wise as well as value wise have been recorded in the books of accounts. 2) The payment for such purchases has been found to have been made by crossed cheques & duly recorded in the books of accounts. 3) The sales corresponding to such purchases have been found recorded in the books of accounts & it is so because Revenue has not doubted the genuineness of the sales, rather accepted the same. 4) There is no allegation of suppression of value of the closing stock or of the saks quantity wise or value wise & there is no allegation of inflation of purchases also. In view of these facts, the appeal of the appellant was allowed. The above order of Tribunal was confirmed bk Gujarat High Court vide Tax appeal no. 1344 of 2008 with Tax appeal no. 1355 of 2008. 4.2.18 Thus in view of the above facts and circumstances of the case and the recent judgements quoted as above which Keyur Shailesh Sanghvi are found to be squarely applicable in the present case of the appellant, it is opined that not the entire purchase price but only the profit element embedded in such purchases is required to be taxed. 7/ 4.2.19 Therefore the possible profit out of purchases made through non genuine parties is required to be estimated. The estimation of rate of profit must necessarily vary with the nature of business and no uniform yardstick should be adopted for which reliance is placed on the recent judgment in the case of CIT vs. Simit P. Sheth 356 ITR 451 (Guj.) of Hon'ble Gujrat High Court wherein disallowance on account of bogus purchases in the case of traders was sustained at 12.5% of the alleged bogus purchases. 4.2.20 In such a case, the best course of action would be to apply OP ratio and confirm certain percentage of alleged purchases to cover any leakage of revenue. In the given circumstances, in view of the above facts, I propose to apply 12.5% OP on the alleged purchases of Rs. 46,81,352/-which seems to be justified in view of the nature of business of the appellant, which works out to Rs.5,85,169/-(12.5% of 46,81,352/-) which would cover all possible leakages of revenue. The appellant therefore gets a relief of Rs. 40,96,183/-.

Keyur Shailesh Sanghvi had considered all the facts of the present case and had also considered in detail the judgments cited by the parties in para no. 4 (4.2 to 4.2.20) of its order and the same has already been reproduced by us in para no. 4 of our order. The Ld. CIT(A) had rightly conclude that the onus is on the assessee to produce the identity of the so called supplier and genuineness of the transaction, when the assessee has claimed the purchase to have been made from them. The Ld. CIT(A) has also correctly appreciated that no concrete evidence has been produced by the assessee to prove the delivery of goods through independent agency/third party. The assessee also failed to file any confirmation of purchases during the assessment or the appellate proceedings, therefore under these circumstances, it was rightly concluded that the assessee has not been able to discharge his onus to prove the claim of such purchases as being genuine and bonafide. It is important to point out that AO had given sufficient opportunity to the assessee to produce the alleged parties and in this respect notices u/s 133(6) of the Act were also issued but the same could not be served upon the questioned parties as the correct addresses were not available by the assessee.

Keyur Shailesh Sanghvi Since the sales of the assessee has not been doubted by the AO, therefore Ld. CIT(A) logically took the view that the purchases might have been undertaken by the assessee from gray market and therefore with a view to cover up all possible leakages of the revenue. The Ld. CIT(A) had correctly applied 12.5% of GP on the alleged purchases by considering the nature of the business of the assessee and thus restricted the additions. Moreover, no new facts or contrary judgments have been brought on record before us in order to controvert or rebut the findings so recorded by Ld CIT (A). Therefore, there are no reasons for us to interfere into or deviate from the findings recorded by the Ld. CIT (A). Hence, we are of the considered view that the findings so recorded by the Ld. CIT (A) are judicious and are well reasoned. Resultantly, these ground raised by the revenue stands dismissed.

Ground No. 6 & 7. 6. These grounds raised by the revenue are general in nature, thus requires no specific adjudication.

Keyur Shailesh Sanghvi 7. In the net result, the appeal filed by the revenue stands dismissed. Order pronounced in the open court on 22nd Nov, 2017 Sd/- Sd/- (R.C. Sharma) (Sandeep Gosain) लेखासदस्य / Accountant Member न्याययकसदस्य / Judicial Member मुंबई Mumbai;यदनांकDated : 22.11.2017 Sr.PS. Dhananjay आदेशकीप्रनिनिनिअग्रेनर्ि/Copy of the Order forwarded to : 1. अपीलाथी/ The Appellant प्रत्यथी/ The Respondent 2. 3. आयकरआयुक्त(अपील) / The CIT(A) 4. आयकरआयुक्त/ CIT- concerned यवभागीयप्रयतयनयि, आयकरअपीलीयअयिकरण, मुंबई/ DR, ITAT, 5. Mumbai 6. गार्डफाईल / Guard File आदेशधिुसधर/ BY ORDER,