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Income Tax Appellate Tribunal, “J”, BENCH MUMBAI
Before: SHRI R.C.SHARMA, AM & SHRI SANDEEP GOSAIN, JM
आदेश / O R D E R PER R.C.SHARMA (A.M):
These are the cross appeals filed by assessee and revenue against the order of CIT(A)-2, Thane for the A.Y.2009-10 in the matte rof order passed u/s.143(3) r.w.s. 147 of the IT Act.
Rival contentions have been heard and record perused. Briefly stated facts of the case are that in this case the return of income, declaring total income at Rs.3,86,912/- was e-filed and the same was processed u/s.143(1) of the Act, on 14/10/2010. The assessee is an HUF and proprietor of M/s. Shri Darshan Pipes, engaged in the business of manufacturing and trading of H.D.P.E. Pipes and Fittings. The re- assessment proceedings u/s.143(3) r.w.s. 147 of the Act, was finalised on 20/03/2014, at total income of Rs.71,95,610/- after making an addition of Rs.68,08,698/-, on account of bogus purchases.
By the impugned order, CIT(A) restricted the addition to the extent of 12.5% of such purchases after observing as under:- “10. I have carefully considered the facts of the case, findings of the AO, submissions of the Ld AR and material placed on record. The Ld. A.R, instead of justifying the genuineness of purchases made from Hawala parties, by filing confirmation, current mailing addresses, other related details etc., he has merely reiterated the fact that the payments have been made through banking channels and material purchased was consumed vis-a-vis corresponding sales have been made. In order to arrive at logical conclusion, the undersigned try to collect the relevant information from the appellant, in the light of decision of the Hon'ble Delhi High Court in the Case of CIT v/s Jansampark Advertising And Marketing (P) Ltd, wherein, Hon'ble Court, inter-alia, held as under:- The AO here may have failed to discharge his obligation to conduct a proper inquiry to take the matter to logical conclusion. But CIT(Appeals), having noticed want of proper inquiry, could not have closed the chapter simly by allowing the appeal and deleting the additions made. It was also the obligation of the first appellate authority, as indeed of ITAT, to have ensured that effective inquiry was carried 10.1 Keeping in view the above facts and submissions of the Ld. AR, the appellant was requested to reconcile the quantitative/ qualitative details, item-wise month to month - op. stock, purchases and sales affected party- wise. The Ld. AR, however, could not furnish these details, in the prescribed format, with the plea that the same are not maintained in the required manner. In the absence of these details, it is not possible for the Department to ascertain the correct amount of the income, from the records / books maintained by the appellant, hence, books are not complete in every respect and not tenable, as per the provisions of section 145(3) of the I.T. Act, 1961, therefore, rejected. During the course of appellate proceedings, the Ld. AR of the appellant, has shown his inability to file the copies of confirmed ledger accounts, their mailing addresses and also refused to produce hawala parties, for examination in person. Considering these facts, the contention of the Ld. AR, is not tenable, hence rejected in view of the following reasons/facts/defects a. The appellant's claim that the payments to the hawala parties have been made through banking channels, is not tenable as hawala parties have duly admitted in their statement / affidavit that after deducting their due commission i.e. approximately 1%, they have refunded back the balance cash to the buyers. b. It is the duty of the appellant to justify the genuineness of purchases, by furnishing necessary supporting documents, bank statement, confirmation, delivery challan, transport receipts etc. and produce the parties for examination. Even during the course of appellate proceedings, the appellant, number of times, was asked to file above details and produce parties for examination, but failed to do so. No transport / octroi receipts were filed to justify genuineness of purchases. c. As regards the appellant's claim that there cannot be any sales without there being corresponding purchases, is also not tenable as the appellant could not reconcile the quantity wise details of purchases from these hawala parties vis. a vis. sales thereof. The Ld AR was also not able to reconcile the stock. . : : d. The perusal of hawala bills reveals that these are plain bills without any marking or signature of either of receipt clerk or of cashier, who has issued the payment. In the case of regular bills / parties, the payments have been made on regular basis, immediately after purchases, whereas in the case of hawala parties, the purchases have been shown on various dates but the payments have not been made in the manner / pattern, as paid to the regular suppliers. e. The appellant could not produce proper verifiable documents which could prove physical delivery of goods vis. a vis. corresponding consumption / sales thereof. On the other hand, in the case of regular purchases, on the same set of circumstances, the department had accepted such purchases without questioning their genuineness, as all relevant documents / records have duly been maintained by the appellant. f. If, the practice of booking of bogus bills is legalized, by disallowing nominal percentage or estimating nominal rate of GP / NP of a particular trade, then this may lead to provide an easy weapon in the hands of the manipulative assessee to suppress / manipulate their profit, as and when so warranted. g. The practice of obtaining of fake bills to support the claim of bogus / unverified purchase being followed by the large number of assesses. This malpractice is in the operation for quite some time and is used brazenly to suppress the profits by obtaining bogus / paper purchase bills (without making actual purchase of goods) and thereby evading payment of legitimate taxes to Government Exchequer. There exists an unholy nexus between the bogus bill providers and businessmen engaged in the various trades. The effect of this malpractice is not only of very serious nature but also multi-dimensional. On one side, it disheartens the honest tax pavers who do not resort to such malpractice and pay their legitimate taxes honestly. On the other side, it emboldens the dishonest tax pavers who resort to such practice. Resultantly, the leakage of the revenue turns out to a natural casualty. Any lenient approach in the matter will not serve the cause of justice and guilty will neither deter nor mend their unethical, spurious and objectionable ways in future as well. h. Onus on the assessee to prove the claim of expenses The assessee has debited the purchases in Trading Account (including the bogus/ unverified purchases) and claimed the deduction for expenses. Since the expenditure has been claimed by the assessee and the primary facts are in appellant's knowledge, the "primary onus" lies on the assessee to prove that the purchases claimed by him are genuine and wholly & exclusively for the purpose of business. For this purpose, the assessee has to lead the evidence to show that the expenditure has actually been incurred by it and the same is for genuine business needs. Here, if the assessee claims that purchases are made from the alleged bogus party then it is the responsibility of the assessee to establish that (a) party is in existence (bl party is capable of supply of goods and (c) party has actually supplied the goods (d) goods so received had actually used for business and declared as part of sale for the year. If the assessee is asked to produce the parties for verification, then it is the duty of the assessee to do so to establish the genuineness of the claim of the expense. In these cases, the assessee has tried to claim that they have discharged their onus by doing the following: (i) By submitting the name, address, PAN. (ii) By claiming that payments were through banking channels (iii) By claiming that the purchases are reflected in the books of accounts. Considering the facts of the cases under consideration, it can safely be concluded that assessee had failed in their efforts in discharging the onus cast upon them. Merely filing name, address, PAN & payments by cheque will not discharge him from the onus especially when the department had received specific material / information from the Sales- tax / VAT Department, wherein these suppliers, on oath had admitted the fact that they have merely provided entry / issued bills without physically delivering any goods. t _ Case laws relied to support the stand of the department: In the case of CIT V/s Golcha Properties (Pvt.) Ltd. 227 ITR 391 (Raj) it was held that the genuineness of transaction could be decided on the basis of primary facts on records. The department is not required to lead a clinching evidence to prove that purchases are bogus. , .
The onus of proof at all relevant times rests upon the assessee. It is for the assessee to establish by evidence that a particular allowance is justified. The law does not prescribe any quantitative test to find out whether the onus in a particular case has been duly discharged. It all depends on the facts and circumstances / situations of the case [Assam Pesticides & Agro Chemicals V. CIT (1997) 227 ITR 846, 851, 852 (Gauh)]. - Mere payment by A/c Payee Cheque is not sacrosanct it would not make otherwise non-genuine transaction genuine. CIT V/s. Precision Finance Pvt. Ltd. 208 ITR 465 (Cal). - Even in the case of M/s. Kanchwala Gems V/s JCIT upheld by SC 288 ITR 10 (SC), Hon'ble ITAT had held that even Account Payee Cheque is not sufficient to establish the genuineness of the purchases. In the case of CIT Vs Motor General Finance Ltd. 254 ITR 449 (Del), it was held that since the assessee, despite several opportunities granted, did not produce the relevant documents, an adverse inference had to be drawn against the assessee. As the assessee could not produce any document, an adverse inference in terms of section 114 of the Evidence Act 1872, had to be drawn to the effect that, had those documents been produced, they would have gone against the interest of the assessee. i. Defects in maintaining books of account led to rejection u/s. 145(3) • No quantitative day to day / Inward / Outward stock register, is maintained with item wise specification, quality and their values, or not furnished in the manner in which called for. . . • Bogus bill provider either not produced, or not found existent at the address provided by the assessee or they admitted to the fact of issuance of bogus bills against charging some nominal commission, without actually supplying any goods. • Payments made by A/c Payee cheques - The Hawala parties accept that after deducting their nominal commission, the balance amount was refunded by cash. • Name, address & PAN of parties given - Assessee claimed it as sufficient compliance & discharge of onus of proving the expenditure, is not acceptable as these parties were not found on given addresses / noi traceable, hence purchases not proved. In the absence of the required details, the AO could not verify the genuineness of purchases. • Assessee was asked to produce the so-called hawala parties from whom bills were obtained - However failed to do so - sufficient opportunities were given during assessment proceedings as well as during appeal notices issued u/s. 133(6) - None appeared or could not be served because of defective address. The assessee could not furnish current mailing addresses nor produce any party for examination. j. Estimation of income - Best Judgement assessment - It is held by the Hon'ble Supreme Court in the case of H M Esufali H M Abdulla 90 ITR 271 (SC) that if the estimation made by the Assessing Authority is a bonafide estimate and based on a rationable basis, the fact that there is no good proof in support of that estimate is immaterial. Apex court has further held in the case of M/s. Kanchwala Gems Pvt. Ltd. vs JCIT 288 ITR 10 (SC) that it is well settled that in a best judgment assessment, there is always a certain amount of "guess work". There are number of decisions by the various courts, where 25% to 100% disallowance of bogus purchases, have been upheld. So. me of them are listed, here as under; 100% disallowance of bogus / unverifiable purchases was upheld, in following cases (i) CIT Vs LaMedica(2001)250ITR575(Del) . (ii) Sri Ganesh Rice Mills VsCIT (2007) 294 ITR 316 (All) (iii) Khandelwal Trading Co. Vs ACIT (1996) 55 TTJ (JP) 261 (iv) Swetambar Steels Ltd. vs. ITO 707 / 1075 / 1262 / 1263 / JD (2002) ITAT(Ahd) In the case of Swetambar Steels Ltd., The Hon 'ble ITAT has confirmed the disallowance of the bogus purchase in entirety stating that the purchase shown from the respective parties were found in-genuine. It is not a matter to be looked into whether the assessee made purchases from different parties other than the alleged ones. It is also worth to mention that the appeal against the decision of Hon'ble ITAT has not been admitted by the Hon'ble Gujarat High Court and the assessee has also lost before the Hon'ble Supreme Court. So, the decision over the issue became final and the same is therefore, very much applicable over the facts of the case. 10.2 There are judicial decisions where the whole amount of bogus purchases was disallowed and the order was confirmed by High Courts. It has been held that after invocation of provisions of section 145(3), the Assessing Officer acquires the mandate even to add the whole amount of purchases found as bogus to the total income of the assessee. One such case is Sri Ganesh Rice Mills Vs. CIT 294 ITR 316 (All) where the entire amount of bogus purchases, from 5 parties, was disallowed and was upheld. The relevant portion of the order of the Tribunal as confirmed by High Court of Allahabad is reproduced, here as under: : "...... Once it is found that the purchases were bogus, addition has to be made to the extent of the purchases found to be fictitious. The consideration that the gross profit disclosed bv the assessee compares favourably as compared to the earlier years is wholly irrelevant. To neutralize the effect of inflation in purchases, the only course open to the Income-tax Officer is to add back that amount to the income irrespective of the fact whether the rate of gross profit goes up and whether the resultant gross profit is higher than the gross profit normally shown in the earlier years." 25% disallowance of bogus / unverifiable purchases had been upheld in following cases (1) Sanjay Oil Cake Industries Vs CIT (2008) 316 ITR 274 (Guj) . - (2) Vijay Proteins Ltd Vs ACIT 58 ITD 428 (Abad) (3) M/s Nand Kishore Meghraj Jewellers, Jaipur CO. No. 105/JP/09 arising out ofITANo.433/JP/2009byITATJaipur (4) M/s. Trident Jewellers ITAT Jaipur Disallowance (a), 25% out of Bogus purchases, held as a reasonable in the case of Viiav Proteins Ltd., in view of the fact that the savings occurred to the suppliers on account of sales tax, duties and Income-tax (having MMR of 30%), bv buying the goods from grey market at lower rates and booking the purchases at normal rate, the assessee got the benefit of this proportion. In view of this, the disallowance (a), 25% is fully justified. Further in the case of M/s. Trident Jewellers Vs. ITO, ITA No. 552/JP/2013, on account of bogus purchases, an addition of 25% of such purchases was confirmed bv the Hon'ble ITAT. Jaipur Bench. 10.3. As regards, the case laws cited by the Ld. AR, it is noticed that the facts of the each case are not identical and also not similar to the facts of the case under appeal. The decisions in these cases, are based on the facts of each case, hence, cannot be applied to the facts of the case under appeal. The ratio of decisions in the cases of Ramesh kumar & Co. vs.ACIT [2959/Mum/2014], DCIT v. Shree Rajeev Kalathil,[67 SOT 52], ITAT Mumbai, ITO v. Premanand 107 TTJ 395, Jodhpur, etc, are not applicable in the case of the appellant, as during the course of assessment proceedings as well as appellate proceedings, the Ld. AR, time and again, was asked to explain / justify the genuineness of purchases made from hawala parties, by filing their current confirmation, current mailing addresses, their bank statements and produce hawala parties for examination etc., but failed to do so. In the absence of these details the department could not examine the correctness, reasonableness and genuineness of these purchases. As regards the claim that the payments have been made through banking channels and department had no evidence to prove that the beneficiaries have received back cash after deducting some commission, is also not correct, as the above hawala parties, in their affidavits, had duly admitted these facts. Secondly, the appellant even during the course of appellate proceedings, was also allowed number of opportunities to prove the genuineness of the above purchases, by furnishing current confirmation / bank statements of hawala parties etc., which the Ld. AR has squarely failed to do so, hence, the facts of the above cases are not exactly same to the facts of the case under appeal. Since the hawala parties have run away from their original addresses and the appellant is not in a position to furnish the current verifiable addresses, therefore, the department is also not in a position to enquire the genuineness of these purchases, mainly due to failure on the part of the appellant. There are a number of court decisions, as referred above, wherein the 100% disallowance of bogus purchases, have been upheld. 10.4 As regards other aspects such as payment through banking channels, justification for purchases made from hawala parties as genuine, sales made against such purchases, etc., I would like to place the reliance on finding of the Hon'ble Supreme Court, in the case of Lachminarayan Madan Lal v. CIT (1972) 86 ITR 439 (SC), wherein it is held that even if there is an agreement, between the assessee and its agents for payments of certain amounts as commission, assuming there was such payment, that does not bind the Income-tax Officer to hold that the payment was made exclusively and wholly for the purposes of the assessee's business. In this case, the Supreme Court observed as under > "Although there might be such an agreement in existence and the payments might have been made, it is still open to the Income-tax Officer to consider the relevant factors and determine for himself whether the commission said to have been paid is properly deductible. In this case absolutely no material on record has been brought by the assessee to suggest that the commission agents had procured any orders for the assessee. The production of bills or payments having been made by account-payee cheques cannot by itself show that the commission agents had procured any order for the assessee. No correspondence ............" 10.5 In the above case, the Hon'ble Supreme Court has made it very clear that by creating documents and making payment through banking channel to give colour, does not sacrosanct/' establishes the genuineness of the transaction. From the above discussion, it is seen that the various courts have upheld the disallowances of bogus purchases, ranging from 12.5% to 100%, based on the facts of each case. In view of the foregoing discussion, the percentage of disallowance of bogus purchases, has to be based on the facts of each case, hence the same cannot be generalized in every case. 10.6 Before the S T Department, these so called hawala dealers, have, inter-alia, stated as under: . 1. ....... do not have any go-downs/storage of goods. 2. ....... have not actually purchased/sold any goods. Only paper bills issued that too without physically delivery of goods. 3. ......do not maintain any books of accounts in respect of above concern. 4. .....have given blank signed cheque book, blank bills and blank challan etc. 5. ...... have signed on blank account opening form of the bank, as per direction." ........ for which I am being paid very nominal amount/ charged nominal commission and so on........ . 10.7 It is important to mention that on account of survey / enquiry action of the S T Department, generally genuine parties will never run away from their locations, by leaving aside their business set-up and other trading items. It is pertinent to mention here that on account of above action of the S T Department; all such bogus parties have run away from their sites. It is surprise to note that out of thousands of such hawala parties, not even a single hawala party, could be located, after action of the S T Department and in other cases also neither of the appellant could furnish the verifiable addresses of these hawala parties. Not even singly entity was found having any trading stock as their sites, during the course of closure of the business. This clearly establish the fact that in the market, the scam of hawala billing was going on, in a systematic manner, to generate the cash, for the purpose, which is well known in the trade, in the form of parallel economy/ for illegal activities. This scam was going on in the market, in the name of persons / employees (who are not man of means), who do not have lent establishment in the city/operating from rented premises, therefore, run away their permanent establishment in the city/operating from rented premises, therefore, run away from the scene, hence not traceable. In view of these facts, in my considered opinion, this type of scam should not be legalized, by restricting the disallowance of bogus purchases to a certain percentage, unless and until it is proved that the appellant had affected, the certain purchases from grey markets due to compelling circumstances, as the same were not available in the regular market, as has been held in the case of M/s. Kanchwala Gems Pvt. Ltd. vs. JCIT 288 ITR 10 (SC). 10.8 Keeping in view the facts in entirely, as discussed above and appellants failure to furnish the confirmed copy of ledger account/current mailing addresses of the hawala parties, item wise quantitative tally's etc. the books of the appellant are not tenable as per provisions of section 145(3) of the Act, therefore rejected. In view of the decision of the Hon. Delhi High Court in the case of CIT-vs- Jansampark Advertising and Marketing (p) Ltd, it is also an obligation on the part of the first appellate authority to ensure that effective enquiry was carried out to arrive at logical conclusion. Accordingly, the necessary details were called for, examined and summarised here, as under. YEAR WISE GROSS PROFIT & NET PROFIT RATIO 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 ASSESSMENT YEAR SALES 10482104 21897420 27827955 38736255 49227713 67307398 56065898 51351407 PURCHASE 9290770 18764492 23427560 31749475 43692204 55969815 43577549 40770579 0 6808698 9943225 6679476 0 0 PURCHASE o FROM ENTRY PROVIDER
955365 1833230 1796990 2438720 3544442 3811152 3892857 Cross Profit 14663 53 491801 679633 790553 924109 944280 845061 Net Profit 19915 28966 7 7 9.11 6.7 4.64 4.95 5.27 6.8 7.58 6.59 Gross Profit Ratio Net Profit Ratio 1.9 1.32 1.77 1.75 1.61 1.37 1.68 1.65 GROSSPROFIT ANDNETPROFIT AFTERHAWAiAADDITION Gross Profit 955365 1 466353 8641928 11740215 9118196 3544442 3811152 3892857 Net Profit 199157 289667 7300499 10622918 7470029 924109 944280 845061 9.11 6.7 18.52 6.80 7.58 31.05 30.31 5.27 Gross Profit Ratio Net Profit Ratio 1.9 1.32 26.23 27.42 15.17 1.37 1.68 1.65 10.9 The scrutiny of the above details, it is noticed that the appellant had affected the purchases of raw-material of Rs. 68,08,698/-, from hawala parties, out of total raw-material of Rs. 82,20,967/-, made during the year, for manufacturing activities, carried out by the appellant, for manufacturing HDPE pipes. The appellant is also engaged in the activity of trading of same items. During the year the appellant had made purchases of 1,52,06,593/-, out of total purchases Rs. 2,34,27,560/-, for trading activities, against which there is no dispute. 10.10 The purchases of Rs.68,08,698/-, from hawala parties, represent 82.82% of total purchase of raw-material of Rs. 82,20,967/-, for the manufacturing activity. The appellant has explained that the hawala purchases constitute 82.82% of the manufacturing purchases and that without the disputed purchases Of Rs. 68,08,698/-, the manufacturing activities and the manufacturing sales of Rs. 1,07,70,909/- could not be achieved, from remaining purchases raw-material of Rs.14,12,269/-. The appellant has submitted the quantitative analysis of consumption as part of his tax audit report. The appellant during the assessment proceedings furnished all the details along-with quantitative analysis before the AO and the same has been duly incorporated by the AO in the body of the assessment order. The AO has, for the only reason that the appellant could not produce the parties or confirmations there from and on the basis of information received from the sales tax authorities disallowed the entire disputed purchases of Rs. 68,08,698/-. 10.11 From the above facts it is clear that this is not the case where the profit has been siphoned off by booking of hawala purchases. Secondly, it is not possible to harvest the turnover of Rs. 1,07,70,909/-. from the manufactured goods, out of remaining purchases raw-material of Rs.14,12,269/-, Therefore, this is a case where at the most the appellant might have inflated its purchases by booking the hawala purchases. This according to me is not appropriate. This would leave purchases of only Rs. 14,12,269/- (Rs.82,20,967 -Rs68,08,698) for manufacturing of HDPE pipes which have been ultimately sold for Rs. 1,07,70,909/-. On the other hand, it is also the case that the appellant could not produce the disputed parties or confirmations from such parties. In the given scenario, it would appear that the purchases have been affected by the appellant not from the purchase parties recorded in the books but from some other parties. The factum of purchases being made by the appellant cannot be discounted. From the above chart, it is further noticed that the GP rate of the hawala year has gone down to 6,59% as against 9.11% declared in the A.Y.07-08, for which the Ld. AR could not offer any valid explanation. This clearly establish the fact that the appellant had suppressed its profit by 2.52% (9.11 - 6.59) i.e. Rs. 7,01,2657- (turnover*suppressed GP/100- 2,78,27,955*2.52/100). On the other hand, if the disallowance is restricted @ 12.50% of the disputed purchases, which work out at Rs.8,51,087/- (12.50% of Rs. 68,08,698/-), which is almost equal to the suppressed GP, in my considered opinion, it would be appropriate in the appellant case, to meet the end of the justice. Such disallowance would effectively plug any revenue loss that may have occasioned due to inflation of purchases. 10.13 Since the disallowance at 12.50% of the hawala purchases is more that the suppress GP, therefore, the disallowance of Rs.8,51,087/-, out of hawala purchases of Rs. 68,08,698/-, is hereby sustained and balance amount of Rs. 59,57,611/- is deleted. This ground of appeal is decided accordingly.”
4. Against the above order of CIT(A) both assessee and revenue are in further appeal before us.
5. We have considered rival contentions and carefully gone through the orders of the authorities below and found form record that AO has reopened assessment on the basis of information from sales tax department regarding bogus purchases. After reopening the assessment AO added entire amount of such purchases in the total income of the assessee. We have observed that assessee failed to furnish confirmed copy of ledger account and current mailing address of the hawala parties. Accordingly, books of accounts were rejected u/s.145(3) by following the decision of Hon’ble Delhi High Court in the case of Jansampark Advertising And Marketing (P) Ltd., After considering the fact that material so purchased have actually been used by the assessee in manufacturing activity and also the fact that assessee has furnished quantitative analysis of consumption as per tax audit report, the CIT(A) has restricted addition to the extent of 12.5%. Keeping in view of the findings recorded by CIT(A) vis-à-vis G.P. rate disclosed by assessee during the year under consideration in its manufacturing activity, we modify the orders of the lower authorities and direct for upholding addition by applying profit rate of 10%. We direct accordingly. 7. In the result, appeal of revenue is dismissed whereas appeal of assessee is allowed in part.