ASST CIT 19(1), MUMBAI vs. HBS MALL NAHUR, MUMBAI

This is an appeal by the Revenue, wherein the Revenue is aggrieved that the learned CIT(A) has not sustained 100% disallowance on account of bogus purchases.

The grounds of appeal read as under:- “1) On the facts and in the circumstance of the case and in law, whether the Ld. CIT(A) was justified in sustaining only an addition @ 15% profit rate on total purchases of Rs.64,20,135/- made from 2 purchase parties as the assessee failed to prove the genuineness of the said purchases when asked to produce consumption register and labour register by the Assessing Officer." 2) The appellant prays that the order of the Ld. CIT(A) on the above grounds be set aside and that of the AO be restored. 3) The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”

The facts of the case are that the assessee is partnership firm engaged in the business of 'Real Estate Development'. The return of income for the year under appeal was filed on 26-09-2009, declaring total income of Rs.6,00,04,243/-. The return was processed u/s 143(1) of the Act. Subsequently, the case was reopened u/s 147, by issuing notice u/s 148 of the Act on 19-02-2014, based on the information received from the DGFT(Inv.), Mumbai, that the assessee is one of the beneficiaries of the accommodation entries provided by two of the MVAT dealers, who were indulging in issuing bogus sale/purchase bills, which was investigated and kept on the public domain by the Sales Tax Department. Assessment, u/s 143(3) r.w.s 147 of the I.T. Act, 1961 was completed by the Ld. AO on 25-03- 2015, determining the total income at Rs. 6,64,24,380/-.

During the course of assessment proceedings, to ascertain the genuineness of purchases shown in the accounts, AO asked to furnish a copy of notice u/s 302 issued by the Sales tax Department and copy of VAT audit report. On verification it is found that the assessee purchased the goods from two parties labour register, stock register, construction register along with the books of accounts to verify the purchases from the 2 parties and the consumption of such material purchased from them. The assessee failed to produce consumption register and labour register to establish the consumption of goods. In view of the same, appellant was asked to explain as to why the books of accounts should-not be rejected u/s 145(3) of the Act. After obtaining the details and explanations from the assessee, AO

Upon assessee’s appeal learned CIT(A) has noted that the sales has not been doubted. That after having rejected books of accounts Assessing Officer should have made an estimate of profit instead of making disallowance of the impugned purchases amount. Accordingly placing reliance upon several case laws and upon the facts of the case, he sustained 15% disallowance out of the bogus purchases. We may gainfully refer to the order of learned CIT(A) in this regard as under:- “6.7 Coming to the issue of bogus purchases made from the two parties, Ld. AO stated in the assessment order that parties in question are non-existent and the appellant failed to furnish whereabouts of the parties. It is also stated that the appellant failed to furnish the consumption register for the goods claimed to have been purchased. In view of the same, AO rejected the books of accounts of the appellant and the total amount of purchases made from the two parties was added to the total income, instead of making an estimation of profit. When the completeness and correctness of the books of accounts is questioned, instead of adding the total amount of purchases from the two parties, AO should have gone for the estimation of profit on the total sales. In this nature of business i.e. construction, it is practically not possible one to one correlation of purchases and sales as the purchases will go into the construction, as submitted by the appellant. Maintaining the quantitative tally of purchases and consumption of the same is . M/s.HBS Mall Nahur. practically not possible in this line of business. In view of the same, Ld. AO not having doubted receipts, could not have gone ahead and made addition in respect of the total amount of purchases from the two parties. As stated by the appellant, without purchases being made, the construction work cannot be done. Thus, the issue would boil down to finding out the element of profit embedded in bogus purchases which the appellant would have made from some unknown entities. 6.8 In this regard, it is apt to refer to the decision of Gujarat High Court in the case of Bhoianath Poly Fab Pvt. Ltd. 355 ITR 290 (Guj) where the Hon'ble Court was battling with the finding of Hon'ble ITAT that purchases were made from bogus parties since notice issued by the A.O. to these parties were allegedly received`returned/unserved' and the assessee was unable to produce any confirmation from these parties. The Tribunal had held that though purchases were made from bogus parties, nevertheless, the purchases themselves were not bogus as the entire quantity of opening stock, purchases and sales were tallying and hence, only the profit margin embedded in such amount would be subjected to tax. The Hon'ble Gujarat High Court taking cognizance of the fact held that whether purchases themselves were bogus or whether parties from whom such purchases were made were bogus, is essentially a question of fact and the Tribunal having examined the evidence on record and concluded that the assessee did produce cloth and sell finished goods, the entire, amount covered under such purchase would not be subjected to tax and only the profit element embedded therein was to be taxed. While coming to the above conclusion, the Hon'ble High Court also relied on the decision in the case of Sanjay Oil Cake Ind. 316 ITR 274 (Guj). 6.9 In Sanjay Oilcake Industries v. Commissioner of Income- tax [2009] 316 ITR 274 (Guj), it was held as under: "12. Thus, it is apparent that both the Commissioner (Appeals) and the Tribunal have concurrently accepted the finding of the Assessing Officer that the apparent sellers who had issued sale bills were not traceable. That goods were received from the parties

Against the above order, assessee is in appeal before the ITAT.

We have heard both the Counsel and perused the records. We find that in this case addition has been made on the basis of information from the Sales Tax Department that the suppliers are bogus. The Assessing Officer has not issued any notice to those suppliers. He has rejected the books of . M/s.HBS Mall Nahur. accounts. Thereafter he had disallowed the entire purchases said to be bogus. Thereafter learned CIT(A) has noted these aspects and after placing reliance upon several case laws has sustained disallowance of 15% of the bogus purchases.

We find that in this case the sales have not been doubted. It is law that when sales are not doubted, 100% disallowance for bogus purchase cannot be done. This proposition is supported from Hon’ble jurisdictional High Court decision in the case of Nikunj Eximp Enterprises. However, the facts of the present case indicate that assessee has made purchase from the grey market. Making purchases through the grey market gives the assessee selling on account of non-payment of tax and others at the expense of the exchequer. In such situation, in our considered opinion, on the facts and circumstances of the case the 15% disallowance out of the bogus purchases meets the ends of justice.

Accordingly, we uphold the order of learned CIT(A) and direct that the disallowance be limited to 15% of the bogus purchases.

In the result, this appeal filed by the Revenue stands dismissed.