Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, MUMBAI BENCH “J”, MUMBAI
Before: SHRI C.N. PRASAD, HONBLE & SHRI RAJESH KUMAR, HONBLEShri Kaushal R Sheth
2 & 1109/MUM/2017 Kaushal R.Sheth O R D E R PER C.N. PRASAD (JM) 1. These two appeals are filed by the Revenue and assessee against the order of the Learned Commissioner of Income Tax (Appeals)–25 Mumbai dated 22.04.2014 for the Assessment Year 2010-11.
The Revenue challenged the orders of the Ld.CIT(A) in deleting addition of ₹.46,73,368/- on account of bogus purchases as against the entire purchases of ₹.62,31,157/- treated as bogus by the Assessing Officer. The assessee in its appeal challenged the order of the Ld.CIT(A) in sustaining the disallowance at 25% of the bogus purchases by estimating the profit element in such purchases.
Briefly stated the facts are that the assessment of the assessee was reopened u/s. 147 and reassessments were completed on 20.03.2014 u/s. 143(3) r.w.s. 147 of the Act determining the income of the assessee at ₹.71,00,410/- for the Assessment Year 2010-11. The Assessing Officer while computing the income of the assessee treated purchases of ₹.62,31,157/- as non-genuine/bogus purchases for the reason that the purchases made by the assessee from some of the dealers referred to in Page No.3 of the Assessment Order are non-genuine. According to the Assessing Officer the dealers are providing only the accommodation entries as deposed by them before Investigation Authorities of Sales Tax 3 & 1109/MUM/2017 Kaushal R.Sheth Department of Maharashtra Government and the notice issued to the dealers by the Assessing Officer were returned unserved. The Assessing Officer also observed that confirmation of the concerned party, copy of transport receipts, copy of stock register, etc., were not furnished by the assessee. Therefore, for these reasons Assessing Officer concluded that the purchases made by the assessee are non-genuine and entire purchases from the dealers referred to in Page No.3 of the Assessment Order were treated as bogus and non-genuine purchases.
On appeal the Ld.CIT(A) restricted the addition/disallowance to 25% of the bogus purchases. Ld. DR vehemently supported the orders of the Assessing Officer in bringing to tax the entire bogus purchases.
We have heard the Ld. DR, perused the orders of the authorities below. The Ld.CIT(A) restricted the addition/disallowance to 25% observing as under: - “10. I have carefully gone through the assessment orders passed by the AO and the statement of facts submitted by the assessee. Since the assessee has neither appeared any time during the appellant proceedings nor filed any written submission in spite of the several notices issued, decision is hereby made on the basis of merit of the case by relying on the materials available on record and judicial pronouncements in this regard. Thus, my observations are as under- 11. Ground No. 1 to 7: In these grounds of appeal, the appellant has agitated about the disallowance of purchases of Rs.62,31,157/- by the AO from the above mentioned seven parties against total 4 & 1109/MUM/2017 Kaushal R.Sheth purchases of Rs. 63.50 lac made during the year, on which a turnover of Rs. 81.97 lac was achieved. It is observed from the assessment order that the AO has formed his view about the bogus nature of the purchases made by the appellant from the above parties on the basis of statements recorded by the Sales Tax Authorities as well as further enquiries carried out by them. A list was forwarded to the Income Tax Department for taking necessary action. The Assessing Officer observed that the list contains the names of above mentioned parties, with which the appellant had shown purchases and accordingly disallowance was made. a. In my opinion, only on the basis of information received from the Sales Tax Authorities regarding bogus nature of purchases from the above mentioned parties, cannot be taken as the basis to treat the entire purchases shown as bogus or non-genuine. The information received from the Sales Tax Authorities is a piece of evidence to initiate in-depth independent investigation on the issue. However, the AO has primarily relied on the information received from Sales Tax authorities, On the given set of facts and circumstances and without appreciating the evidences submitted by the appellant during assessment proceedings, total purchases shown to be made from the above parties cannot be held to be entirely bogus. It has not been appreciated that the goods shown to be purchased from these parties were used in the business and without which, corresponding turnover of 81.97 lac would not possible. Thus, there ought to be purchases made and hence, disallowance of purchases of Rs. 62.31 lac from 7 parties against total purchases of Rs. 63.50 lac during the year is not justified. b. In this regard, I find the ratio laid down by the Hon'ble High Court of Bombay in the case of CIT v. Nikunj Eximp Enterprises (P.) Ltd., quite relevant wherein Hon'ble High Court has held that:- "When the assessee have filed letter of confirmations of the suppliers, Bank statements highlighting the payment entries through account payee cheque, copies of invoices, stock reconciliation statements before the AO; and merely because the suppliers did not appear 5 & 1109/MUM/2017 Kaushal R.Sheth before the AO, one cannot conclude that the purchases were not made by the assessee. The AO cannot disallow the purchases on the basis of suspicion because the suppliers were not produced before them." C. The facts and circumstances as outlined above, clearly suggest that the purchases of materials by the appellant cannot be doubted but a major lacuna in these transactions is the unverifiable nature of the purchases from the parties in question, as they could not be located at the given addresses. The evidentiary value of the information received from the Sales Tax Department cannot be set aside too. Thus, the purchases prices shown on these invoices are not subjected to verification and as such it was difficult to establish the correctness of the purchase prices paid for the materials purchased from them. such verification of the sale price shown on the invoices/bills was necessary to ascertain the correctness of the profits shown by the appellant for the period under consideration. This verification was also vital to determine as to whether the purchase prices shown on the bills/invoices, are as per prevailing market prices of the materials purchased and to ascertain that the price paid for the materials purchased from these parties are not over invoiced. In the absence of any such verification of the correctness of the price paid for the materials purchased by the appellant, the purchase price paid as mentioned on the invoices/bills cannot be accepted as the correct price paid for the goods purchased from such parties. In view of the same, the possibility of over-invoicing of the materials purchased to reduce the profits, cannot be ruled out. Therefore, the gross profit rate shown by the appellant for the year under consideration cannot be relied upon. In the circumstances, the correct approach in such transactions would be to estimate the additional benefit or profit eared on these purchases and not to disallow the entire purchases from these seven parties. The disallowance of the entire amount of purchases from such parties would not be logical and would amount to travesty of justice. In my view either the purchases from these parties are over invoiced or the purchases were actually made but not from the parties from which it was claimed to have been made and instead may have been purchased from grey market without proper billing or documentation.
6 & 1109/MUM/2017 Kaushal R.Sheth d. As of now the issue of such types of unverifiable purchases have been much discussed and debated by the various courts and tribunals. In many judicial pronouncements on the issue, the Courts have taken a consistent view that in case of non-existent parties from which the purchases are shown to have been made, only part of such purchases can be disallowed, particularly in the such cases where the corresponding sales are not doubted. Alternatively, the profit embedded in such sales against the alleged bogus purchases should be brought to tax. e. In the case of CIT-1 Vs Simit P. Sheth, ITA.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) with 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. However, vital question while considering whether the entire amount of purchases should be added back to the income of the assessee or only the profit element embedded therein was to ascertain whether the purchases themselves were completely bogus and nonexistent or that the purchases were actually made but not from the parties from whom it was claimed to have been made and instead may 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 assessees theory that the purchases were not bogus but were made from the parties other than those mentioned in the books of accounts.
7 & 1109/MUM/2017 Kaushal R.Sheth 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-IV vs. Vijay M Mistry Construction Ltd. vide order dated 10.01.2011 passed in Tax Appeal No. 1090 of 2009 and in case of Commissioner of Income Tax-1 vs. Bholanath Poly Fab Pvt. Ltd. vide order dated 23.10.2012 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." (emphasis supplied)” f. Similarly while dealing with an identical issue, in the case of CIT, Vs. Bholanath 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 Oilcake Industries v. CIT [2009] 316 ITR 274 (Guj). Such decision is also followed by this court in a judgment dated August 16,2011, in Tax Appeal No. 679 of 2010 in the case of CIT v. Kishor Amrutlal Patel. In the result, tax appeal is dismissed."
8 & 1109/MUM/2017 Kaushal R.Sheth g. In view of the facts and circumstances and the judicial pronouncements cited above, what can be disallowed or taxed in the instant case, is the excess profit element embedded in such purchases shown to have been made from these parties. In this regard, the yardstick laid down by the Hon'ble Ahmadabad Tribunal in the case of M/s Vijay Protein Pvt. Ltd. (supra), as approved by the Hon'ble Gujarat High Court in the case of Simit P. Sheth (supra) by disallowing 25% of purchases as the benefit garnered in such unverifiable purchases where sales are not disapproved, is a sound benchmark that is being adopted in the present case too. h. Therefore in the instant case, it is found that all the facts and circumstances outlined above lead to the conclusion that although the purchases made by the appellant from the above mentioned parties mentioned above during the year under consideration cannot be summarily rejected but at the same time it is difficult to accept that the purchases shown on invoices/bills issued by these parties are as per the prevailing market price of those materials or actually been made from such parties and might have been purchased in the grey market. The appellant has not placed any evidence on record that the goods were purchased from the above parties at arms' length price. The appellant has also not placed on record any comparable bills/invoices for purchases of similar items made from other parties to establish that the purchases from the above parties in question were at par with the purchases made from other parties during the period under consideration. The possibility of such purchases from unregistered dealers without invoices cannot be ruled out. In view of the above, the correctness of the purchase prices mentioned on such bills/invoices issued by the above parties in question cannot be accepted and some additional profit needs to be estimated on such purchases made from the above parties in question. As stated above, following the guidelines laid down in the case of Vijay Protein P. Ltd.(Supra), disallowance of 25% on such alleged bogus purchases of Rs. 62,31,157/-. i.e., Rs.15,57,789/- is confirmed, which needs to be added to the total income of the assessee on account of alleged bogus purchases and the balance addition of Rs. 46,73,368/- is hereby deleted, Hence, the ground no. 1 is partly allowed.”
9 & 1109/MUM/2017 Kaushal R.Sheth 6. Further, the Hon'ble Gujarat High Court in the case of Bholanath Polyfab Pvt. Ltd [355 ITR 290] held that when the assessee made purchases and sold the finished goods as a natural corollary not the entire amount covered under such purchases would be subject to tax but only the profit element embedded therein. Similar view has been taken by the Hon'ble Gujarat High Court in the case of CIT v. Simit P. Seth [38 taxman.com 385]. Simply because the parties were not produced the entire purchases cannot be added as held by the Bombay High Court in the case of CIT v. Nikunj Eximp [216 Taxman.com 171]. Thus, we do not see any infirmity in the order passed by the Ld.CIT(A) except in sustaining the addition/disallowance to the extent of 25% of the purchases. Therefore, we direct the Assessing Officer to restrict the disallowance to 12.5% of the purchases treated as non-genuine by estimating the profit element in such bogus purchases for the Assessment Year 2010-11.
In the result, appeal of the assessee is partly allowed and the appeal of the Revenue is dismissed.
Order pronounced in the open court on the 25th October, 2017.