V & V PHARMA INDUSTRIES,THANE vs. ACIT CIR. 3, THANE, THANE

Assessee by: Shri. Deepak Raje Revenue by : Ms. Pooja Swaroop सुनवाई की तारीख /Date of Hearing : 03-10-2017 घोषणा की तारीख /Date of Pronouncement : 28.11.2017 आदेश / O R D E R PER RAMIT KOCHAR, Accountant Member These two appeals , filed by the assessee, being & 6057/Mum/2016 for assessment year‟s (AY) 2010-11 and 2011-12, are directed against common appellate order dated 14-07-2016 passed by learned Commissioner of Income Tax (Appeals)-2, Thane (hereinafter called “the CIT(A)”), for assessment year 2010-11 and 2011-12, appellate proceedings had arisen before learned CIT(A) from separate assessment orders both dated 27-03-2015 passed by learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) r.w.s 147 of the Income-tax Act, 1961 (hereinafter called “the Act”).

I.T.A. No. 6056 & 6057/Mum/2016 (hereinafter called “the tribunal”) in AY 2010- 11 , read as under:- “1. The Ld. Commissioner of Income Tax (Appeals) [hereinafter referred to as "Ld. CIT(A)"] erred in passing the order dated 14.07.2016 upholding the order dated 27.03.2015 passed by the Ld. Assessing Officer disallowing an amount of Rs. 59,73,566/- under Section 69C of the Income Tax Act, 1961 without appreciating the facts and circumstances of the case. The disallowance of the amount under Section 69C of the Act is not justified and the same may be deleted.

2. The Ld. CIT(A) erred in treating various purchases amounting to Rs. 59,73,566/- as unexplained expenditure under Section 69C of the Act, and not taking into consideration the submissions given by the Appellant. The said disallowance of Rs. 59,73,566/- is not justified and the same may be deleted.

3. The Ld. CIT(A) failed to appreciate that all the payments for the said purchases have been made through proper banking channels, and that there was no direct evidence with the Ld. Assessing Officer proving that the purchases of Rs. 59,73,566/- are bogus, except a soft copy of the affidavit of the seller made to the Sales Tax Department. The said disallowance of Rs. 59,73,566/- is thus not justified and the same may be deleted.

4. The Ld. CIT(A) failed to appreciate the Appellant's claim that there are corresponding sales against the purchases of Rs. 59,73,566/, which have not been rejected by the Ld. Assessing Officer, and that there cannot be any sales without there being corresponding purchases. The said disallowance of Rs. 59,73,566/- is thus not justified and the same may be deleted.

6. The Ld. CIT(A) failed to justify the applicability of Section 69C in the case of the Appellant. As the said addition is done on the basis of a hypothesis that the Appellant may have purchased the goods from undisclosed persons and not from the parties listed in the books of accounts. The said addition of Rs.59,73,566/- is thus not justified and the same may be deleted.

7. The Ld. CIT(A) has erred in not going into the merits of the assessment done by the assessing officer and outright rejecting the books of accounts without proper justification, The said disallowance of Rs. 59,73,566/- is thus not justified and the same may be deleted.

8. The Appellant craves leave to add, alter, rescind or amend any of the above grounds of appeal.”

I.T.A. No. 6056 & 6057/Mum/2016

SI. Name VAT .N0. Amount No Mls SAILEELA TRADING PVT 27660591 188V 3498600 I LTD ---- 2 Mls NAVPAD EXPORTS 27430616389V 381056 PVT.LTD 3 Mls DEV ENTERPRlSES 27450526556V 1659112 4 Mls ABHILASHA SALES PVT 27450723466V 434798 ( LTD TOTAL 59,73,566/- Notices u/s. 133(3) was issued by the AO to the aforesaid parties on the given addresses but the letters were returned back un-served by the postal authorities with the remarks „not known‟. The assessee was asked to explain why the purchases made from the above parties should not be treated as an unexplained expenditure . The assessee submitted purchases invoices along with delivery challans, Purchases Registers, ledger accounts of creditors

I.T.A. No. 6056 & 6057/Mum/2016 showing the recording of said purchases , bank statements showing that payment were made through banking channels. The assessee also submitted Audit Reports and financial statement to support its claim. The assessee also submitted stock register showing stock movements during the year and also batch sheets showing the use of materials in the manufacturing process along with the product mix, production process and the process chart, clearly depicting the manufacturing process The assessee also produced books of accounts before the AO. The assessee also claimed that it is not brought on record by the Revenue that the said alleged amount has been re- routed back to the assessee.

The A.O observed that Maharashtra Sales Tax Department had conducted investigation in case of several dealers and beneficiaries and such investigations had unearthed a fraudulent racket involving many hawala dealers and beneficiaries whereby the fake bills were issued to the beneficiaries by hawala dealers without supplying any material , who got commission in return of the fake bills . The AO observed that these hawala operators have given affidavits before sales tax department stating that the purchase transactions were not genuine and material was not actually supplied by them. The assessee is one of beneficiaries of these fake/ bogus bills issued by hawala operators. These hawala dealers in their statement recorded before the sales tax department have admitted the fact that transactions are not genuine. The AO observed that the assessee has booked these purchases from hawala dealers as an expenses in its books of accounts , the onus is on the assessee to prove the genuineness and the correctness of these purchase transaction . The AO observed that purchases claimed by the assessee are not genuine . The assessee also could not prove the details of the vehicle expenses such has vehicle number , type of vehicle and transport receipts were not submitted by the assessee before the AO . the AO observed that since the assessee has shown the entries of said purchase, the only conclusion is that the assessee made purchases from open market. The AO observed that although the assessee has submitted the delivery challans, purchase registers , ledger accounts of the creditors , bank statements and stock statements but the same could not be verified from the books of accounts . The AO made additions to the tune of Rs. 59,73,566/- towards bogus purchases being unexplained expenditure under section 69C

I.T.A. No. 6056 & 6057/Mum/2016 on the allegation that the assessee has obtained accommodation bills for introducing unaccounted goods into the accounted streams, vide assessment order dated 27-03-2015 passed by the AO u/s 143(3) r.w.s. 147.

examination, proof for delivery of goods' i.e. delivery challan, transport receipts, octroi receipts, loading, unloading expenses, stock register, etc, to prove the hawala purchases. Also furnish qualitative/quantitative details i.e. O.S., Purchases, total, sales, CS, item- wise/party- wise, on month to month basis. Please also furnish comparative turnover, GP, GP rate, NP & NP rate for the hawala year last 2 years & subsequent 2 years & also furnish similar details after addition of purchase for the year -and last 2 years and subsequent 2 years and justify the account w.r.t the provision of section 145(3) of the Act, in view of the above facts, Furnish the qualitative/quantitative details i.e. a.s., Purchases, total sales, C.S, item- wise/party- wise, on month to month basis, in the following format for hawala parties Name of the Party- Date of Purchase Amount Date of payment Amount Mode of payment till date ..

Quantitative tally with HP & without HP- MATERIAL PURCHASED & SOLD/CONSUMED

Opening Stock Purchase Total Consumption Closing Stock Quantity I Value Quantity I Value I Value Quantity I Value Quantity I Value Quantity

FINISHED GOODS Opening Stock Production Total Sale Closing Stock: (Quantity) (Quantity) (Quantity) (Quantity) .. (Quantity)

A. Yr (As applicable) Turnover Gross profit GP Rate Gross profit After addition of BP GP rate NP NP Rate NP After addition of BP NP Rate Production of finished goods R Raw material consumed a w %age of raw material to total production Name of Opening Purchase .during Total Payment Closing Date wise Mode of m the hawala balance the year(in Rs.) (in Rs.) made balance payment made in payment a (in Rs.) next year party t e Name and address of parties to whom hawala purchases/goods were sold and GP/NP recorded. r i Name of item Amount Name of item sold Amount C.S. a l 6 c o n

I.T.A. No. 6056 & 6057/Mum/2016 purchased (quantity) Quantity I (Quantity) Value 6.3 In compliance, the Ld AR furnished the certain details but not in prescribed format, item- wise/party-wise. In the absence of these details, it is not possible for the Department to ascertain whether the goods purchase from alleged hawala parties were actually delivered at 'appellant premises, consumed, finished goods produced/sold, therefore, unable to determine the correct amount of the income, from the records / books maintained by the appellant, hence, books are not complete in every respect and not tenable, as per the provisions of section 145(3) of the I.T. Act, 1961, hence, rejected. During the course of appellate proceedings, the Ld. AR of the appellant, has shown his inability to file the copies of confirmed ledger accounts, their mailing addresses and also refused to produce hawala parties, for examination in person. Considering these facts, the contention of the Ld. AR, is not tenable, hence rejected in view of the following reasons/ facts/defects: a. The appellant's claim that the payments to the hawala parties have been made through banking channels, is not tenable as hawala parties have duly admitted in their statement / affidavit, on oath before the responsible Government authority, that after deducting their due commission i.e. approximately 1 %, they have refunded back the balance cash to the buyers. b. It is the duty of the appellant to justify the genuineness of purchases, by furnishing necessary supporting documents, bank statement, confirmation, delivery challan, transport receipts etc. and produce the parties for examination. Even during the course of appellate proceedings, the appellant, number of times, was asked to file above details and produce parties for examination, but failed to do so. No transport / octroi receipts were filed to justify the genuineness of purchases. c. As regards the appellant's claim that there cannot be any sales without there being corresponding purchases, is also not tenable, as the appellant could not reconcile the quantity wise detail of purchases from these hawala parties vis-a-vis consumption thereof. d. The appellant could not produce proper verifiable documents which could prove physical delivery of goods vis. a vis. corresponding consumption / sales thereof. On the other hand, in the case of regular purchases, on the same set of circumstances, the department had accepted such purchases without questioning their genuineness, as all relevant documents / records have duly been maintained by the appellant. e. If the practice of booking of bogus bills is legalized, by disallowing nominal percentage or estimating nominal rate of GP / P of a particular trade, then this may lead to provide an easy weapon in the hands of the manipulative assessee to suppress / manipulate their profit as and when so warranted. f. The practice of obtaining of fake bills to support the claim of bogus / unverified purchase being followed by the large number of assesses. This malpractice is in the operation for quite some time and is used brazenly to suppress the profits by obtaining bogus / paper purchase bill (without making actual purchase of goods) and thereby evading payment of legitimate taxes to Government Exchequer. There

I.T.A. No. 6056 & 6057/Mum/2016 exists an unholy nexus between the bogus bill providers and businessmen engaged in the various trades. The effect of this malpractice is not only of very serious nature but also multi- dimensional. On one side, it disheartens the hone t tax payer who do not resort to such malpractice and pay their legitimate taxs honetly. On the other side, it emboldens the dishonest tax payers who re ort touch practice. Resultantly, the leakage of the revenue tums out to a natural casualty. Any lenient approach in the matter will not serve the cause of justice and guilty will neither deter nor mend their unethical, spurious and objectionable way in future as well. f. It is pertinent to mention here that these alleged hawala parties are issuing the bills of any items / materials, ranging from building material, pharmaceuticals, chemicals, consumer item , etc., without having 'any go- downs/stocks, staff. It is further noticed that they had been running number of concerns, meant for issuing hawala bills, from very small rented 'premises, in the name of small type of person, which are not men of means. h. Onus on the assessee to prove the claim of expenses -The assessee has debited the purchases in Trading Account (including the bogus/ unverified purchases) and claimed the deduction for expenses. Since the expenditure has been claimed by the assessee and the primary facts are in appellant's knowledge, the "primary onus" lies on the assessee to pro e that the purchases claimed by him are genuine and wholly & exclusively for the purpose of business. For this purpose, the assessee has to lead the clinching evidences to show that the expenditure has actually been incurred by it and the same is for genuine bu in needs. Here, if the assessee claims that purchases are made from the alleged bogus party then it i the responsibility of the assessee to establish that (a) party is in existence (b) party' is capable of supply of goods and (c) party has actually supplied the goods (d) goods so received had actual been used for business and declared as art of sale for the year. If the assessee is asked to produced the parties for verification, then it is the duty of the assessee to do so to establish the genuineness of the claim of the expense. In these cases, the assessee has tried to claim that they have discharged their onus by doing the following: (i) By submitting the name, address, PAN, copies of bills, ledger accounts, etc. (ii) By claiming that payments were through banking channels (iii) By claiming that the purchases are reflected in the books of accounts, and sales not doubted. Considering the facts of the cases under consideration, it can safely be concluded that assessee had failed, in their efforts, in discharging the onus cast upon them. Merely filing name, address, PAN, bills, ledger accounts & payments by cheque will not discharge them from the onus especially when the department had received specific material I information from the Sales-tax I V A T Department, wherein these suppliers, on oath had admitted the fact that they have merely provided entry / issued bills without physically delivering any goods. Case laws relied to support the stand of the department:

I.T.A. No. 6056 & 6057/Mum/2016

In the case of CIT Vis GoIcha Properties (Pvt.) Ltd. 227 ITR 391 (Raj) it was held that the genuineness of transaction could be decided on the basis of primary facts on records. The department is not required to lead a clinching evidence to prove that purchases are bogus. The onus of proof at all relevant times rests upon the assessee. It is for the assessee to establish by evidence that a particular allowance is justified. The law does not prescribe any quantitative test to find outwhether the onus in a particular case has been duly discharged. It all depends on the facts and circumstances / situations of the case [Assam Pesticides & Agro Chemicals V. CIT (1997) 227 ITR 846, 851, 852 (Gauh)]. - . Mere payment by A/c Payee Cheque is not sacrosanct it would not make otherwise non- genuine transaction genuine. CIT Vis. Precision Finance Pvt. Ltd. 208 ITR 465 (Cal). Even in the case of M/s. Kanchwala Gems Vis JCIT upheld by SC 288 ITR 10 (SC), Hon'ble ITAT had held that even Account Payee Cheque is not sufficient to establish the genuineness of the purchases. In the case of CIT Vs Motor General Finance Ltd. 254 ITR 449 (Del), it was held that since the assessee, despite several opportunities granted, did not produce the relevant documents, an adverse inference had to be drawn against the assessee. As the assessee could not produce any document, an adverse inference in terms of section 114 of the Evidence Act, 1872, had to be drawn to the effect that, had those documents been produced, they would have gone against the interest of the assessee. i. Defects in maintaining books of account led to rejection u/s. 145(3) No quantitative day to day/Inward/Outward Stock register, is maintained with time wise specification, quality and their values, or not furnished in the manner in which called for. • Bogus bill provider either not produced, or not found existent at the address provided by the assessee or they admitted to the fact of issuance of bogus bills against charging some nominal commission, without actually supplying any goods. • Payments made by A/c Payee cheques - The Hawala parties accept that after deducting their nominal commission, the balance amount was refunded by cash. • Name, address & PAN of parties given - Assessee claimed it as sufficient compliance & discharge of onus of proving the expenditure, is not acceptable as these parties were not found on given addresses / not traceable, hence purchases not proved. In the absence of the required details, the AO could not verify the genuineness of purchases. • Assessee was asked to produce the so-called hawala parties from whom bills were obtained - However failed to do so - sufficient opportunities were given during assessment proceedings as well as during appeal. Notices issued u/s. 133(6) - could not be issues I/served because of defective address. The assessee could not furnish current mailing addresses nor produce any party for examination. These ground is sufficient to reject the account u/s 145(3) of the Act, therefore, rejected. 5.4 There are number of decisions by the vanous courts, where 25% to 100% disallowance of bogus purchases, have been upheld, depends upon the fact of each case. Some of them are listed, here as under: 9

I.T.A. No. 6056 & 6057/Mum/2016 100% disallowance of bogus / unverifiable purchases was upheld, in following cases: (i) CIT Vs La Medica (2001) 250 ITR 575 (Del) (ii) Sri Ganesh Rice Mills Vs CIT (2007) 294 ITR 316 (All) (iii) Khandelwal Trading Co. Vs ACIT (1996) 55 TT] (JP) 261 (iv) Swetambar Steels Ltd. vs. ITa 707 / 1075 / 1262/ 1263 / JD (2002) I.TAT (Ahd) In the case of Swetambar Steels Ltd., The Hon 'ble ITAT has confirmed the disallowance of the bogus purchase in entirety stating that the purchase shown from the respective parties were found in-genuine. It is not a matter to be looked into whether the assessee has made purchases from different parties other than the alleged ones. It is also worth to mention that the appeal against the decision of Hon 'ble ITAT has not been admitted by the Hon'ble Gujarat High Court and the assessee has also lost before the Hon'ble Supreme Court. So, the decision over the issue became final and the same is therefore, very much applicable over the fact of the case.

6. There judicial decisions where the whole amount of bogus purchases was disallowed and the order were confirmed by High Courts. It has been held that after invocation of provisons of section 145(3), the Assessing Officer acquires the mandate even to add the whole amount of purchase found as bogus to the total income of the assessee. One such case is Sri Ganesh Rice Mills Vs. CIT 294 ITR 316 (All) where the entire amount of bogus purchases, from parties, was disallowed and was upheld. The relevant portion of the order of the tribunal as confirmed by High Court of Allahabad, is reproduced, here as under: " ....Once it is found that the purchases were bogus, addition has to be made to the extent of the purchases found to be fictitious. The consideration that the gross profit disclosed by the assessee compares favourably as compared to the earlier years is wholly irrelevant. To neutralize the effect of inflation in purchases, the only course open to the Income-tax Officer is to add back that amount to the income irrespective of the fact whether the rate of gross profit goes up and whether the resultant gross profit is higher than the gross profit normally shown in the earlier years." 25% disallowance of bogus /unverifiable purchases had been upheld in following cases (1) Sanjay Oil Cake Industries Vs CIT (2008) 316 ITR 274 (Guj) (2) Vijay Proteins Ltd Vs ACIT 58 ITD 428 (Abad) (3) M/s Nand Kishore Meghraj Jewellers, Jaipur CO. No. 10S/JP/09 arising out of ITA No.'433/JP/2009 by ITAT Jaipur (4) M/s. Trident Jewellers ITAT Jaipur ITA 552/JP/2013. Disallowance @ 25% out of Bogus purchases, held as a reasonable in the case of Viiay Proteins Ltd., in view of the fact that the savings occurred to the suppliers on account of sales tax, duties and Income-tax (having MMR of 300ft.), by buying the goods from grey market at lower rates and booking the purchases at normal rate, the assessee got the benefit of this proportion. In view of this, the disallowance @ 25% is fully justified. Further in the case of M/s. Trident Jewellers Vs. ITa, ITA o. 552/JP/20 13, on account of bogus purchases, an addition of 25% of such purchases was confirmed by the Hon'bIe ITAT, Jaipur Bench. 10

I.T.A. No. 6056 & 6057/Mum/2016

6.5. As regards, the case laws cited by the Ld. AR, it is noticed that the facts of the each case are not identical and also not similar to the facts of the case under appeal. The decisions in these cases, are based on the facts of each case, hence, cannot be applied to the facts of the case under appeal. The ratio of decisions in the cases of CIT Vs. Nangalia Fabrics Pvt. Ltd. Tax Appeal No 689 of 2010 Gujrat, Rajesh P. Soni Vs. ACIT, 100 TTJ, 982, YFC Projects (P) Ltd Vs DCIT (2010) 46 'DTR 496 Sardul Singh Vs State of Bombay (AIR 1957 S.c. 747) etc, are not applicable in the case of the appellant, as during the course of assessment proceedings as well as appellate proceedings, the Ld. AR, time and again, was asked to explain I justify the genuineness of purchases made from hawala parties, by filing their current confirmation, current mailing addresses, their bank statements and produce hawala parties for examination etc., but failed to do so. In the absence of these details the department could not examine the correctness, reasonableness and genuineness of these purchases. As regards the decisions in the cases of DCIT v. Rajeev Kalathil (ITA no. 672/Mum/2012, ITAT Mumbai, Balaji Textile Industries (P) Ltd. Vs. ITO (1994) 49 ITD 177 (Mum) (Trib), CIT vs Smith P. Seth (2013), 38 Taxmann, 385, CIT vs. Nikunj Eximp Enterprises Pvt Ltd (2015) 372 ITR 0619 etc relied by the appellant for claiming that the payments have been made through banking channels and department had no evidence to prove that the beneficiaries have received back cash after deducting some commission, is also not correct, as the above hawala parties in their affidavits, had duly admitted these facts. Secondly, the appellant, even during the course of appellate proceedings, was also allowed number of opportunities to prove the genuineness of the above purchases, by furnishing current confirmation / bank statements of hawala parties etc., which the appellant has squarely failed to do so, hence, the facts of the above cases are not exactly same to the facts of the case under appeal. Moreover, in the case of Nikunj Eximp Enterprises Pvt. Ltd, the sales were made to Government Department i.e. Defence, hence sales to such parties can't be doubted. 6.7 Since the hawala parties have run away from their original addresses and the appellant is not in a position to furnish the current verifiable addresses, therefore, the department is also not in a position to enquire the genuineness of these purchases, mainly due to failure on the part of the appellant. In view of these facts, the question of cross verification cannot be allowed to the appellant, mainly on account of its failure in providing the current mailing addresses. There are a number of court decisions, as referred above,wherein the 100% disallowance of bogus purchases, have been upheld. 6.8. As regards other aspects such as payment through banking channels, justification for purchases made from hawala parties as genuine, sales made against such purchases? etc., are concerned, in this regard I would like to place the reliance on finding of the Hon "ble Supreme Court, in the case of Lachminarayan Madan Lal v. CIT (1972) 86 ITR 439 (SC), wherein, inter-alia, it is held that even if there is an agreement, between the assessee and its agents for payments of certain amounts as commission, assuming there was such payment, that does not bind the Income-tax Officer to hold that the payment was I.T.A. No. 6056 & 6057/Mum/2016 made exclusively and wholly for the purposes of the assessee's business. In this case, the Supreme Court observed as under :- "Although there might be such an agreement in existence and the payments might have been made, it is still open to the Income-tax Officer to consider the relevant factors and determine for himself whether the commission said to have been paid is properly deductible. In this case absolutely no material! on record has been brought by the assessee to suggest that I commission agents had procured any orders for the assessee. The production for bills payments or having been made by account-payee cheques cannot by itself show that the commission agents had procured any order for the assessee. No correspondence............ In the above case, the Hon’ble Supreme Court has made it very clear that by creating document making payment through banking channel to give colour, does not sacrosanct/ establishes the genuineness of the transaction. From the above discussion, it is seen that the various courts have upheld the disallowances of bogus purchases, ranging from 12.5% to 100%, based on the facts of each case. In view of the foregoing discussion, the percentage of disallowance of bogus purchases, has to be based on the facts of each case, hence the same cannot be generalized in every case. 6.10. Before the S T Department, these so called hawala dealers, have, inter-alia, stated as under: 1. ......do not have any go-downs storage of goods. 2. . ......have not actually purchased sold any goods. Only paper bills issued that too without physically delivery of goods. 3. ...........do not maintain any books of accounts in respect of above concern. 4. ...........have given blank signed 'cheque book, blank bills and blank challan etc . .. 5. .. ~ have signed on blank account opening form of the bank, as per direction." ........ for which I am being paid very nominal amount! charged nominal commission and so on ................ 6.11. It is important to mention that on account of survey! enquiry action of the S T Department, generally genuine parties will never run away from their locations. by leaving aside their business set-up and other trading items. It is pertinent to mention here that on account of above action of the S T Department; all such bogus parties have run away from their sites. It is surprise to note that out of thousands of such hawala parties, not even a single hawala party, could be located, after action of the S T Department and in other cases also neither of the appellant could furnish the verifiable addresses of these hawala parties. Not even singly entity was found having any trading stock as their sites, during the course of closure of the business. This clearly establish the fact that in the market, the seam of hawala billing was going on, in a systematic manner, to generate the cash, for the purpose, which is well known in the trade, in the form of' parallel economy for illegal activities. This seam was going on in the market, in the name of persons / employees (who are not man of means), who do not have their permanent establishment in the city/operating from rented premises, therefore, run away from the scene, hence not traceable. In view of these facts, in my considered opinion, this type of seam should not be legalized, by restricting the disallowance of bogus 12

I.T.A. No. 6056 & 6057/Mum/2016 purchases to a certain percentage, unless and until it is proved that the appellant had affected, the certain purchases from grey markets due to compelling circumstances, as the same were not available in the regular market, as has been held in the case of M/s. Kanchwala Gems Pvt. Ltd. vs. JCIT 288 ITR 10 (SC) 6.12. Keeping in view of the facts in entirely, as discussed above and appellants failure to furnish the firmed copy of ledger account, bank statements of the suppliers, item wise quantitative tally’s etc. the books of the appellant are not tenable as per provisions of section 145(3) of the Act, therefore rejected. Considering the above facts and in view of the decision of the Hon. Delhi High Court in the case of Cl'T Vs. Jansampark Advertising and Marketing (p) Ltd, it is also an obligation on the part of the first appellate authority to ensure that the effective enquiry is carried out, to arrive at logical conclusion. Therefore, to understand the impact of booking of hawala purchases on the profit of the year, the Ld AR was required to furnish the comparative details of GPINP and GPINP rates for hawala years, preceding two years and subsequent two years. In compliance, the appellant has submitted the details, as under:- - Details FY 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 Turnover 4,10,18,147 5,15,22,872 5,84,44,245 8,55,96,725 9,39,76,191 10,70,03,104 12,39,17,10 GP 97.31, I11 1,02.1)0.119 1,29,26,558 1,91,12,173 2,48,42,258 3,18,25,463 3, ~ , 1l8,766 GP rate 23.72 19.97 22.12. 22.33 26.43 29.74 25.94 GP After 1,52,77,634 2,23,78,759 2,61,95,725 - addition GP rate 26.14 26.16 27.87 I NP ·U4X6 -1,74.256 13,08,782 26,79,293 28,72,754 26,59,008 3,89,959 , NP Rate I I 3.06 1.16 092 2.14 3.1J 2.48 0.31 :NP 36,59,858 50,30,369 52,23,830 N P Rate After 6.26 :.88 5.:6 - addition I I

6.13 From the above chart, it is noticed that the gross profit rate has gone down from 29.74% in A Yr 2012-13 (non-hawala purchase year) to 22.08% in A Y 2009-10, 22.33% in A Yr 2010-11 and 26.43 % in A Yr 2011-12, the years in which the alleged hawala purchases were booked, for which the appellant could not offer any valid explanation. These facts clearly established that the appellant had suppressed its profits by booking alleged hawala purchases, as above by 7.66% (29.74 - 22.08), 7.41% (29.74 - 22.33) and 3.31% (29.74 - 26.43) in A Yr 2009- 10,2010-11 and 2011-12, respectively, as compared to GP of A Yr 2012-13_ This 'has resulted into suppression of gross profit by Rs 44,76,629/- (5,84,44,245 x 7.66%), Rs 63,42,717 (8,55,96,725 x 7.41 %) and Rs 31,10,612/- (9,39,76,191 x 3.31 %) in A Yrs 2009-10, 2010-11 and 2011-12, respectively. Considering the nature of appellant's business, i.e. manufacturing and exporting of chemicals and the turnover, the appellant has shown NP quite at lower side ranging from 0.92% to 3.13%, hence the same is liable to be re-estimated by rejecting the accounts. In this regard, I would like to place my reliance

I.T.A. No. 6056 & 6057/Mum/2016 on the ratio laid down by the following courts- it 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 further held in the case of M/s. Kanchwala Gems Pvt. Ltd. vs JCIT 288 ITR 10 (Se) that it is well settled that in a best judgment assessment, there is always a certain amount of "guess work'. 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 (Se) 86 ITR 439 and in the case of Swadeshi Cotton Mills Co. Ltd. v. CIT 63 ITR 57, has held that the taxing authorities have right to consider whether the expenditure ri1imcd by the assessee was excessive. 6.14 IUs pertinent to mention here that the appellant was able to harvest the GP @ 29.74% in A Yr 2012-13, from same business, by same management, as against GP of 22.08% in A Y 2009-10,22.33% in A Yr 2010-11 and 26.43% in A Yr 2011-12. In the absence of any valid explanation, along with credible documents, the contention of the appellant is not tenable, therefore, the books of accounts are hereby rejected and GP declared in A Y 2013-14, i.e. 29.74% is estimated in the hawala years as well, in the light of decision of the Hon 'ble S.c. in the case of M/s Kanchwala Gem 288ITRIO. A Yr 2009-10 By booking alleged bogus purchases, as compared to the A. Y. 2012-13, the appellant has suppressed its profit by Rs.44,76,629/- (5,84,44,245 x 7.66%). In compliance, the Ld. AR could not offer any valid reasons for fall in the GP rate. Considering the facts in entirety I the appellant being manufacturer and exporter of chemicals and relying on decisions in the case of M/s. Kanchwa!a Gems Pvt. Ltd. Vis JCIT 288 ITR 10 (SC), etc, as quoted above, in my considered opinion, as the suppressed GP of Rs 44,76,629/- is more than the hawala purchases, therefore, the entire disallowance of Rs 1,9301- made by the AO, is required to be upheld. All the grounds of appeal

, are hereby dismissed. A Yr 2010-11 By booking alleged bogus purchases, as compared to the A.Y. 2012-13, the appellant has suppressed its profit by Rs Rs 63,42,717 (8,55,96,725 x 7.41 %). In compliance, the Ld. AR could not offer any valid reasons for fall in the GP rate. Considering the facts in entirety / the appeal being manufacture and exporter of chemicals and relying on decisions in the case of M/s. Kanchawala Gems P. LTd vs. JDCIT 288 ITR

10. (SC), as quoted above, in my considered opinion, as the suppressed GP of Rs 63,42,717/- is more than the hawala purchases, therefore, the entire disallowance of Rs 59,73,5661- made by the AO, is required to be upheld. All the grounds of appeal are hereby dismissed. A Yr 2011-12, By booking alleged bogus purchases, as compared to the A.Y. 2012-13, the appellant has suppressed its profit by Rs 31,10,612/- (9,39,76,191 x 3.31 %). In compliance, the Ld. AR could not offer any valid reasons for fall in the GP rate. In compliance, the Ld. AR could not offer any valid reasons for fall in the GP rate. Considering the facts in entirety I 14

I.T.A. No. 6056 & 6057/Mum/2016 the appellant being manufacturer and exporter of chemicals and relying on decisions in the case of M/s. Kanchwala Gems Pvt. Ltd. Vis JCIT 288 ITR 1~(SC), as quoted above, in my considered opinion, as the suppressed GP of Rs 31,10,6121- is more than the hawala purchases of Rs.18,61,3 72/- therefore, the entire disallowance of Rs 18,61 372/- made by the AO, is required to be upheld. All the grounds of appeal arc hereby dismissed. 6.15 As per details submitted by the Ld. AR, as above, the quantum of alleged hawala purchases has been worked out at Rs.23,51 ,076/-, Rs.32,66,406/- & Rs.13,53,467/-, by the Ld. AR, whereas the AO had disallowed the above amount at Rs.1,9301-,Rs.59,73,566/- & Rs.18,61,372/ ... In the respective years. Since, the suppressed GP is more than disallowances of hawala purchases, which have been sustained in toto, in all three years, therefore, this variation will not be make any difference, in the taxable income of the appellant. However, the A.O may examine this aspect, accordingly.”

5. Aggrieved by the appellate order dated 14-07-2016 passed by learned CIT(A), the assessee has come in appeal before the tribunal It was submitted by learned counsel for the assessee that the assessee is engaged in the manufacturing and export of drug intermediates , speciality chemical, API‟s and rare to find chemicals. It was submitted that the case was reopened after getting information from the sale tax department that the assessee is allegedly beneficiary of bogus accommodation bills from hawala operators . It was further submitted by learned counsel for the assesses that all the documents were submitted before the AO including stock register, delivery challan, purchase invoices, bank statements from where payments were made were submitted . It was submitted by learned counsel for the assessee that the A.O has made additions to the tune of the 100% and also learned CIT(A) confirmed the additions to the tune of 100% . The learned counsel for the assessee relied upon the decision of the tribunal in dated 26.04.2017 in assessee‟s own case , wherein the tribunal has restricted the addition to the tune of 12.5% of alleged bogus purchases. The assessee also placed reliance on tribunal decision in thee case of ACIT v. Steel Line India reported in (2017) 50 CCH 0306(Mum-trib) and also decision of the tribunal in the case of M/s Geolife Organics v. ACIT in ITA no. 3699/Mum/2016 for AY 2009-10 vide orders dated 05-05-2017, wherein additions to the tune of 2% was upheld by the tribunal.

The Ld. DR on the other hand submitted that learned CIT(A) in para 6.2 and 6.3 has asked for details from the assessee w.r.t. material purchased , 15

I.T.A. No. 6056 & 6057/Mum/2016 consumed and sold , which the assessee could not furnish and since the assessee could not reconcile the quantity wise details of purchases from these hawala parties vis-a-vis consumption, the additions were confirmed by learned CIT(A) as were made by the AO which was confirmed after detailed enquiry and analysing the profitability of other years also. The learned DR relied upon the decision of the Hon‟ble Supreme Court in the case N K Proteins 2017-TIOL-23-Supreme Court and also decision of the Supreme Court in the case of Kanchwala Gems v. JCIT reported in 288 ITR 10(SC).

The Ld. AR in rejoinder relied on paper book/ page no. 34 to 50 wherein the abstract of stock summary for the month of January, February and March, 2010 are placed . Our attention was drawn to para 6.3 of learned CIT(A) to contend that the statements as desired by learned CIT(A) were submitted . Our attention was drawn to paper book/page 242-253 wherein details were submitted wherein quantitative details were submitted. It was submitted that learned CIT(A) was not justified in rejecting the books of accounts . Ld. Counsel for the assessee also make attempt to distinguish the decision of the Hon‟ble Supreme Court in the case of N. K Proteins(supra) as the facts in his opinion in N K Proteins were different wherein there was search and incriminating documents were seized which led the Courts to uphold additions to the tune of 100% of bogus purchases . It was submitted that there are no evidence with learned A.O/CIT(A) that the said purchases are not genuine . It is also submitted that GP ratio of manufacturing concern can vary depending upon demand and obsolescence. It was submitted that the AO should make an independent enquiry & he cannot rely on the information received from third party.

I.T.A. No. 6056 & 6057/Mum/2016 on 19.07.2013 which was within four years from the end of the assessment year. It is also pertinent to mention that originally no scrutiny assessment was framed by the Revenue u/s 143(3) of the Act. The information was received by Revenue from Sales Tax Department, Maharashtra that the assessee is beneficiary of the bogus purchases made from the following four parties wherein only bogus bills were issued by these parties without supplying any material to the assessee:

SI. Name VAT .N0. Amount No Mls SAILEELA TRADING PVT 27660591 188V 3498600 I LTD ---- 2 Mls NAVPAD EXPORTS 27430616389V 381056 PVT.LTD 3 Mls DEV ENTERPRlSES 27450526556V 1659112 4 Mls ABHILASHA SALES PVT 27450723466V 434798 ( LTD TOTAL 59,73,566/- Notices u/s. 133(3) was issued by the AO to the aforesaid four parties on the given addresses but the letters were returned back un-served by the postal authorities with the remarks „not known‟. The assessee was asked to explain why the purchases made from the above parties should not be treated as an unexplained expenditure . These parties have deposed by filing affidavits/statements before sales tax authorities that they have only issued bogus accommodation bills without supplying any material. The assessee could not provide correct addreses of these parties nor the confirmations from these parties could be filed. The assessee also could not produce these parties before the authorities below . However, the assessee submitted purchases invoices along with delivery challans, Purchases Registers, ledger accounts of creditors showing the recording of said purchases , bank statements showing that payment were made through banking channels. The assessee also submitted Audit Reports and financial statement to support its claim. The assessee also submitted stock register showing stock movements during the year and also batch sheets showing the use of materials in the manufacturing process along with the product mix, production process and the process chart, depicting the manufacturing

I.T.A. No. 6056 & 6057/Mum/2016 process . The assessee also produced books of accounts before the AO. The assessee also claimed that it is not brought on record by the Revenue that the said alleged amount has been re-routed back to the assessee. The A.O had made addition to the tune of 100% of the alleged bogus purchases , which was later confirmed by learned CIT(A) who made detail and elaborate analysis of the working and profits of the assessee by comparing profitability of the impugned year with AY 2012-13. The learned CIT(A) rejected the books of accounts of the assessee u/s 145(3) as the assessee, inter-alia, could not prove consumption/utilisation of the material allegedly purchased from these parties with reference to its books of accounts. However, the learned CIT-A compared the profits for AY 2010-11 and 2011-12 with subsequent year i.e. AY 2012-13 as the said profits were highest rather than comparing profits for impugned assessment year with the preceding AY 2007-08 and 2008-09 . It is observed that the learned CIT(A) did cherry picking by selecting the year i.e. AY 2012-13 where there was highest Gross Profit(GP) ratio of 29.74% , while GP ratio of AY 2007-08 was 23.72%, AY 2008-09 was 19.97%, AY 2009-10 was 22.12% , AY 2010- 11 was 22.33% , AY 2011-12 was 26.43%, AY 2012-13 was 29.74% and for AY 2013-14 was 25.94% , thus, choosing the year with the highest GP ratio for AY 2012-13 led to learned CIT(A) in upholding additions to the tune of 100% of bogus purchases as the differential of GP by applying the highest rate of GP ratio of AY 2012-13 vis-a-vis impugned year under consideration led to higher differential leading to confirmation of additions to the tune of 100% of bogus purchase by learned CIT(A) , albeit the learned CIT(A) came to conclusion based on judicial precedents and factual matrix of the case that additions to the tune of 25% of bogus purchases are warranted in the case of the assessee. The assessee has claimed to have submitted consumption details to prove that the material so purchased from the said alleged hawala dealers were duly utilised/consumed for manufacturing of finished goods which were later claimed to be sold by the assessee . The copies of monthly stock summaries for the year are placed in paper book/page 34-50 and 94- 145. The assessee however could not provide the correct addresses of the said alleged hawala dealers which disabled revenue to conduct enquiries . The assessee could not produce confirmation from these parties nor the assessee could produce these parties before the authorities below.These parties have given incriminating statements/affidavits incriminating

I.T.A. No. 6056 & 6057/Mum/2016 assessee that the assessee has obtained bogus purchase bills from these parties without getting any material physically. The purchases are appearing in the assessee‟s books of accounts and primary onus is on the assessee to prove that purchases are genuine. The said parties have given incriminating statements before the sales tax authorities that the sale bills issued by them were bogus without supplying any material. Under such circumstances keeping in view entire factual matrix of the case, profits embedded in such purchases need to be estimated and brought to tax as the assessee made savings by way of low cost in buying from hawala dealers, VAT and other tax savings. Ratio of decision of Hon‟ble Kachwala Gems(supra) is applicable. The learned CIT(A) has made detailed analysis and came to conclusion that disallowance @25% of the alleged bogus purchases is warranted but as differential between GP ratio of the year under consideration with GP ratio of AY 2012-13 which was the highest GP ratio in the last 5 years led learned CIT(A) to uphold additions to the tune of 100% of alleged bogus purchases. We have discussed anomaly in working of learned CIT(A) as he undertook cherry picking by choosing highest GP ration in all these five years as well chose for subsequent years without giving any basis/justification for such choice. We have observed that the tribunal in assessee‟s own case after considering entire factual matrix of the case has upheld addition to the tune of 12.50% of the alleged bogus purchases in an order dated 26-04-2017 for AY 2009-10 in by holding as under:

“This appeal filed by the assessee on 10.10.2016 is against the order of the CIT(A)-2, Thane dated 14.07.2016 for the assessment year 2009- 10.

2. In this appeal, assessee raised seven grounds in toto. The solitary and core issue raised in the appeal relates to the correctness of the addition on account of 'bogus purchases’ amounting to Rs. 1,930/-. AO and the CIT(A) made the entire bogus purchases of Rs. 1,930/- as addition u/s 69C of the Act.

3. During the proceedings before the Tribunal, Without going to the other aspects, Ld Counsel for the assessee submitted that restricting the disallowance to GP rate of 12.50% of Rs. 1930/- will meet the ends of justice. Ld AR also submitted that similar additions are made in subsequent years without restricting the addition to GP rate of 12.50%.

4. On hearing both parties, I am of the opinion that making the entire bogus purchases as addition u/s 69C is no longer sustainable in law 19

I.T.A. No. 6056 & 6057/Mum/2016 considering the the Bombay High Court Judgment In the case of Nikunj Eximp Enterpries P Ltd (372 ITR 619) (Bom) and Gujarat High Court Judgment in the case of CIT vs. Simit P Sheth{2013} (356 ITR 451) (Guj) wherein restricting the addition to GP rate of 12.50% is approved. Accordingly I order and direct the A.O to restrict the disallowance to only 12.50% of the sum of Rs.1,930/-. Accordingly, ground raised by the assessee are partly allowed.

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

Respectfully following the afore-stated decision of the tribunal in assessee‟s own case for AY 2009-10, disallowance in the instant appeal is restricted to 12.5% of the bogus purchases of Rs. 59,73,566/- . We have duly considered all the decisions relied upon by the assessee while arriving at our conclusion that in the instant year too , the tribunal decision albeit passed by SMC bench (single member bench) for preceding year AY 2009-10 ought to be followed in the year under consideration as facts are similar in this year and there are no reasons/justification before us to deviate from the said decision of the tribunal for AY 2009-10 .The assessee gets part relief. The appeal of the assessee in AY 2010-11 is partly allowed. We order accordingly.

Assessee’s Appeal in for AY 2011-12

I.T.A. No. 6056 & 6057/Mum/2016

Order pronounced in the open court on 28.11.2017 आदेश की घोषणा खुऱे न्यायाऱय में ददनांकः 28.11.2017 को की गई ।