FILTERTECHNIKS P.LTD,MUMBAI vs. ITO 8(1)(4), MUMBAI

Briefly stated the facts are that, the Assessing Officer in the course of Assessment Proceedings noticed that assessee made purchases from various parties out of which purchases of ₹.39,59,200/- were made from three parties namely M/s. Om Traders, M/s. S.M. Trading & M/s. Mahavir Sales Corporation. The Assessing Officer stated that information has been received from Sales Tax Department indicating that the above said parties have not actually sold any material to the assessee company but have only issued bogus bills for the year under consideration. It is also observed that proprietors of the above concerns gave statements before the Sales Tax Department confessing that they have neither purchased nor sold any material and they only issued sale bills without actual delivery of materials. Based on the above information, Assessing Officer issued notices u/s.133(6) to the aforesaid parties and notices were served on M/s. Om Traders & M/s. S.M. Trading but no compliance was made by the parties. In the case of M/s. Mahavir Sales Corporation notice returned unserved with the postal remark that the said concern is ‘Left’. The Assessing Officer also observed that summons was issued u/s. 131 of the Act to the parties and statements were recorded by him and the parties have denied supply of goods and they have admitted that they have issued only accommodation bills.

The assessee was required to substantiate that the purchases made from these parties as genuine. Assessee submitted its reply dated 22.01.2014 stating that assessee had asked one supplier to procure certain material and accordingly materials were procured and the supplier arranged the bills. It is not aware of the fact that the bills are fake bills and as the material was received as per requirements the assessee has not gone into genuineness of the bills. It was submitted that the materials were supplied by the suppliers at assessee’s door step. Assessee is not having any lorry receipt. It was contended that out of three purchases one item has been exported to P.T. Indo-Bharat Rayon, Jakarta and balance two items were supplied to Andritz Hydro Private Limited, Pawal, Haryana, copies of export and sales bills along with bill of lading and lorry receipts were furnished before the Assessing Officer. Assessee also furnished the stock register maintained by the assessee. It was further contended that assessee is engaged in the manufacture of engineering goods which are manufactured as per the customers’ drawings and designs and the items are not standard goods. Assessee also relied on the decision of the Hon'ble Gujarat High Court in the case of CIT v. Simit P. Sheth [356 ITR 451] and submitted that on identical circumstances only 12.5% have been disallowed not the entire purchases.

However, the Assessing Officer concluded that the parties from whom the assessee said to have been purchased the material namely M/s. Om Traders, M/s. S.M. Trading & M/s.Mahavir Sales Corporation have categorically denied supply of goods to the assessee and this gives rise to the conclusion that the assessee has paid cash to the undisclosed real suppliers for making purchases of goods and assessee made cash purchases from the real suppliers and hence expenditure incurred by cash purchases remains unexplained. Therefore, Assessing Officer treated the purchases made from the above parties as unexplained expenditure u/s.69(C) of the Act and the Ld.CIT(A) sustained the disallowance made by the Assessing Officer.

Learned Counsel for the assessee reiterated the submissions made before the lower authorities. He further submits that in assessee’s own case in ITA.No.1200/MUM/2017 dated 23.08.2017 for the Assessment Year 2010-11 the Tribunal estimated the disallowance i.e profit from these purchases at 8% as against 100% sustained by the Ld.CIT(A). Therefore, he submits that, following this order the disallowance may be restricted to 8% of the purchases.

Ld.DR vehemently supported the orders of the lower authorities.

We have heard the rival submissions, perused the orders of the authorities below. Assessee has shown purchases from the following parties. PAMOUNT OF NAME OF THE NAME OF THE S.NO. PURCHASE (₹.) PARTY PROPRIETOR 1 M/s. Om Traders Dhiren M. Lakhani 12,60,720/- 2 M/s. S.M. Trading Co. Ketan V. Shah 12,48,480/- 3 M/s. Mahavir Sales 14,50,000/- Corporation 8. Based on the information received from the Sales Tax Department the Assessing Officer issued notices u/s. 133(6) and also summons u/s.131 of the Act to the above parties. Notices and summons were served on the proprietaries of M/s. Om Traders and M/s. S.M. Trading namely Dhiren M. Lakhani and Ketan V. Shah respectively. Both of them appeared before the Assessing Officer and deposed that they have not supplied any material to the assessee but only provided accommodation bills. The Assessing Officer also confronted these statements recorded on oath from proprietaries of M/s. Om Traders & M/s. S.M. Trading company and required the assessee to show cause as to why the purchases shown from the aforesaid entities should not be considered as bogus. Assessee submitted that it had procured material from one supplier and the supplier has arranged the bills since the material was received as per the requirement of the assessee, assessee did not check

6 ITA.No.1561/MUM/2016 (A.Y: 2011-12) Filtertechniks Private Ltd. the genuineness of the bills. It was contended that the payments were made through cheques. It was contended that out of three purchases one item has been exported to P.T. Indo-Bharat Rayon, Jakarta and the remaining two items are supplied to Andritz Hydro Private Limited, Pawal, Haryana and submitted that the copies of export and sales bills along with the bill of lading and lorry receipts.

It was also contended that proper stock register was maintained and all the purchases and sales are recorded. It was also contended that if the assessee had not procured the material it would not have supplied same to the ultimate customers according to the designs and drawing as required by the customers. Here we observe from the Assessment Order that, the Assessing Officer not doubted the sales made by the assessee but however he disallowed the purchases on the ground that the parties have denied in their statements and therefore since the parties have denied in their statements he concluded that the assessee might have purchased the materials outside the Books of Accounts by way of cash and therefore it was unexplained expenditure. On confronting by the Assessing Officer about the statements given by the proprietors the assessee said that the materials were procured from one supplier who delivered the goods at its door steps. It is not even furnished who is the supplier and no evidences were furnished whether such supplier procured

The Hon'ble Gujarat High Court in the case of Bholanath Polyfab Pvt. Ltd [355 ITR 290] held that when the assessee made purchases and sold the finished goods as a natural corollary not the entire amount covered under such purchases would be subject to tax but only the profit element embedded therein. Similar view has been taken by the Hon'ble Gujarat High Court in the case of CIT v. Simit P. Seth [38 taxman.com 385]. Further, we also find from the Order of the Tribunal where M/s. Mahavir Sales Corporation was one of the suppliers in the immediately preceding Assessment Year, the Tribunal estimated the profit element from the said purchases at 8%.

Thus, in view of the above discussion and keeping in view the facts and circumstances of the assessee’s case, we direct the Assessing Officer to recompute the disallowance estimating the profit at 12.5% of the 8 ITA.No.1561/MUM/2016 (A.Y: 2011-12) Filtertechniks Private Ltd. purchases made from the above parties and recompute the income accordingly.

In the result, appeal of the assessee is partly allowed.