ITO 7(3)(4), MUMBAI vs. PROMPT TOYS P.LTD, MUMBAI

Date of hearing 12-10-2017 Date of pronouncement 31-10-2017 O R D E R

Per G Manjunatha, AM :

1. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting addition of Rs. 73,96,790/- made on account of bogus purchases without appreciating the fact that notices u/s 133(6) issued to the purchase parties returned unserved and that the assessee failed to produce these parties for verification even after providing sufficient opportunities thereby failing to prove the identity and genuineness of the purchase transactions.

2. On the facts and in the circumstances of the case and in law, whether the Ld. CIT(A) is right in deleting addition of Rs. 73,96,790/- made on account of bogus purchases without appreciating that the purchase transactions are within privileged knowledge of the assessee and thus, onus to prove the purchase were genuine is on the assessee who failed to discharge the onus even I remand proceedings.”

In this case, the assessment was completed u/s 143(3) on 29-12-2011 determining the total income at Rs.15,82,091. Subsequently, on the basis of information received from the sales-tax department & DGIT (Inv), assessment was reopened u/s 147 on the ground that income chargeable to tax had been escaped assessment on account of bogus purchases made from certain parties listed by Sales-tax department as hawala operators involved in providing accommodation entries. In response to notice u/s 148, assessee vide letter date 16-08-2013 requested to treat the return of income filed on 24-09-2009 as being filed in response to notice issued u/s 148 of I.T. Act, 1961. In response to notices issued u/s 143(2) and 142(1), the authorized representative of the assessee appeared from time to time and furnished the details, as called for.

During the assessment proceedings, the AO noticed that the assessee is the beneficiary of bogus bills issued by M/as Jupiter Multitrade Pvt Ltd & Option

Mercantile Pvt Ltd for Rs.73,96,790 as both the parties are categorized as hawala operators indulging in the activity of providing accommodation entries.

Therefore, the AO called upon the assessee to furnish necessary evidences to justify purchases from the above two parties and also to produce the parties in person. In response to notices, the assessee, vide letter dated 06-01-2014 and 19-03-2014 submitted purchase bills and payment proof to prove purchases from the above parties as genuine. During the course of assessment proceedings, to ascertain the correctness of purchases, the AO issued notices u/s 133(6) to the parties to file necessary evidence. The notices issued u/s 133(6) were returned unanswered with remark “no such parties are available at the given address”. The AO, based on the information received from DGIT(Inv), coupled with further enquiries conducted during the course of assessment proceedings, came to the conclusion that purchases from the above two parties are bogus in nature and hence, made addition of R.73,96,70 u/s 69C of the Income-tax Act, 1961. Aggrieved by the assessment order, assessee preferred appeal before the CIT(A).

During the course of appellate proceedings, the AO forwarded additional evidences filed by the assessee to the AO for his comments. The AO, vide his

02-11-2016 opposed admission of additional evidence and also reiterated his findings in the assessment order. The CIT(A), after considering relevant submissions of the assessee and also relying upon certain judicial precedents observed that the AO had not carried out any enquiries with regard to actual supplies made by the assessee as the assessee has furnished complete details of purchases and sales. The CIT(A), further observed that the AO has not made any attempt to locate the alleged hawala parties, leave alone, verified their bank accounts to check if cash withdrawals had followed the deposit of assessee’s cheques. The assessee has filed entire documentation in terms of copies of ledger account, vouchers, production register, registered bills for transport and the bank statement. All these evidences lead to an undoubted inference that the purchases from the above parties are genuine, therefore, there is no reason for the AO to disallow total purchases on the basis of information received from DGIT (Inv). With these observations, the Ld.CIT(A) deleted additions made by the AO towards bogus purchases u/s 69C of the Act.

Aggrieved by order of CIT(A), the revenue is in appeal before us. 4. We have heard the Ld.DR and perused material available on record. The AO made addition towards purchases on the basis of information received from Maharashtra Sales-tax department which informed that the parties are involved in providing accommodation entries without any business activity.

According to the AO, notices issued u/as 133(6) were returned unserved with remark “not known” or “unclaimed”. Therefore, the AO opined that though the assessee has furnished certain evidences to justify purchases from above parties, 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.

proof. The assessee, on the other hand, filed certain evidences in the form of purchase bills and payment proof to prove the genuineness of 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 with remark, “not known” or “unclaimed”. 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. 6. In the result, appeal filed by the assessee is partly allowed. Order pronounced in the open court on 31st October, 2017.