DCIT 13(3)(1), MUMBAI vs. REMI EDELSTAHI TUBULARS LD, MUMBAI

The Revenue in its cross appeal has raised the following grounds of appeal:

Brief facts of the case are that assessee is a company which is engaged in the business of manufacturing of Stainless Tubes and Pipes, trading in Steel and other goods. The assessee filed return of income for relevant AY on 30.10.2007 declaring total income of Rs. Nil under the normal provision and book profit of Rs. 5,44,06,979/- under section 115JB of the Act. Thereafter, the assessee filed revised return of income declaring total income and claimed brought forward loss of Rs. 3,55,00,440/-. The assessment was completed under section 143(3) of the Act on 28.08.2009 assessing total income of assessee at Rs. Nil. Under the normal provision and book profit at Rs. 5,54,33,187/- under Minimum Alternate Tax (MAT). Subsequently, the assessment was re-opened on the basis of information received from the office of DGIT (Inv.), Mumbai. It was informed to the assessing officer by CIT-3, Mumbai that details information was received from Sales Tax Department, Government of Maharashtra that some hawala traders are engaged in providing accommodation/bogus bills without delivery of material and that the assessee is one of the beneficiary from such dealers. On the basis of information, the assessment was re-opened under section 147 of the Act. Notice under section 148 dated 25.03.2014 was issued to the assessee. The assessee filed objection against the re-opening. The objection of the assessee was rejected vide order dated 18.09.2014. The Assessing Officer (AO) completed the assessment under section 143(3) r.w.s. 147 of the Act on 20.02.2015. During the re-assessment proceeding, the AO noted that the assessee claimed expenses of Rs. 61,27,238/- on account of purchases shown from Shree Sundha Steels Pvt. Ltd. for Rs. 10,24,166/- and Metalex Tube Industries Rs. 51,03,072/- total of Rs. 61,27,238/-. Both the parties were indulged in Hawala Transaction as per the information received by the AO. The AO issued notice under section 133(6) dated 06.02.2015 to both the parties. No reply was received from the said parties. During the assessment proceeding, the assessee was asked to reconcile the purchases from these two parties. The assessee was also asked to produce the parties. However, the assessee could not produce the parties. In order to verify the genuineness of purchases. The assessee filed his detailed reply and contended that the assessee has purchases steel goods from Shree Sundha Steels Pvt. Ltd. and Metalex Tube Industries of Rs. 24.47 Crore and Rs. 8.32 Crore. The assessee filed ledger account of the parties and contended that all transaction with the said parties is genuine. The assessee further filed a copy of invoices, delivery challan, receipt of good received and the copy of statement of account reflecting the payments made for the purchases. The contention of the assessee was not accepted by the AO holding that the parties were declared as hawala parties and the transaction made with these parties are Hawala transaction. The burden of proof lies upon the assessee to prove the genuineness of transaction and that assessee failed to discharge the onus for proving the genuineness of transaction. The AO made the addition of aggregate of the purchases of both the parties for Rs. 61,27,238/-. On appeal before the ld. CIT(A), the disallowance was restricted to Rs. 10,00,000/- was made thereby deleted the remaining addition of Rs. 51,27,238/-. The ld CIT(A) restricted the disallowance on adhoc basis. Hence, further aggrieved by the order of ld. CIT(A), both the parties has filed their cross appeal. The assessee have challenged the action of ld. CIT(A) in confirming the disallowance to the extent of Rs.10,00,000/-. The Revenue in its appeal have challenged the action of ld. CIT(A) in deleting the addition of Rs. 51,27,238/-.

The appeal came up hearing on 05.10.2017. None appeared on behalf of assessee despite waiting for sufficient time. When none appeared on behalf of assessee, we left no option except to hear the ld. DR for the Revenue and to proceed on the basis of material available on record. The ld. DR for the Revenue argued that investigation wing of Income-tax Department made full-fledged investigation about the racket of hawala dealers, who were engaged in providing bogus accommodation entries without delivery of any goods or material. The assessee obtained only bills in order to inflate the expenses and bring down the profitability in order to avoid the tax. It was argued that the AO made the addition of 100% as the assessee failed to substantiate the expenses. The ld. CIT(A) deleted the addition of Rs. 51,27,238/- and restricted the addition of Rs. 10,00,000/- on adhoc estimation of disallowance. The ld. DR for the Revenue prayed for dismissal of assessee’s appeal and to restore the action of AO.

We have considered the submission of ld. DR for the Revenue and perused the material available on record. We have noted that assessment was completed under section 143(3) on 28.08.2009. The AO re-opened the assessment on the basis of information received from the DGIT(Inv.) wherein it was disclosed that information was received from Sales Tax Department, Government of Maharashtra regarding the rackets of hawala dealers. During the re-assessment proceeding, the AO asked the assessee to substantiate the expenses of Rs. 61,27,238/-. The assessee filed its reply dated 11.02.2015. In the reply, the assessee contended that the expenses made by the assessee are genuine. It was further contended that the information, statement or the affidavit allegedly given by the parties to the Sales Tax Department, Government of Maharashtra cannot be relied as an evidence against the assessee. The assessee furnished copy of invoices, delivery challan, receipts of goods and payment of goods/material. The contention of the assessee was not accepted by the AO. The notice under section 133(6) dated 06.02.2015 was issued by the AO to the said parties. However, no reply was received from those parties. The AO on the basis of information of Sales Tax Department made the addition of expenses of Rs. 61,27,238/-. The AO further concluded that mere making of payment through cheques or RTGS does not substantiate the claim of purchases. The modus operendi of such accommodation bill provider is to provide bills, received payment through banking channel and to return of consideration in cash. If the assessee has claimed huge purchases, the party may be well-known to the assessee and the assessee should have no difficulty and produced the said parties for cross-examination.

We have noted that the AO has relied upon the third party information. There was no independent and incriminating material before the AO except the information of Sales Tax Department received through DGIT (Inv.). The AO has not brought any material to establish that the assessee received back the alleged consideration. The AO has not examined the Gross Profit/Net Profit ratio of the earlier or subsequent year. The statement of account of assessee was not rejected. The AO has not rejected the consumption or sale of the alleged material. The ld. CIT(A) made the adhoc disallowance despite making reliance on the decision of Hon’ble Gujarat High Court in CIT vs. Smith P. Seth in of 2012 dated 16.01.2013. We have noted that the ld. CIT(A) examined the consumption of raw-material and the Gross Profit/Net Profit. The ld. CIT(A) further observed that AO just picked up certain bills for disallowance based on information. The assessee is a manufacturer and unlike trading concerned, it cannot be said that no sale can take place with the purchase. The assessee was asked to establish the consumption. The assessee filed the confirmation of both the parties. The ld. CIT(A) on the basis of decision of CIT vs. Smith P. Seth (supra) that entire purchase cannot be added to the income of the assessee and fair profit ratio would be sufficient to add back in the income of assessee and thus, made the adhoc disallowance of Rs. 10,00,000/-. We have noted that the disallowance restricted by ld CIT(A) is about 16.32% of the alleged bogus purchases. After considering the fact and the material available on record, we find that the disallowances restricted by ld CIT(A) is on little higher side.

We are of the view that under the Income-tax Act only real income can be taxed by the Revenue. We may further note that even in case where the whole transaction is not verifiable due to various reasons, the only taxable is the taxable income component and not the entire transaction. The Hon’ble Bombay High Court in case of Hariram Bhambhani in ITA No. 313 of 2013 decided on 04.02.2015 also held that revenue is not entitled to bring the entire sale consideration to tax, but only the profit attributable on the total unrecorded sale consideration alone can be subject to income tax after considering the submission of ld. DR for the Revenue, we are of the opinion that in order to fulfil the gap of revenue leakage, the disallowance of reasonable percentage of disputed purchase would meet the end of justice. Considering the fact, the assessee has shown the profit @ 3.97 % before taxation at Rs.5.44 Crore. In our view the disallowance @ 12.5% on account of impugned/bogus purchases would meet the end of justice. Thus, the AO is directed to restrict the disallowance of the disputed purchases to 12.5% (Rs. 61,27,238/-) of the disputed / bogus purchased identified by him, Thus, grounds of appeal

In the result, appeal filed by assessee is partly allowed and the appeal filed by Revenue is dismissed.