PREMJI MANSHI GALA,MUMBAI vs. INCOME TAX OFFICER, WARD 3(2), MUMBAI

The facts relating to the case are discussed in brief. The assessee is engaged in the business of trading in stationery items and gift articles. Consequent to the information received from the Sales tax department that certain parties are engaged in the business of providing accommodation bills without actually supplying the materials and upon noticing that the assessee has purchased goods from some of such parties in both the years under consideration, the AO reopened the assessment of these years by issuing notice u/s 148 of the Act. In AY 2009-10, the AO added entire purchase amount of 2 Shri Premji Manshi Gala Rs.14.66 lakhs. However in AY 2010-11, the AO estimated profit from the suspicious purchases at 12.50% and added the same to the total income.

In AY 2009-10, the Ld CIT(A) noticed that the GP rate declared by the assessee was 6.93% in AY 2008-09 and 17.53% in AY 2010-11. However in AY 2009-10, the assessee had declared rate of gross profit at 3.97%. Hence the Ld CIT(A) rejected the books of accounts of the assessee and proposed to adopt G.P rate of 10.60%, being the difference of G.P rate declared in AY 2010-11 and 2008-09. The Ld CIT(A) applied the G.P rate of 10.60% on the entire sales of the assessee and accordingly sustained addition to the extent of Rs.6,58,981/- and deleted the addition to the tune of Rs.8,07,342/-.

In AY 2010-11, the Ld CIT(A) upheld the order passed by the AO in estimating the profit from suspicious purchases at 12.50%.

I heard the parties and perused the record. I notice that the assessing officer had deputed his inspector to locate the suppliers, but he could not locate them. The AO also asked the assessee to produce the parties before him, but the assessee could not produce them. Hence, in my view, it cannot be said that the assessee has conclusively proved the genuineness of purchases. In that case, I am of the view that the tax authorities are justified in estimating the profit from the suspicious purchases.

The Ld A.R submitted that the Ld CIT(A) should not have applied the G.P rate on entire value of sales in AY 2009-10, since only a portion of purchases have been suspected. I find merit in this contention. I notice that the Ld CIT(A) has enhanced the Gross profit rate by 10.60%. In AY 2010-11, the tax authorities have estimated the profit from suspicious purchases at 12.50%, meaning thereby, they have accepted the genuineness of sales and it cannot be 3 Shri Premji Manshi Gala denied that the sales cannot be made without making corresponding purchases. In this view of matter only, the profit has been estimated at 12.50% of the value of purchases made in AY 2010-11. The basis is that the assessee did not purchase from the hawala parties, but could have sourced the materials from grey market.

In my view, it would be justifiable to adopt same methodology to estimate profit from suspicious purchases in both the years, since the facts are identical in both the years. The Ld A.R submitted that the VAT rates applicable to the products dealt by the assessee are 5% and 12.50%. Hence, in my view, the profit element may be estimated in between the two rates as it would take care of savings made by way of VAT tax plus the discount, if any, got by the assessee from the purchases made from grey market. Accordingly I modify the orders passed by Ld CIT(A) in both the years and direct the AO to estimate the profit from the value of suspicious purchases at 10.60% in both the years.

In the result, both the appeals of the assessee are partly allowed. Order has been pronounced in the Court on 2.11.2017.