ITO WD 3(1), KALYAN vs. BHARAT R VALIA, DOMBIVALI

These three appeals filed by the Revenue are directed against a common order dated 27.8.2015 passed by the learned CIT(A)-Thane and they relate to A.Ys. 2009-10 to 2011-12.

2 Shri Bharat R. Valia sustaining addition relating to bogus purchases and sales promotion expenses made by the Assessing Officer in all the years under consideration.

6. We noticed that the learned CIT(A) has decided the issue by making following observations:- 5. The appellant is engaged in the business of reselling of electrical and general hardware goods. On the basis of information received from Investigation Wing, the AO noticed that the appellant was a beneficiary of Hawala entry operators. The appellant had shown purchases amounting to Rs. 50,09,091/- from various parties, who were listed by the Sales Tax authorities as Hawala operators i.e. only providing bills without there being any actual transaction of purchases or sales. Therefore, AO issued notice u/s. 148 of the T.T. Act, to the appellant and re-opened the assessment proceedings. During the course of the assessment proceedings, the AO asked the appellant to establish the genuineness of the purchases shown from all such parties. The appellant filed copies of purchase bills and also stated that the payment to all the parties had been made through cheques. However, the appellant could not file copies of transport hills, delivery challans and octroi payments MW in respect of all such 3 Shri Bharat R. Valia

transactions. It was submitted that as the goods were hand delivered to the appellant, therefore, there were no such transport and octroi hills. The AO deputed his Inspector, who obtained information in respect of all such parties u/s. 133(6) of the I.T. Act and reported that no business activity was being carried out at any of the addresses mentioned in respect of all these parties. The AO asked the appellant to produce the parties before him for examination, which was not (lone. The AO therefore, after rejecting the books of accounts of the appellant u/s. 145(3) of the I.T. Act for not being complete and correct, added the amount of Rs. 50,09,091/- to the appellant's income by treating all such purchases as bogus purchases.

A/c. year A/c. year A/c. year A/c. year A/c. year 2008-09 2009-10 2010-11 2011-12 2012-13 GP 23,72,895 25,87,399 31,84,790 40,24,437 45,33,170 GP ratio 4.30% 4.23% 3.87% 4.42% 5.35% NP 4,82,121 5,12,160 7,24,120 7,96,680 11,48,094 NP ratio 0.87% 0.84% 0.88% 0.87% 1.35%

Merely because the parties were not found at the address given, no adverse inference could be drawn against the assessee. This view is supported by the judgement of the Hon'ble Supreme Court in the case Ahmed & Sons vs. C1T (297 ITR 431).

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Also the judgement of the Hon'ble court of Gujarat in the case of MK. Bros. vs. 'IT 163 ITR 240 supports the case of the assessee. In that case, the sellers had admitted before the Sales Tax Authorities, they had issued bogus vouchers. The Tribunal however found that there was no evidence that the vouchers were bogus and there was also no material to show that the payments made by the assessee had been returned to it. The tribunal deleted the addition which was upheld by the Hon'ble High Court. Recently, in the case of Commissioner of Income tax vs. Bholanath Poly Fab. Pvt. Ltd., the Hon'ble High Court of Gujarat (2013) 355 ITR 290 (Guj) has held as below –

'Whether the purchases themselves were bogus or whether parties from whom such purchases were allegedly made were bogus is essentially a question o f fact. The Tribunal examined the evidence on record and concluded that the assessee did purchase the cloth and sell 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.'

Under the circumstances and the facts of case, we request to delete the addition made by the AO.

Without prejudice the above, we further state that to buy peace of mind and to avoid prolonged strenuous, litigation at the proceedings we agrees that the law laid down by the Hon'ble Gujarat High Court in the case C1T-1 Vs. Simit P. Sheth 1TA No. 553 of 2012 order dated 16/01/2013 may be applied to the fact (. f our case and addition on account of profits suppres.ved due to this transaction by applying GP percentage may be brought to tax."

5 Shri Bharat R. Valia purchases. Therefore, the appellant had not been able to establish the genuineness of the purchases from such parties.

9. With regard to the appellant's reliance on various decisions it is seen that the facts of the appellant's case are different from the facts of the decisions relied upon by the appellant. In the case of Nikunj Exim (supra) the Hon'ble Bombay High Court held that the assessee in that case had filed confirmations from the suppliers, copy of bank account statement showing payment through check, stock reconciliation statement etc. Based on all this evidence the Tribunal's order holding that purchases were not bogus was held to be well reasoned. In the case of CIT vs. M.K. Brothers, it was held by the ITAT that there was no evidence that the parties had issued bogus vouchers and that the payment made by the assessee in that case through checks had been received back by the assessee. It was held that even though there were some doubtful features of the transactions but sufficient evidence was not there to hold the purchases as bogus. The Hon'ble Gujrat High Court upheld the order of the ITAT by observing that whether the said transactions were bogus or not was a question of fact. In the case of Rajeev Kalathil vs ITO it was held that Assessing Officer had made the addition as one of the supplier was declared a hawala dealer by the VAT Department. It was a good starting point for making further investigation and taking it to logical end. But the AO left the job at initial point itself. In the appellant's case, the AO has carried out independent enquiries by issuing notices u/s 133(6) and also through the inspector of the Ward. On the basis of inquiries conducted by the AO, it was established that none of these parties existed at the addresses given by the appellant and no business activity was being carried out there. Therefore, the appellant has not been able to establish the genuineness of the purchases. However, it is seen that if the whole of the amount of bogus purchases is added to the income of the appellant then the net profit rate for the year under consideration will go up to 7% and for the Assessment year 2009-10 and 2010-11 to 8% as can be seen from the chart below –

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The assessee in this case was engaged in the business of trading in steel on wholesale basis. Assessing Officer noticed that some of the alleged suppliers of steel to the assessee had made their statements on oath to the effect that they had not supplied the steel to the assessee but had only provided sale bills. In turn, they were receiving a small commission. The AO during the course of the assessment proceedings noticed that there were no documents other than the delivery challans and sale invoices. There was no movement of goods. He, therefore, concluded that total purchases of Rs. 41,04,903/- cumulatively made from the said three parties were bogus. He thus, treated such purchases as bogus purchases and added the entire amount of Rs. 41,04,903/- to the gross profit of the assessee. The Commissioner (Appeals) though confirmed the view of the Assessing Officer that the purchases were not made by the said three parties viz. Bhavna Trading Co., M/s. Minaxi Enterprise and Arun Industrial Corporation but believed that the appellant assessee had made the purchases from other parties in the open market. Thereupon, he retained 30% of the purchase cost as the probable profit of the assessee. The Tribunal was of the opinion that twelve and half

7 Shri Bharat R. Valia percent of the disputed purchases should be retained in the hands of the assessee as business profit.

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 assessee's 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 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-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 lTD 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 @ 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 uniform yardstick can be adopted.

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7. We noticed that the assessee has been declaring GP ratio of around 4% in all the years. The Ld CIT(A) has noticed that the assessee has produced copy of purchase bills and details of payment. He has also noticed that the Net profit declared by the assessee was less than 1% in these three years and impugned addition made by the Assessing Officer would result in abnormal increase in NP ratio to around 8%, which is unreasonable one. Hence the Ld CIT(A) has taken the view that the entire purchases could not be disallowed. However, since the assessee has failed to furnish confirmation letters obtained from suppliers nor could he produce them before the Assessing Officer, the learned CIT(A) by following the decision rendered by Hon'ble Gujarat High Court in the case of CIT Vs. Simit P. Sheth (356 ITR 451) has restricted the addition to 12.5% of the value of purchases. The apparent inference drawn by the Ld CIT(A) is that the assessee could have made profit from out the impugned purchases by sourcing the materials from some other sources. Under facts of this case, we are of the view that the learned CIT(A) has taken a fair view on this matter and hence the orders passed by him on this issue does not call for any interference.

8. The Revenue is also aggrieved by the decision of the learned CIT(A) in restricting disallowance of made out sales promotion expenses to 10%, as against the disallowance made by AO @ 100%. The Assessing Officer disallowed 100% of sales promotion expenses and 10% of advertisement and transport expenses, since the assessee failed to furnish evidences in support of the expenses claimed by him. The learned CIT(A) noticed that the AO did not give any reasoning for disallowing expenses at different rates. Accordingly he restricted the disallowance made out of Sales promotion expenses also at uniform rate of 10% in all the three years under consideration. We notice that the learned CIT(A) has taken this view upon noticing that the Assessing Officer

9 Shri Bharat R. Valia has not furnished any credible reason for disallowing Sales promotion expenses @ 100%, while making disallowance out of advertisement and transport expenses @ 10%. Before us, the revenue could not furnish any valid reason for adopting different standards for making disallowance out of expenses, when the underlying facts are identical in all the cases. Hence we are of the view that the order passed by the learned CIT(A) on this issue also does not call for any interference in all three years under consideration.

Order has been pronounced in the Court on 09.10.2017.