SANDEEP KEWALCHAND MEHTA,MUMBAI vs. ACIT 31(3), MUMBAI

O R D E R Per G Manjunatha, AM : This appeal filed by the assesse is directed against the order of CIT(A)-42, Mumbai dated 09-08-2016 and it pertains to AY 2009-10. 2. The brief facts of the case are that the assessee is an individual is engaged in the business of civil construction, filed his return of income for the AY 2009-10 on 30-09-2009 declaring total income of Rs.44,08,204. Basically, the civil construction works carried out by the assessee is in the nature of road repairing and debris clearing for BMC, a local body. In this case, the 143(3) on 28-11-2011 determining a total income of Rs.47,92,956. Subsequently, the AO received information from the office of the DGIT (Inv), Mumbai to the effect that the assessee has been a beneficiary of bogus purchase bills issued by hawala operators listed by the Sales-tax department. Based on the information, the AO reopened the assessment on the ground that income chargeable to tax had been escaped assessment within the meaning of section 147 of the Income-tax Act, 1961. In response to notices u/s 143(2) and 142(1), the authorised representative of the assessee appeared from time to time and filed the details, as called for. During the course of assessment proceedings, the AO noticed that the assessee has purchased from 3 parties, viz. Om Corporation, Raj Traders, and Sunrise Enterprises amounting to Rs.43,48,834. The AO, further observed that all the above three parties appeared in the list of hawala operators prepared by Sales- tax department, therefore, called upon the assessee to furnish necessary details to justify purchases from those parties. In response to notice, the assessee has filed copies of purchase bills and copy of bank statement to prove payment against such purchases however, stated that the said parties have not paid VAT to the CTO, therefore, they have been declared a hawala operators.

The AO, after considering necessary submissions of the assessee observed that though the assessee has filed certain documents like purchase bills and payment proof, but failed to justify the purchases with further evidences in the backdrop of clear findings of the Sales-tax department that the parties are hawala operators indulging in providing accommodation entries. Therefore, he opined that purchases from the above parties are bogus in nature and accordingly disallowed total purchases from above parties of Rs.43,48,834 and added back to the total income of the assessee. Aggrieved by the assessment order, assessee preferred appeal before CIT(A).

With these observations, the CIT(A) confirmed additions made by the AO towards bogus purchases. Aggrieved by the order of CIT(A), the assessee is in appeal before us.

According to the AO, notices issued u/as 133(6) were returned unserved.

Therefore, the AO opined that though the assessee has furnished certain evidences to justify purchases from above parties, but failed to prove the genuineness of purchases in the backdrop of clear findings of Maharashtra Sales-tax department that the parties are involved in providing accommodation entries. It is the contention of the assessee that purchases from above parties are genuine in nature as its purchases are supported by valid purchase bills, delivery challans and payment for such purchases has been made through proper banking channels. The assessee further contended that additions cannot be made towards purchases merely on the basis of third party information ignoring the evidences filed to justify purchases. The assessee further contended before the lower authorities that the AO neither pointed out any error or discrepancy in the books of account nor did make out any case of sales made outside the books of account. In the absence of any finding as to incorrectness of books of account, addition cannot be made towards bogus purchases.

Therefore, we are of the considered view that addition cannot be made towards alleged bogus purchases only on the basis of information received from Maharashtra Sales-tax department. At the same time, it is also an undisputed fact that the notices issued u/s 133(6) were returned unserved.

The assessee has failed to furnish correct addresses of the parties. Under these circumstances, it is very difficult to accept that the purchases from those parties are explained to the satisfaction of the AO. Under these facts and circumstances what needs to be taxed is only the profit element in such purchases but not the total purchases made from alleged bogus parties. This view has been further supported by the decision of Ahmedabad Tribunal in the case of Vijay Protiens Ltd (supra) wherein it was held that only profit element embedded in bogus purchases needs to be taxed. We further notice that the Hon’ble Gujarat High Court in the case of Bholanath Poly Fab Pvt Ltd 355 ITR 290 (Guj) observed that whether purchases themselves were to be taxed or whether parties from whom such purchases made were bogus is essentially a question of fact and the Tribunal having examined the evidence on record concluded that the assessee did purchase cloth and sold goods, the entire purchase would not be subjected to tax. In yet another case, the Hon’ble Gujarat High Court in the case of Simit P Sheth (supra) has held that no uniform yardstick can be applied for estimation of net profit which is dependent upon facts and circumstances of each case. The co-ordinate bench of ITAT, Mumbai in several cases has taken a view that only the profit element embedded in bogus purchases needs to be taxed. Accordingly, estimated net profit of 12.5% on bogus purchases. Therefore, considering the facts and circumstances of the case and also being consistent with the view taken by the co-ordinate bench, we are of the view that only profit element embedded in purchases needs to be taxed. Hence, we direct the AO to estimate net profit of 12.5% on total purchases made from the above parties.

Order pronounced in the open court on 31st October, 2017.