DCIT 28(3), NAVI MUMBAI vs. SUNIL KHANNA, NAVI MUMBAI

2 & CO No.131/M/16 (A.Y. 2011-12) Sunil H. Khanna आदेश / O R D E R

Per Sandeep Gosain, Judicial Member:

(Revenue’s appeal) 3. First of all we take up assessee’s appeal in for assessment year 2011-12.

3 & CO No.131/M/16 (A.Y. 2011-12) Sunil H. Khanna 1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the addition made by the A.O. of Rs.3,82,45,715/- of account of bogus purchases. 2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in directing the A.O. to disallow 10% of the alleged bogus purchases, being the profit element from the purchases made from the parties.

by the Revenue in para no.

2. (2.1 to 2.25) of its order. The operative portion is contained in paras 2.7 to 2.25 and the same is reproduced below: 2.7 I have carefully considered the facts and circumstances of the case and the reasons given by the A.O. for making the additions on account of bogus purchases as well as submission made by the assessee in support of the grounds taken by it. I am of the opinion that on merit what is to be decided is whether the addition on account of the said purchases actually purchased goods at a relevant point of time an be held to be bogus, when the A.O. himself admits that the purchases are made. 2.8 It is settled principal that the onus to prove the genuineness of the expenditure lies on the assessee. The assessee has discharged his onus by furnishing the bills, delivery challans relating to the said purchases, details and evidence also show that payment of such purchases were made by account payee cheques, which are duly accounted in the books of the assessee. All the purchases are reflected in the stock reconciliation and the A.O. himself accepts in the assessment order that the assessee has made purchases, Therefore, the assessee would appear to have discharged its onus in respect of the purchases in question. Further, as the A.O. has not" doubted the sales arising out of the said manufacturing activity and its consumption ratio, the entire purchases in this case cannot be treated as bogus. Further the A.O. has not made available the copies of affidavits which the A.O. has relied upon for the purpose of 4 & CO No.131/M/16 (A.Y. 2011-12) Sunil H. Khanna making the addition that also proves that there is no evidence to show that the money which was given by cheques to such persons has come back to the assessee in the form of cash. However, the fact of the matter remains that the purchase parties have not responded to the notices under section 133(6) cannot be ignored. 2.9 The AO has made an addition under section 69C with regard to entire purchases made by assessee from parties whose names appeared in the website of MAHAVAT as suspicious dealers while taking a cue from the aforesaid information, the AO arrived at conclusion that assessee had purchased goods from third parties but purchases were recorded in the names of suspicious dealers. It is based on the presumption that assessee might have paid cash to third parties out of unexplained sources.. However, AO has not disputed the fact that the assessee had in fact purchased the goods and also made sales out of such purchases. Therefore, so far as purchases are concerned AO has not disputed the fact that assessee purchased goods at relevant points of time for which he produced and accounted the bills of these parties. It is, thus, clear that AO has made an addition on the basis of presumption of third party purchases and cash payment thereof. Further, it is not in dispute that assessee has made payment by account payee cheques in favour of those parties from whom he has shown to have purchased goods. Hence, presumption can also be that the source , if it be, could come from such account payee cheques. It is well settled that no matter, howsoever, wild suspicion may be, it cannot partake the character of proof and it is also well settled that no addition or disallowance can be made on mere presumption, conjecture or surmises. It is also pertinent to note that the parties from whom purchases are shown to have been made are registered dealers under the MVAT Act. In this regard, it would be appropriate to reproduce the Head note of the decision of the ITAT Chennai Bench in the case of Kirtilal Kalidas Jewellers Pvt. Ltd reported in 54 SOT 29 where it is observed as under: II. Section 69C of the Income-tax Act, 1961- Unexplained expenditure- Purchases-Assessment year 2007-08- During assessment proceedings, Assessing Officer noted that for some of purchases effected by assessee, no details or address of vendors were available in purchase vouchers- He, therefore, considered such purchases to be non-genuine and an addition was made on that account-Whether since purchases were recorded in books of account of assessee and were also shown in its stock, in such circumstances merely because those purchases did not carry full addresses of venodors, could not be a reason to treat said purchases as unexplained- Held, yes- whether therefore, impugned addition made by Assessing Officer was to be deleted- Held yes 5 & CO No.131/M/16 (A.Y. 2011-12) Sunil H. Khanna [Para 14] [in favour of assessee] 2.10 Considering the fact that purchases effected by assessee are not in dispute and that there is no material on record brought by AO to show that assessee purchased material from unexplained cash available with him, no addition can be made under section 69C of Income Tax Act, 1961. As regards invocation of section 40A(3), it is also based on presumption and conjecture and not on any record, hence the same is not-sustainable 2.11 In case of Shubh Laxmi Exports, ITAT Jaipur was required to decide the issue of addition of Rs.15.19 lakhs U/S.69C on account of bogus purchases. The relevant facts are that during the year under consideration the assessee had exported gerns and jewelry and material were claimed to have been purchased from M/s Adinath Traders, M/s Om Shree Jewelers, M/s Ambika Impex and M/s M.D. Exports. The AO doubted the purchases made from the claimed four parties since in her view the said four parties had only issued accommodation bills without physical delivery of the goods. She accordingly made addition of Rs. 15,19,724 under s. 69C of the Act and consequent to that the expenditure equal to purchase was considered non-genuine and Rs. 15,19,724 were also disallowed in view of proviso to s. 69C of the Act. The AO also denied the claim of export and deduction under s. 80HHC on the claimed profit stated to have been earned from the export of the goods purchased from the above named four parties. The sales credited in the books of account in respect of export consignment were treated as unexplained and added under s. 68 of the Act. The CIT(A) has upheld the assessment sustaining addition of Rs. 15,19,724 under s. 69C. In this case, on the above facts, ITAT has deleted the addition u/s. 69C and held as under :- 11. After considering the arguments advanced by the parties, we find substance in the above contentions of the learned Authorised Representative. The AO has treated the claimed purchases of goods at Rs. 15,19,724 from the four parties M/s Adinath Traders, M/s Om Shree Jewellers, M/s Ambica Impex and M/s M.D. Exports as bogus doubting the physical delivery of the goods for the said amount to the assessee against the bills issued by them which as per the AO is only accommodation bills. The AO has made detailed observations to justify the allegation made by her that the above named four parties had not delivered the goods for the said amount of Rs. 15,19,724. The goods were actually not purchased from them. The assesses had claimed to have purchased stones/material worth Rs, 5,20,880 from M/s Ambika 6 & CO No.131/M/16 (A.Y. 2011-12) Sunil H. Khanna Impex, Rs. 6,41,326 from M/s Adinath Traders, Rs. 3,51,053 from M/s M.D. Exports and Rs. 6,367 from M/s Om Shree Jewellers. On the basis of information received and enquiry, conducted by her, 'the AO has tried to establish that the above named four parties out of whom only M/s Adinath Traders and M/s Om Shree Jewellers appeared before the AO had only issued accommodation bills and goods were not purchased from them Since goods were alleged, to have been not purchased from the above named parties, the AO has also denied the genuineness of export of the goods and has made addition under s. 68 of the Act on the amount credited in the books of account of the assessee in respect of export consignment. The AO has further made addition of Rs. 15,19,724 under the proviso to s. 69C of the Act besides addition of the same amount of Rs. 15,19,724 under s. 69C of the Act treating it as deemed income on account of alleged bogus unexplained expenditure on purchases. In our view, while rejecting books of account and making above additions on account of bogus purchases, the AO has failed to appreciate that there was sufficient material to establish on the part of the assessee that goods purchased from the stated four parties were exported to Image Link Co. Ltd., Japan and had realized export proceeds of Rs. 26,31,578 on 22nd Feb., 2001 and from A.R. Gems Co. Ltd., Bangkok, had realized export proceeds of Rs. 78,91,245 on 23rd Feb., 2001. To support the export of the goods, the assessee had furnished export invoices, export airways bill, bill of customs house agent, proof of charges by the Rajasthan Small Industries Corporation Ltd., (a Government of Rajasthan undertaking), proof of export realization in the bank, shipment airways bill, etc., copies whereof have been furnished at pp. 24 to 54 of the paper book. At pp. 55 and 56 of the paper book have been placed copy of Form No. 1, bank certificate of export and realization, at pp. 57 to 60 of the paper book copy of application and annexure of REP licence and at pp. 61 to 69 copy of application and annexure for allotment of code number for export and membership of the Gems and Jewellery Export Promotion Council and certificate of importer-exporter code have been placed. Thus, without disproving these documents, in our view the AO was not justified in treating the export as not genuine and in making the addition under s. 68 of the Act on the sales credited in the books of account in respect of export consignment. The same has thus rightly been deleted by the learned CIT(A) while allowing the claim of deduction under s. 80HHC thereupon by the assessee. Thus, when export of the goods has been admittedly made by the assessee the undoubted inference would be that those goods were purchased by the assessee. Thus, the question before 7 & CO No.131/M/16 (A.Y. 2011-12) Sunil H. Khanna us is as to wherefrom those goods were purchased by the assessee if not from the above named four parties. Even if we accept the version of the AO for a moment that the above named four parties had only issued accommodation bills to the assessee against the goods purchased without physical delivery of the goods as those parties either are not in existence or not in the same business, the implication would be that goods have been purchased from others. Now, there are two possibilities in this regard. Firstly, some small suppliers who have no any regular establishment had actually supplied the goods to the assessee through the above named four parties onpayment of commission to them for utilizing their purchase bills having CST/RST numbers, PANs, address, etc. The other possibility is that those four parties to avoid payment of due tax have now denied the sale and that they had only issued bills without physical delivery of goods by charging commission only or they are not coming forward before the AO to disclose the truth, Undisputedly, it is not always within the control of a purchaser to produce the suppliers before the AO to establish the genuineness of claim of purchase. What is expected from a prudent purchaser to establish genuineness of claim of purchases is furnishing of purchase bill containing all the necessary details of the transaction, payment through banking channel, books of account, etc. In the present case before us, the assessee had furnished purchase bills issued by above named four parties, their CST/RST numbers, PANs, proof regarding payment made by account payee cheques, etc. which was expected from a prudent purchaser. We are thus of the view that the assessee had discharged its primary onus. Besides two parties of the purchase i.e. M/s Adinath Traders and M/s Om Shree Jewellers had appeared before the AO and confirmed the sales made to the assessee. The assessee had also accounted for all purchases in the books. The goods purchased from these four parties were exported and customs authorities have certified the exports made by the assessee.

12. In support of the exports, as discussed earlier, necessary documents were furnished which included invoice of sending the goods to Image Link Co. Ltd., Japan and M/s A.R. Gems Co. Ltd., Bangkok. The goods were exported by Thai Airways International Public Co. Ltd. and payments were made to custom house agent Shri P.K. Jain. The cargo was handled through Rajasthan Small Industries Corporation Ltd. and foreign currency was received through bank. The assessee had also credited the export realization received through, banking channel in its books of account. On considering these facts and circumstances in totality, we are of the -view that the balance of bona fide of purchases 8 & CO No.131/M/16 (A.Y. 2011-12) Sunil H. Khanna made from the above named four parties is in favour of the assessee especially in absence of any positive evidence which the AO ought to have brought on record that goods were purchased from some other named parties if not from the above named four parties and that am,ountpaid to them through account payee cheques by the assessee was ultimately returned by them to the assessee. In absence of such positive evidence, the AO in our view was not justified in treating the purchases worth Rs. 15,19,724 claimed to have been made from the above named four parties as non-genuine and bogus. The learned CIT(A) has also erred in sustaining tine addition of Rs. 15,19,724 made in this regard under s. 69C of the Act and again under proviso to s. 69C of the Act without appreciating the aforesaid facts and circumstances properly. Thus, there was no occasion before the AO to invoke provisions of s. 145(3) of the Act and making additions in question i.e. Rs. 15,19,724 under s. 69C of the Act and Rs. 15,19,724 under-proviso to s. 69C of the Act. Both the additions are directed to be deleted. Ground Nos. 1 and 2 are thus allowed in favour of the assessee. 2.12 In the case of Sunsteel, ITAT Ahmedabad while deciding the issue of addition u/s.69C on account of unverifiable purchases, an addition of Rs.5O,000/- has been sustained out of unverifiable purchases of Rs.27.39 lakhs. 2.13 However, in case of Sunsteel, addition of only about 2% has been sustained whereas in the case of Champalal Choudhary addition of 5% has been sustained. The estimated disallowance has been upheld to augment the possible suppression in GP plying real income theory depending on the facts of the case. Mo basis of such timation has been given in these decisions. Additions made U/S.69C in the case of hubh Laxmi Exports and Sunsteel have been deleted. 2.14 It is not the case of the AO that the payments against these purchases are in cash. All the payments have been made through account payee cheques and are debited in the bank account of the appellant in the names of the parties concerned. Further it is not the case of the AO that he has made further investigations to prove that these payments made to the parties in question were withdrawn from their accounts in cash and flown back to the appellant. Though he could lay his hands on the bank accounts of the said parties, he could not bring on records any single evidence about money flowing back to the appellant. Instead, the AO merely assumed that tlie appellant has received the money back from the said parties. In the absence of any such evidence placed on record, no purchases made from these parties can be treated as bogus in entirety.

2.15 The AR of the appellant has relied upon the jurisdictional ITATs decision in the case of DCIT vs. Rajeev G. Kalanthi [ITA No. 6727/Mum/2012] wherein under almost similar facts it was held as under: "We find that AO had made the addition as one of the supplier was declared a hawala dealer by the VAT Department We agree that it was a good starting point for making further investigation and take it to logical end. But, he left the job at initial point itself. Suspicion of highest degree cannot take place of evidence. He could have called for the details of the bank accounts of the suppliers to find out as whether there was any immediate cash withdrawal from their account. We find that no such exercise was done. Transportation of good to the site is one of the deciding factor to be considered for resolving the issue. The FAA has given a finding of fact that part of the goods received by the assessee was forming part of closing stock. As far as the case of Western Extrusion Industries (supra) is concerned, we find that in tflat matter cash was immediately withdrawn by the supplier and there was no evidence of movement of goods. But, in the case before us, there is nothing, in the order of the AO, about the cash traial. Secondly, proof of movement of goods is not in doubt. Therefore, considering the peculiar facts and circumstances of the case under appeal, we are of the opinion that the order of the FAA does not suffer from any legal infirmity and there are not sufficient evidence on file to endorse the view taken by the AO. So, confirming the order of the FAA, we decide ground no. 1 against the AO." 2.16 The observations of the Hon’ble Mumbai 1TAT are largely applicable to the facts of the present case. In this case also, the AO has merely relied upon the information received from the sales-tax department that the parties from whom the appellant had purchased the goods were suspicious dealers. The AO did nothing except relying upon the n on-verification of the parties under an inquiry u/s. 133(6) and information obtained from the sales-tax department. The crucial facts of corresponding consumption and sale of goods purchased from the said parties and payments to them by proper banking channels have been completed ignored by the AO. 2.17 Further, the AO has invoked the provisions of Section 69C and added the said purchases as unexplained expenditure. As rightly contended by the Ld. AR of the appellant, section 69C applies only in a case where the source of the expenditure is in doubt and not the expenditure itself. In the present case, on 10 & CO No.131/M/16 (A.Y. 2011-12) Sunil H. Khanna one hand the AO has doubted the expenditure in the form of purchases from the said parties and on the other hand he has added the income on the ground that the source of the said expenditure has remained unexplained. If the expenditure itself has been rejected as non-genuine then there is no question of adding any income on the ground that the source of the said expenditure has remained unexplained. Both these are mutually exclusive. Therefore, I agree with the contention of the appellant that no addition can be made u/s. 69C in the facts of the case. . 2.18 Though no addition can be made u/s. 69C, it is required to be adjudicated as to whether any addition or disallowance is required to be made on account of the purchases from the said three parties which were not verifiable. The appellant should not get escaped the taxation merely because the AO has invoked the wrong provisions of the Act. As an appellate authority, it is my duty to decide the whole issue of making addition on account of the said purchases which is before me and not only from its limited view point of addition u/s. 69C of the Act. All the facts and circumstances explained above goes to prove that the goods purchased from the above parties are not conclusively proved to be non-genuine or bogus. It is also a fact that the above parties, from whom the goods have been purchased during the year, are not available for verification of purchases made from them. 2.19 The facts mentioned above, therefore, leads to the conclusion that the appellant has made the purchases in question but due to the non availability of such parties and adverse reports from the sales-tax authorities, the AO proceeded to treat such purchases amounting to Rs. 31,38,749/-, made from the three parties in question as bogus and hence income of the appellant. Such conclusions drawn by the AO are not supported by any other evidence and therefore unacceptable. Simply because the parties are not available for confirmation of the sales made by them to the appellant or because the parties were declared as suspicious dealers by the sales-tax department, will not make the same as bogus purchases, liable to be disallowed in entirety. 2.20 There are many judicial pronouncements on the issue now, wherein the courts have taken a view that in case of non-existent parties from whom the purchases are shown to have been made, only part of such purchases can be disallowed in the cases where the corresponding sales are treated as genuine, or the profit embedded in such sales can only be brought to tax. There is no question of disallowing the entire purchases made from certain alleged bogus parties. Since the purchases have not been confirmed by the parties concerned, there is possibility that such purchases are over invoiced to reduce the profits.

11 & CO No.131/M/16 (A.Y. 2011-12) Sunil H. Khanna Therefore what can be taxed in such transactions is profit element embedded and not the entire purchases. 2.21 In the case of CIT-1 vs. Simit P. Sheth, JTA no. 553 of 2012, order dated 16/01/2013, while deciding a similar issue, the Hon'ble High Court of Gujarat has held that “We are broadly in agreement with the reasoning adopted by the Commissioner (Appeals) respect to the nature of disputed purchases of steel It may be that the three suppliers from whom the assessee claimed to have purchased the steel did not own up to such sales, ever, vital question while considering whether the entire amount of purchases should added back to the income of the assessee or only the profit element embedded therein to ascertain whether the purchases themselves were completely bogus and non-existent or that the purchases were actually made but not from the parties from whom it was claimed to have been made and instead they have been purchased from grey market without proper billing or documentation. In the present case, CIT believed that when as a trader in steel the assessee sold certain quantity of steel, he would have purchased the same quantity from some source. When the total sale is accepted by the Assessing Officer, he could not have questioned the very basis of the purchases. In essence therefore, the Commissioner (Appeals) believed assessee's theory that the purchases were not bogus but were made from the parties other than those mentioned in the books of accounts. That being the position, not the entire purchase price but only profit element embedded in such purchases can be added to the income of the assessee. So much is clear by decision of this Court. In particular, Court has also taken a similar view in case of Commissioner of Income Tax-lV vs. Vijay M Mistry Construction Ltd. vide order dated 20.01,2011 passed in Tax Appeal No. 1090 of 2009 and in case of Commissioner of Income Tax-7 vs. Bholanath Poly Fab Pvt. Ltd. vide order dated 23.10.2022 passed in Tax Appeal No. 63 of 2012. The view taken by the Tribunal in Case of Vijay Proteins Pvt. Ltd. vs. CIT reported in 58 ITD 428 came to be approved." 2.22 Similarly while dealing with an identical issue, in the case of CIT vs. Bhalanath Poly Fab (P) Ltd., I.T.A.No. 63 of 2012, in the order dated 23/10/2012, the Hon'ble High Court of Gujarat has held as under- "We are of the opinion that the Tribunal committed no error. Whether the purchases themselves were bogus or whether the parties from whom such purchases were allegedly made were bogus is essentially a question of fact. The Tribunal having examined the evidence on record came to the conclusion that the assessee did purchase the cloth and sell the finished goods. In that view of the matter, as natural corollary, not the entire amount covered under such purchase, but the profit element embedded therein would be subject to tax. This was the view of this court in the case of Sanjay Oilcoke Industries v, CIT [2009] 326 ITR 274 (Guj). Such decision is also followed by the court in a judgment dated August 16, 2021, in Tax Appeal No. 679 of 2020 in the case of CIT v. Kishor Amrutlal Patel In the result, tax appeal is dismissed." 2.23 Similar view have been expressed by the Hon'ble High Court of Gujarat in the case of CIT vs Sathyanarayan P. Rathi (2013) 351 ITR 150 (Guj.). 2.24 The above decision of the Hon'ble High Court of Gujarat and the ITAT, Ahmedabad are squarely applicable to the facts of the instant case. What can be disallowed in the case of the alleged bogus purchases, as decided by the Hon'ble High Court of Gujarat and the ITAT, Ahmadabad in the above cited case, is that only the profit element embedded in such purchases shown and not the entire amounts of the alleged bogus purchases. 2,25 Keeping in view all the above facts and circumstances as well the judicial pronouncements on the issue, it would be fair and reasonable if the disallowance out of the alleged bogus purchases in the case of the appellant for the year under consideration is restricted to 10%. The AO is, therefore, directed to disallow the 10% of the alleged bogus purchases, which comes to Rs.42,49,524/- being the profit element from the purchases made from the parties during the year under consideration. Therefore the addition to the extent of Rs.42,49,524/- on account of bogus purchases is confirmed and the balance addition made is deleted. The ground no. 1 and 2 are partly allowed accordingly.