ASST CIT 19(3), MUMBAI vs. VINOD H. SANGHVI, MUMBAI

“1. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was justified in confirming addition @ 17.5% of total purchases held as bogus.

2. The appellant prays that the order of the Learned CIT(A) on the above ground be set aside and that of the A.O be restored.

3. The appellant craves leave to amend or take any ground or add a new ground which may be necessary.”

S. No. Name of the Party Amount Remarks [as regards Notices sent u/s 133(6)] 1. M/s Aman Impex 16,63,457 Not Known 2. M/s Chair Impex Trading 19,87,336 Not Claimed Pvt. Ltd.

3. M/s Chirag Steel Centre 10,41,003 Not Known 4. M/s Devang Metals 10,32,140 Left 5. M/s Kanak Steel (India) 17,64,703 Not Known 6. M/s Kanak Guru Tubes & 3,25,47,465 Not Known Metals Pvt. Ltd.

5. The A.O issued a „Show Cause‟ notice (for short „SCN‟) to the assessee to explain that now when he had failed to establish the authenticity of the purchase transactions, therefore, why an addition of the peak credit addition of Rs. 3,66,65,814/- may not be made in its hands under Sec. 69C of the „Act‟. The A.O after deliberating on the explanation of the assessee, however, did not find favor with the same, and thus taking cognizance of the fact that the assessee had failed to discharge the onus as stood cast upon him to substantiate the genuineness and veracity of the purchases which were claimed to have been made from the aforementioned parties, therefore, on the basis of his said conviction made an addition of Rs. 3,66,65,814/- in the hands of the assessee.

6. Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) after deliberating on the contentions of the assessee Vinod H Sanghvi vs. ACIT- to 127/Mum/2016 7 ACIT Vs. Vinod H. Sanghvi – ITA No. 121-123/Mum/2016 A.Ys. 2009-10 to 2011-12 as regards the authenticity of the purchase transactions, however, was not persuaded to accept the same. The CIT(A) taking cognizance of the fact that the notices issued under Sec. 133(6) to the aforementioned parties from whom the assessee had purportedly made purchases were returned by the postal authorities with the remarks “not known”, “left” and “unclaimed”. The CIT(A) observed that the assessee despite being afforded sufficient opportunity had failed to produce the aforementioned parties for examination before the A.O. The CIT(A) further took cognizance of the fact that the assessee had failed to place on record the purchase orders, transportation bills, octroi receipts, weighing bills, goods receipt notes (GRN), subsequent sale/manufacturing details, despite sufficient opportunity having been afforded to him during the course of the assessment proceedings. The CIT(A) observed that now when the Sales tax Department had classified the aforementioned parties as Hawala dealers and intimated to the Income-tax department that the assessee was one of the beneficiary, therefore, a very heavy onus was cast upon the assessee to dislodge the said observations and prove on the basis of infallible evidence that he had made genuine purchases from the said parties. The CIT(A) observed that the assessee had failed to discharge the onus as stood cast upon him and could not prove the genuineness and veracity of the purchase transactions under consideration to the hilt. The CIT(A) took strong cognizance of the fact that the assessee had failed to produce the copies of consignments, if any, received from the transport contractor showing that the material purchased from the consignors was actually delivered to him and freight was paid on the same. The CIT(A) further deliberated on the fact that the assessee had failed to place on record documentary evidence which could go to prove the genuineness and veracity of the aforesaid purchase transactions, viz. goods consignment notes; transport bills and the Vinod H Sanghvi vs. ACIT- to 127/Mum/2016 8 ACIT Vs. Vinod H. Sanghvi – ITA No. 121-123/Mum/2016 A.Ys. 2009-10 to 2011-12 delivery challans issued by the aforementioned parties or octroi receipts issued to substantiate delivery of goods to the assessee. Thus, in the backdrop of his aforesaid observations the CIT(A) concluded that the assessee had failed to place on record independent and reliable evidence to prove complete trail as regards movement of consignment from the aforementioned parties to the place of the assessee. The CIT(A) being of the view that the fact that the payments were made by the assessee to the aforementioned parties vide banking channels would not conclusively prove the genuineness and veracity of the said purchase transactions. The CIT(A) further took note of the fact that the perusal of the bills/invoices revealed that the column for vehicle number was left blank in each of the delivery challan/invoice. The CIT(A) taking support of host of judicial pronouncements concluded that now when the assessee had claimed to have made purchases from the aforementioned parties, therefore, the onus was cast upon him to substantiate the veracity of the said purchases transactions. The CIT(A) being of the view that the question of rejection of the books of account of the assessee under Sec. 145(3) would normally arise only when the profitability ratio shown by the assessee was not accepted by the A.O having regard to the profits declared by the assessee in the preceding years and the profits shown by other assesses in the same line of business or certain major discrepancies/defects were noticed in the books of account of the assessee, therefore, on the basis of his said observations concluded that it was not obligatory on the part of the A.O to have rejected the books of account of the assessee before characterizing the purchases as ingenuine and disallowing the same in the hands of the assessee. The CIT(A) further being of the view that as the assessee had not discharged the primary onus as stood cast upon him to prove the genuineness and veracity of the purchase transactions under Vinod H Sanghvi vs. ACIT- ITA No. 125 to 127/Mum/2016 9 ACIT Vs. Vinod H. Sanghvi – ITA No. 121-123/Mum/2016 A.Ys. 2009-10 to 2011-12 consideration, therefore, he could not assail the validity of the assessment for the reason that no cross-examination of the aforementioned parties was allowed to him.

7. The CIT(A) found himself as being in agreement with the view of the A.O that the assessee had failed to substantiate the genuineness and veracity of the purchase transactions and could not disprove the findings of the A.O regarding the non-existence of the parties. However, the CIT(A) observed that now when the A.O had not doubted the genuineness of the sales, therefore, he could not have gone ahead and made addition of the peak investment in making of the said purchases by the assessee. The CIT(A) thus concluded that now when it remained as a matter of a conceded fact that the assessee had made purchases of the goods under consideration, though not from the aforementioned bogus parties, but from certain unidentified source, therefore, the addition in the hands of the assessee was liable to be restricted only to the extent of the profit element that would be involved in making of such purchases. The CIT(A) in support of his aforesaid conviction relied on the judgment of the Hon’ble High Court of Gujarat in the case of Bholanath Polyfab Pvt. Ltd. 355 ITR 290 (Guj). The CIT(A) in the backdrop of his aforesaid observations deliberated on the aspect of quantification of the estimated profit element in respect of the said bogus purchase transactions. The CIT(A) taking cognizance of the observations of the Hon’ble Gujarat High Court in the case of CIT Vs. Simit P. Sheth (2013) 38 taxmann.com 385 (Guj), therein observed that the Hon‟ble High Court had concluded that no uniform yardsticks could be applied to estimate the rate of profit, as the same varied with the nature of business. The CIT(A) in the backdrop of his aforesaid deliberations estimated the profit element in the hands of the assessee @17.5%. The CIT(A) further taking cognizance of the order of the ITAT, Mumbai, in Vinod H Sanghvi vs. ACIT- to 127/Mum/2016 10 ACIT Vs. Vinod H. Sanghvi – ITA No. 121-123/Mum/2016 A.Ys. 2009-10 to 2011-12 the case of Madukant B Gandhi Vs. ITO in ITA No. 1950/Mum/2009; dated 23/02/2010, therein further directed the A.O to reduce the profit that was already declared by the assessee on the aforesaid purchases and reduce the same from the estimated net profit of 17.5% on the purchases made from the said twelve parties. Thus, the CIT(A) on the basis of his aforesaid observations partly allowed the appeal of the assessee.

8. Both the assessee and revenue being aggrieved with the order of the CIT(A) had carried the matter in appeal before us. The ld. Departmental representative (for short „D.R‟) taking us through the facts of the case submitted that the A.O after concluding that the assessee had not made any purchases from the aforementioned bogus parties had thus in all fairness made an addition of the peak credit of the investment of the assessee towards making of purchases from certain unidentified sources. It was submitted by the ld. D.R that though the CIT(A) had accepted that no purchases were made by the assessee from the abovementioned bogus parties, but however, he had erred in setting aside the addition of peak investment of Rs. 3,66,65,814/- and had wrongly restricted the same to 17.5% of the said bogus purchases, subject to a further relief of the profit that had already been disclosed by the assessee on the said purchases. The ld. D.R submitted that as the CIT(A) had failed to appreciate the facts of the case in the right perspective, therefore, his order may be set aside and that of the A.O be restored. Per Contra, the Ld. Authorized representative at the very outset submitted that as the assessee had duly substantiated the genuineness of the purchase transactions on the basis of documentary evidences, viz. stock register, delivery challans, confirmations etc. of the supplier parties, therefore, no disallowance of any part of the said purchases was called for in the Vinod H Sanghvi vs. ACIT- to 127/Mum/2016 11 ACIT Vs. Vinod H. Sanghvi – ITA No. 121-123/Mum/2016 A.Ys. 2009-10 to 2011-12 hands of the assessee. However, on a specific query by the bench the ld. A.R accepted that there was no compliance by either of the parties to notices issued under Sec. 133(6). Alternatively, the ld. A.R submitted that as during the year under consideration the rate of VAT on ferrous and non-ferrous items in which the assessee was trading was 4%, therefore, even if the genuineness of the purchase transactions was to be disbelieved, the addition was liable to be restricted to the extent of VAT of 4% of the value of the purchases under consideration. The ld. A.R to support his aforesaid contention as regards the rate of VAT as was applicable during the year under consideration, therein drew our attention to the purchase invoices (Page 38-39) of his „Paper book-1‟ (for short „APB-1‟) wherein the VAT rates were reflected at 4%.

9. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record. We have given a thoughtful consideration to the facts of the case and are of the considered view that from a perusal of the records it can safely be gathered that the assessee had failed to substantiate the genuineness and veracity of the purchase transactions under consideration. We are of the considered view that the information received by the A.O from the Sales Tax Authorities, Government of Maharashtra that the parties under consideration were engaged in providing accommodation entries without any actual sale of the goods, as accepted by them in their respective statements and affidavits filed with the sales tax authorities, thus, did cast a very heavy onus on the assessee to substantiate the authenticity of purchases which were claimed by the assessee to have been made from them. We are further of the view that the returning by the postal authorities of the notices issued u/s 133(6) to the aforementioned parties by the A.O, with the remarks “not known”, “left” and Vinod H Sanghvi vs. ACIT- to 127/Mum/2016 12 ACIT Vs. Vinod H. Sanghvi – ITA No. 121-123/Mum/2016 A.Ys. 2009-10 to 2011-12 “unclaimed”, further fortified the fact that they were non-existent and bogus parties. We find ourselves to be in agreement with the observations of the lower authorities that even otherwise the assessee had failed to substantiate the genuineness and veracity of the purchase transactions by not only failing to produce the parties for examination before the A.O, but even by failing to place on record irrefutable documentary evidence to substantiate the authenticity of the purchase transactions. We further find that as observed by the A.O, though the assessee had during the course of the assessment proceedings placed on record the copies of the ledger accounts of the aforementioned parties, copies of the purchase bills and the bank statements indicating payments made to them, but however, despite specific directions the assessee had failed to place on record material as was called for by the A.O to prove the genuineness of purchase transactions to the hilt and dispel the doubts raised as regards the veracity of the same, viz. transportation details, documents evidencing delivery of goods at assesses place, details of the transport contractor who had delivered the goods etc. We are in agreement with the view of the CIT(A) that now when the assessee had claimed to have made purchases from the aforementioned supplier parties and had debited its profit and loss account to the said extent, then, the onus was cast upon the assessee to place on record documents which could go to evidence the genuineness and veracity of the purchase transactions. We are further of the view that now when there were serious allegations in respect of the purchase transactions claimed by the assessee to have been made from the aforementioned parties, therefore, a much more heavy onus was liable to be discharged by the assessee in order to irrebutably evidence the genuineness and veracity of the purchase transactions under consideration. We find that the assessee had failed to substantiate the authenticity of the purchase Vinod H Sanghvi vs. ACIT- to 127/Mum/2016 13 ACIT Vs. Vinod H. Sanghvi – ITA No. 121-123/Mum/2016 A.Ys. 2009-10 to 2011-12 transactions, and to the extent the material was placed on record by him, the same to our considered view was seriously falling short of the quality of onus which was required to be discharged by him. We have given a thoughtful consideration to the facts of the case and are of the considered view that now when the assessee had failed to discharge the onus as stood cast upon him as regards proving the authenticity of the purchase transactions under consideration, therefore, the same without any choice had been held as ingenuine transactions by the CIT(A). We are further of the considered view that the CIT(A) had fairly concluded that now when the sales of the assessee had been accepted by the A.O, therefore, it could safely be concluded that the assessee had purchased the goods, though not from the aforementioned bogus parties, but from unidentified sources. We are persuaded to be in agreement with the CIT(A) that as the sales of the assessee had not been doubted, therefore, the A.O could not have made an addition towards peak investment in the hands of the assessee. We agree with the view of the CIT(A) that the addition in the hands of the assessee was liable to be restricted only to the extent of the profit element involved in making of such purchases by the assessee from the unorganized sector. We have further given a thoughtful consideration to the estimation of the profit element involved in making of such purchases by the assessee from the unidentified suppliers operating in the open/grey market. We are of the considered view that the assessee by making the purchases from the open/grey market would had procured the goods at a lower rate, i.e by saving on the VAT liability, cash discounts and certain other factors, as in comparison to the price at which the same would be available in the organized sector. We find that as the VAT involved on ferrous and non-ferrous items during the year under consideration was 4%, therefore, keeping in view the other monetary benefits which the assessee as observed by us hereinabove Vinod H Sanghvi vs. ACIT- ITA No. 125 to 127/Mum/2016 14 ACIT Vs. Vinod H. Sanghvi – ITA No. 121-123/Mum/2016 A.Ys. 2009-10 to 2011-12 would had benefited from by procuring the goods from the open/grey market, the same could safely be taken at an aggregate figure of 8%. We thus, in the backdrop of our aforesaid observations direct the A.O to restrict the addition in the hands of the assessee to 8% of the aggregate value of the purchases of 5,47,94,473/- (as tabulated hereinabove) claimed by the assessee to have been made from the aforementioned parties. We thus modify the order of the CIT(A) to the extent of estimation of the profit element involved in making of the purchases under consideration.

10. That the appeal of the assessee for A.Y 2010-11, marked as is partly allowed and the appeal of the revenue, marked as ITA No. 122/Mum/2016 is dismissed.

ITA No. 125/Mum/2016 (Assesses appeal) & (Revenues appeal) A.Y. 2009-10 11. We shall now take up the cross appeals of the assessee and the revenue for A.Y. 2009-10. The assessee vide his appeal marked as had assailed the order of the CIT(A) by raising the following grounds of appeal before us:

1. That on the facts and circumstances of the case and in law the ld. Assessing officer has erred in making disallowance u/s 69C of Rs. 1,86,43,641/- on account of purchases from ungenuine parties and the ld. CIT(A) has erred in not deleting the said entire addition but has estimated disallowance on account of alleged bogus purchases @ 17.5% of such purchases, net of gross profit declared by the assessee appellant in accounts. In view of the same appellant prays that the alleged estimated disallowance confirmed by the ld. CIT(Appeals) at Rs. 30,67,611/- being wrong on facts and bad in law, therefore the same may kindly be deleted.

Vinod H Sanghvi vs. ACIT- to 127/Mum/2016 15 ACIT Vs. Vinod H. Sanghvi – ITA No. 121-123/Mum/2016 A.Ys. 2009-10 to 2011-12 2. That the appellant craves the leave to amend , alter, substitute and or to raise new or additional grounds of appeal at the time of hearing.” The revenue on the other hand had vide its appeal, marked as CIT(A) on the following grounds:

“1. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was justified in confirming addition @ 17.5% of total purchases held as bogus.

2. The appellant prays that the order of the Learned CIT(A) on the above ground be set aside and that of the A.O be restored.

3. The appellant craves leave to amend or take any ground or add a new ground which may be necessary.”

S. No. Name of the Party Amount Remarks [as regards Notices sent u/s 133(6)] 1. G.K Industrial Corporation 1027709 No reply to notice u/s 133(6) received till date 2. P M Steel Alloys 48672 No reply to notice u/s 133(6) received till date 3. Vijay Industries 630433 No reply to notice u/s 133(6) received till date 4. Manibhadra Metal Industries 1438140 No reply to notice u/s 133(6) received till Vinod H Sanghvi vs. ACIT- to 127/Mum/2016 16 ACIT Vs. Vinod H. Sanghvi – ITA No. 121-123/Mum/2016 A.Ys. 2009-10 to 2011-12 date 5. R K Metal 1146704 No reply to notice u/s 133(6) received till date 6. Reliable Metal (India) 245775 No reply to notice u/s 133(6) received till date 7. Nerolac Metal (India) 555241 No reply to notice u/s 133(6) received till date 8. Aman Impex 3065093 No reply to notice u/s 133(6) received till date 9. S K Engineering Co. 9356940 No reply to notice u/s 133(6) received till date 10. Moksha Metals Pvt. Ltd. 803563 No reply to notice u/s 133(6) received till date 11. Malwa Metal Corpn. 829243 No reply to notice u/s 133(6) received till date 12. Shree Keshar Impex Metals 2454905 No reply to notice u/s 133(6) received till Private Ltd. date Total 2,16,02,418

Vinod H Sanghvi vs. ACIT- to 127/Mum/2016 18 ACIT Vs. Vinod H. Sanghvi – ITA No. 121-123/Mum/2016 A.Ys. 2009-10 to 2011-12 ITA No. 127/Mum/2016 (Assesses appeal) & ITA No. 123/Mum/2016 (Revenues appeal) A.Y. 2011-12 17. We shall now take up the cross appeals of the assessee and the revenue for A.Y. 2011-12. The assessee vide his appeal marked as ITA No. 127/Mum/2016, had assailed the order of the CIT(A) by raising the following grounds of appeal before us: “1. That on the facts and circumstances of the case and in law the ld. Assessing officer has erred in making disallowance u/s 69C of Rs. 76,92,768/- on account of purchases from ungenuine parties and the ld. CIT(A) has erred in not deleting the said entire addition but has estimated disallowance on account of alleged bogus purchases @ 17.5% of such purchases, net of gross profit declared by the assessee appellant in accounts. In view of the same appellant prays that the alleged estimated disallowance confirmed by the ld. CIT(Appeals) at Rs. 12,20,251/- being wrong on facts and bad in law, therefore the same may kindly be deleted.

2. That the appellant craves the leave to amend , alter, substitute and or to raise new or additional grounds of appeal at the time of hearing.” The revenue on the other hand had vide its ITA No. 123/Mum/2016 challenged the order of the CIT(A) on the following grounds:

“1. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was justified in confirming addition @ 17.5% of total purchases held as bogus.

2. The appellant prays that the order of the Learned CIT(A) on the above ground be set aside and that of the A.O be restored.

3. The appellant craves leave to amend or take any ground or add a new ground which may be necessary.”

S. No. Name of the Party Amount Remarks [as regards Notices sent u/s 133(6)] 1. Veer Industries 154856 Return undelivered by the postal authorities.

2. Ratandeep Tubes 182769 Return undelivered by the postal authorities.

3. Sunshine Enterprises 298799 Return undelivered by the postal authorities.

4. Sunidhi Metal 729961 Return undelivered by the postal authorities.

13. Pioneer Enterprises 2701124 Return undelivered by the postal authorities. Total Rs. 93,88,570 Vinod H Sanghvi vs. ACIT- to 127/Mum/2016 20 ACIT Vs. Vinod H. Sanghvi – ITA No. 121-123/Mum/2016 A.Ys. 2009-10 to 2011-12 20. The A.O after deliberating on the facts of the case, therein being of the view that as the assessee had failed to substantiate the genuineness and veracity of the aforesaid purchase transactions by either producing the aforementioned parties or by placing on record irrefutable documentary evidences fortifying the veracity of the said purchase transactions, therefore, made an addition of the Peak Investment of Rs. 76,92,768/- which as per the A.O was made by the assessee towards making of purchases from the unidentified suppliers. That on appeal the CIT(A) though agreed with the A.O that the assessee had failed to prove the genuineness of the purchase transactions, but however, being of the view that as the assessee had purchased the goods, though not from the aforementioned bogus parties, but from the unidentified parties, therefore, concluded that the addition in the hands of the assessee was liable to be restricted to the extent the assessee had inflated the purchases. The CIT(A) on the basis of his aforesaid conviction restricted the addition in the hands of the assessee to the extent of the profit element that was involved in making of the purchases under consideration from the unidentified parties operating in the open/grey market. The CIT(A) estimated the profit element involved in making of such purchases @17.5% of the aggregate value of the purchases claimed by the assessee to have been made from the aforesaid parties, subject to a further relief of the profit that had already been disclosed by the assessee on the said purchases. That both the assessee and the revenue being aggrieved with the order of the CIT(A) had carried the matter in appeal before us by way of filing the present cross-appeals.

Order pronounced in the open court on 27/10/2017.