SUMIT M. MALHOTRA,KALYAN vs. ITO 3(4), MUMBAI

सुनवाई क� तार�ख / : 16.08.2017 Date of Hearing घोषणा क� तार�ख / : 16.10..2017 Date of Pronouncement आदेश / O R D E R Per Shamim Yahya, A. M.: These appeals by the assessee are directed against common order of learned CIT(A) dated 16.08.2016 and pertain to assessment years 2009-10 and 2010-11.

Since facts are similar we are considering facts again figures from assessment year 2009-10. In this case, the assessee is engaged in the business of trading of M.S.

Beams, angles, channels and scrap in the name of his proprietary concern M/s. S.M.

Steel Traders. During the year under consideration, the assessee had shown total turnover of Rs.1,45,32,877/- on which gross profit and net profit of Rs. 4,32,437/- & Rs.2,14,347/- was shown giving the gross profit and net profit ratio of 2.98% and 1.47% respectively. Information had been received by the AO from the Sales-tax Department, Maharashtra to the effect that the assessee was one of the beneficiaries of transactions with hawala dealers. The assessee had shown purchases amounting to Rs.1,08,91,612/- from the following parties - Sr. Name of Hawala Tin of Hawala PAN of Hawala Amount of bill No. dealer dealer dealer 1 Vitrag Trading Co. 27830385697V AAFFV2004C 36,15,641/- 2 Sampark Steels 27170360840V ABAFS4806M 36,60,863/- 3 Prayan Trading Co. 27740535951V AAISP6755D 36,15,108/-

TOTAL 1,08,91,612/- the Sales-tax Department of Maharashtra. The hawala dealers had admitted before the Sales-tax authorities in their statement 7 affidavit that they were providing only accommodation bills without there being any actual purchase 7 sale of goods. Though the payment was received by the said parties from their customers through banking channels, however, after clearing of the cheques cash was withdrawn and handed over to the customers after deduction of nominal commission charges. The AO issued notice u/s. 148 of the I.T. Act dated 27.05.2013 to the assessee for re-opening of the assessment proceedings. During the course of assessment proceedings, the AO asked the assessee to file documentary evidence to establish the genuineness of the purchases like copy of purchase bills, transportation and octroi payment receipts as well as stock register. The assessee was also asked to file details of mode of payment and also to establish that the goods had actually been received at his premises. The assessee was able to file copies of purchase bills and ledger account of transportation charges which were paid in cash and were supported by self made vouchers. The assessee also filed copies of some octroi receipts. The A.O. issued notice u/s. 133(6) of the IT. Act to the above listed parties which were received back unserved with the remark "left / not known". On being asked to produce these parties before the AO for verification, the assessee failed to do so. For all these reasons the AO held that the assessee had not been able to establish the genuineness of the purchases shown from 4 (A.Ys.09-10 & 10-11) Mr. Sumit M. Malhotra vs. ITO the above listed three parties and therefore made addition of Rs.1,08,91,612/- to the assessee’s income on account of unproved purchases.

5 (A.Ys.09-10 & 10-11) Mr. Sumit M. Malhotra vs. ITO as per Annexure-4 of the Audit report and was also filed before the AO during the course of assessment proceedings. This information shows that the goods were actually purchased resulting in subsequent sale. However, it could not be established that the goods had been purchased from the parties listed above. In view of the detailed facts of the appellant's case as discussed above, it is seen that the appellant could not establish the genuineness of the purchase transactions with the parties listed above. Therefore, the only inference that can be drawn in this case is that the appellant had made purchases in the open market and had only obtained bills from the hawala dealers. In this process the appellant would have saved on the sales-tax / VAT and enhanced his profit by inflating the purchases. Therefore a suitable disallowance is required to be made on account of unproved purchases after rejecting the appellant's books of account u/s 145(3) of the Act. In this regard it is seen that in the case of CIT vs Simit P. Sheth, 356 ITR 451, Hon'ble Gujrat High Court upheld a disallowance of 12.5% of such unproved purchases after holding as under –

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. 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 Misiry Construction Ltd. vide order dated 10.01.2011 passed in Tax Appeal No. 1090 of 2009 and in case of Commissioner of Income Tax-I 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. This being the position, the only question that survives is what should be the fair profit rate out of the bogus purchases which should be added back to the income of the assessee. The Commissioner adopted ratio of 30% of such total sales. The Tribunal, however, scaled down to 12.5%. We may notice that in the immediately preceding year to the assessment year under consideration the assessee had declared gross profit @

6 (A.Ys.09-10 & 10-11) Mr. Sumit M. Malhotra vs. ITO 3.56% of the total turnover. If the yardstick of 30%, as adopted by the Commissioner, is accepted GP rate will be much higher. In essence, the Tribunal only estimated the possible profit out of purchases made through non-genuine parties. No question of law in such estimation would arise. The estimation of rate of profit return must necessarily vary with the nature of business and no M uniform yardstick can be adopted.

12. In result, both the appeals of the appellant are partly allowed.

8. We have heard the learned departmental representative. None appeared on behalf of the assessee despite notice. Hence, these appeals are being disposed of by hearing the learned departmental representative and perusing the records.

9. The first common issue raised pertains to the validity of reopening. This issue was never raised before the learned CIT-A. Assessee has also participated in the assessment proceedings as well as proceedings before the learned CIT-A without challenging the validity of reopening.

7 (A.Ys.09-10 & 10-11) Mr. Sumit M. Malhotra vs. ITO 10. We find that tangible and cogent incriminating material were received by the AO which clearly showed that the assessee was beneficiary of bogus purchase entries from bogus entry providers which formed the reason to believe by the AO that income has escaped assessment. The information so received by the AO has live link with reason to believe that income has escaped assessment. On these incriminating tangible material information, assessment was reopened. At this stage there has to be prima facie belief based on some tangible and material information about escapement of income and the same is not required to be proved to the hilt. In this regard, I refer to the decision of the Hon'ble Apex Court in the case of CIT(A) Vs. Rajesh Jhaveri Stock Brokers P. td, 291 ITR 500:-

"Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to lax if he has reason to believe that income for any assessment year has escaped assessment. The word "reason" in the phrase "reason to believe" would mean cause or justification. If the AO has cause or justification to know or suppose (hat income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the AO should have finally ascertained the fact by lega/ statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Supreme Court in Central Provinces Managnese Ore Co, Itd. v. ITO(1991) 191 ITR 662, for initiation of action under section 147(a) (as the provision stood at the relevant time) fulfillment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is "reason to believe", but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the AO is within the realm of subjective satisfaction ITO v. Selected Dalurband Coal Co, (P.) Ltd. (1996) 217 ITR 597 (Supreme Court): Raymond Woollen Mills Ltd. v. ITO of reopening in this case. Accordingly, we uphold the validity of reopening.

Assessee was found to have taken accommodation entry/bogus purchase bills during the concerned assessment year from different parties. Based upon this information assessment was reopened. The credibility of information relating to reopening remained un-assailed before the learned CIT-A. In such factual scenario, the assessing officer has made the necessary enquiry. The issue of notice to all the parties have returned unserved. Assessee has not been able to provide any confirmation from any of the party. Assessee has also not been able to produce any of the parties. Necessary evidence relating to transportation of the goods was also not on record. In this factual scenario it is amply clear that assesses has obtained bogus purchase bills. Mere preparation of documents for purchases cannot controvert overwhelming evidence that the provider of these bills are bogus and non-existent.