MANGALMURTI REALTORS,MUMBAI vs. ITO WD 2 PANVEL, MUMBAI

The brief facts of the case are that the assessee is a partnership firm engaged in the business of promoters and builders, filed its return of income for the assessment year 2011-12 on 13-9-2011 declaring total loss of Rsa.1,81,686. The case was selected for scrutiny and notices u/s 143(2) ad 142(1) of the Act alongwith questionnaire were issued. In response to the notices, authorized representative of the assessee attended from time to time and submitted the details, as called for. The assessment was completed u/s 143(3) on 20th March, 2014 determining the total income at Rs.1,95,04,320, interalia making additions towards disallowances of purchase from hawala dealers, addition towards unproved / bogus purchases, disallowance of interest on capital and remuneration to partners.

Aggrieved by the assessment order, assessee preferred appeal before the CIT(A). Before CIT(A), the assessee has filed elaborate written submissions.

The first issue that came up for our consideration from assessee’s appeal is addition towards disallowance of bogus purchases of Rs.5,54,863. The AO disallowed purchases of Rs.5,54,863 from M/s Mahavir Steel Corporation, M/s Kameshwar Trading Pvt Ltd, M/s Shreeji Enterprises & M/s Paras Enterprises on the ground that the said dealers have been declared as hawala dealers on the website of Sales-tax department. The AO further observed that the said suppliers had also filed affidavits before the Sales-tax department wherein they admitted that no real business was conducted by them and no physical delivery of goods was given. It was alleged that after receipt of cheque equivalent cash was given back after deducting commission. The AO further observed that the assessee could not substantiate purchases with necessary above parties are bogus in nature. It is the contention of the assessee that the AO was erred in disallowing purchases from the above parties ignoring the material placed on record including purchase bills, merely on the basis of third party statement without allowing the assessee to cross examine the statement of third party. The assessee further submitted that purchases from above parties are genuine in nature, which are supported by valid documents and also these purchases have been used in the execution of the project. In this regard relied upon certain judicial precedents.

We have heard both the parties and perused the materials available on record. The AO made addition towards bogus purchases from 4 parties on the ground that such parties were listed by the Sales-tax department as hawala dealers indulging in providing bogus purchase bills without actual delivery of goods. According to the AO, the assessee has failed to substantiate purchases with necessary evidences except furnishing purchase bills. The AO further observed that on receipt of cheques cash has been withdrawn and returned to the purchasers, after retaining commission. It was further observed that the said suppliers had also filed affidavits wherein thy admitted that no real business was conducted by them and no physical delivery of goods was ever given. furnished purchase bills, failed to file evidences to justify purchases from above parties in the backdrop of clear findings of Sales-tax department that the parties are suspicious dealers involving in providing accommodation entries. Though the assessee claims to have justified the purchases, failed to substantiate the allegations made by the AO that the said parties have filed affidavit before the Sales-tax department that they were engaging in the business of providing accommodation entries and no real business has ever been carried out. The CIT(A), after considering the relevant facts and also by relying upon plethora of judicial precedents including the decision of Hon’ble Allahabad High Court in the case of Ganesh Rice Mills vs CIT 294 ITR 316(All) held that purchases from such parties are non genuine and, therefore, the work-in-progress shown in the current year is reduced by an amount of Rs.5,54,863 on account of inflation of purchases. Facts remain unchanged.

We have heard both the parties, perused the material available on record and gone through the orders of authorities below. The AO made addition towards unproved / bogus creditors on the ground that purchases from certain parties were returned in the subsequent year and purchases from certain parties are bogus in nature as they were listed by the Sales-tax department in the list prepared by them as hawala dealers. The AO never disputed the fact that these purchases were made during the previous financial year. The AO made addition only on the ground that no confirmation has been furnished from those parties. We do not find any merit in the findings of the AO for the reason that merely because confirmation has not been furnished from the parties, addition cannot be made towards sundry creditors brought forward from earlier financial year. We further observe that all these creditors are arising out of purchases made during the previous financial year. We further notice that the purchases from 4 parties were returned in the subsequent year. When the purchases are returned, obviously, the assessee will reduce the purchase in the subsequent financial year and reverse the creditors. Therefore, there is no reason for the AO to make creditors. Insofar as purchases from other parties, the AO has made additions only on the basis of list of Sales-tax department which classifies these parties as suspicious dealers involving in providing accommodation entries. Except this, the AO does not have any other evidence to prove that purchases from these parties are bogus in nature. We further notice that the AO has made addition towards creditors, who are brought forward from earlier financial year in the impugned assessment year. The question that needs to be answered here is whether addition can be made towards creditors and in which year such creditors are taxable and also whether it is taxable u/s 41(1) or 68 of the Act. It was required to examine whether this amount should be brought to tax in the year in which credit was so made for the first time in the books of account or in the year in which these are found not payable. If one analyse the provisions of sections 41(1) and 68, the provisions of section 41(1) is applicable, where remission or cessation of liability is taken place during the previous year. The provisions of section 68 is applicable where any sum found credited in the books of account maintained by the assessee for a previous year may be charged to Income-tax as income of the assessee of that previous year, if the assessee offers no explanation about the nature of the source of such sum or the explanation offered by him is, in the opinion of the AO, not Court in the case of CIT vs Bhogilal Ramjibha Attara in Income-tax Appeal No.588/2013 dated 04-02-2013 in which it was held that section 41(1) of the Act would apply in a case where there had been remission or cessation of liability during the year under consideration subject to the conditions contained in the statute being fulfilled. Such cessation or remission had to be during the year under consideration. The Hon’ble Court further observed that it could not also be added u/s 68 of the Act. In this case, both the elements were found to be missing. There was nothing on record to suggest that there was remission or cessation of liability, that too, during the previous year relevant to AY 2011-12 and these creditors are brought forward from previous financial years. Therefore, we are of the view that the AO was erred in making addition towards unproved / bogus creditors during the year under consideration. The CIT(A), after considering relevant facts has rightly deleted addition made by the AO. We do not find any error in the order of CIT(A).