ITO 32(1)(5), MUMBAI vs. EMPEE ENGINEERING CORPORATION, MUMBAI

O R D E R PER C.N. PRASAD (JM) 1. These appeals are filed by the assessee and Revenue against the orders of the Learned Commissioner of Income Tax (Appeals)-44, Mumbai dated 23.05.2016 and 28.02.2017 for the Assessment Years 2009-10 and 2010-11 respectively.

3 & 4945/MUM/2016 (A.Y: 2009-10) ITA NO.2990 & 3177/MUM/2017 (A.Y: 2010-11) M/s. Empee Engineering Corporation 3. Briefly stated the facts are that, the assessments for the Assessment Years 2009-10 and 2010-11 were reopened u/s. 147 based on the information received from the DGIT(Investigation) and Sales Tax Department, Government of Maharashtra, that the assessee availed bogus purchase entries from various parties referred to in Page Nos.1 & 2 of the Assessment Order. In the course of re-assessment, assessee was required to prove of the genuineness of the purchases made from those parties and in response to the same assessee furnished Ledger Account, Bank Statement, Copy of Bills from the parties. Assessee did not produce inward registers, day to day Stock Register as no such records were maintained as submitted by the assessee before the Assessing Officer. The Assessing Officer to verify the genuineness of the purchases issued notices u/s. 133(6) to the parties but the notices have returned unserved with an endorsement that notice were unclaimed/left. Therefore, since the assessee could not produce the Stock Registers and could not prove the movement of goods by way of transport receipts and as the parties were also not produced for verification and no records were furnished for consumption of material he has added the entire purchases made by the assessee from the parties as unproved/bogus purchases.

4 & 4945/MUM/2016 (A.Y: 2009-10) ITA NO.2990 & 3177/MUM/2017 (A.Y: 2010-11) M/s. Empee Engineering Corporation 4. On appeal Ld.CIT(A) referring to various judicial pronouncements and taking note of the fact that the Assessing Officer has accepted the sales and without their being any purchases there would not have been any sales, Ld.CIT(A) concluded that only the profit element embedded in the purchases is to be brought to tax and since the assessee has shown the Gross Profit rate at 14.33% for the Assessment Year 2009-10 and 12.63% for the Assessment Year 2010-11, he sustained the addition to the extent of the Gross Profit shown by the assessee and deleted the balance addition in both these Assessment Years. Assessee preferred appeals in sustaining the addition/disallowance to 14.33% and 12.63% and the Revenue is in appeal in granting relief to the assessee for the Assessment Years 2009-10 and 2010-11 respectively.

5 & 4945/MUM/2016 (A.Y: 2009-10) ITA NO.2990 & 3177/MUM/2017 (A.Y: 2010-11) M/s. Empee Engineering Corporation 2010-11. 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]. Therefore, taking the above decisions and also the totality of facts into consideration, we restrict the addition/disallowance to 10% of the alleged purchases instead of 14.33% and 12.63% estimated by the Ld.CIT(A). Thus, we direct the Assessing Officer to disallow 10% of the purchases treated as non-genuine and recompute the income accordingly.