ANIL JAIN,MUMBAI vs. ITO 25(2)(1), MUMBAI

Assessee by: Miss None Department by: Shri Ram Tiwari सुनवाईकीतारीख / Date of Hearing: 04.09.2017 घोषणाकीतारीख /Date of Pronouncement:. 27.09.2017 आदेश / O R D E R

PER AMARJIT SINGH, JM:

1. General Anil Jain On the facts and circumstances and in law, the order passed by Ld. CIT9A) is bad in law and on facts, legally untenable and void ab initio.

2. Ad hoc addition of Rs.40,39,122 (being 12.5% profit element involved in alleged purchases) by wrongly treating the said purchases are from non-genuine parties. 2.1 On the facts and circumstances and in law, the Ld. CIT(A) erred in partly confirming the AO action of ad-hoc addition of Rs.48,46,947/- by making the ad-hoc addition of Rs.40,39,122/- being 12.5% profit element involved in alleged purchases by wrongly treating the said purchases are from Bogus parties 2.11 The Ld. CIT(A) erred in making the ad- hoc addition of Rs.40,39,122/-(being 12.5% profit element involved in alleged purchases. Despite the fact that the said purchases are genuine.

3. Interest u/s 234B and 234C The Ld. CIT(A) erred in directing the AO to charge the interest u/s 234B and 234C.

4. Humble request for relief On the facts and circumstances and in law, and in view of ground of appeal mentioned supra, it is humble prayed that: (i) Ad- hoc addition of Rs.40,39,122/- (being 12.5% profit element involved in alleged purchases) by wrongly treating the said purchases are frombogus parties may kindly be deleted. (ii) Interest charges u/s 234B and 234C may kindly be deleted. (iii) Such other relief or reliefs as deemed just and proper may also kindly be granted.

5. Each of the above, mentioned ground of appeal is without prejudiced to, and independent of, other grounds of appeal.

6. The appellant carves leave to add, alter, amend or modify the grounds of appeal.”

3. The brief facts of the case are that the assessee filed his return of income declaring total income to the tune of Rs.6,53,051/- on 29.09.2009 for the A.Y. 2008-09. The return was processed u/s 143(1) of the I.T. Act, 1961. The information was received from Sales Tax Department through DGIT(Inv.), Mumbai that the assessee has claimed bogus purchases to the tune of Rs.3,23,12,978/- from various Anil Jain parties which was declared as hawala dealers in the F.Y. 2008-09 relevant to the A.Y. 2009-10. The case of the assessee was reopened u/s 147 of the I.T. Act, 1961. Notice u/s 142(1) of the Act dated 26.03.2014 was issued and served upon the assessee. Notice u/s 142(1) of the Act dated 25.08.2015 was also issued and served upon the assessee. The assessee was engaged in the business of trading of marbles in the name and style of M/s Jainson Marble Centre. Under the year of consideration the assessee has shown the income from salary, business income and income of other sources being bank interest. The bogus purchases from five parties was found to the tune of Rs.3,23,12,978/-. Therefore, 15% of the said amount i.e., to the tune of Rs.48,46,947/- was added to the income of the assessee and the total income was assessed to the tune of Rs.55,00,000/-. Feeling aggrieved, the assessee filed an appeal before the CIT(A) who reduced the bogus purchases to the extent of 12.5% and accordingly income to the tune of Rs.40,39,122/- was added to the income of the assessee. The assessee was not satisfied, therefore, the assessee has filed the present appeal before us.

ISSUE NO. 1:- 4. Issue no. 1 is generally in nature which nowhere required any adjudication.

Anil Jain ISSUE NO. 2:- 5. Under this issue the assessee has challenged the addition of Rs.40,39,122/- being 12.5% profit element involved in the alleged bogus purchases to the tune of Rs.3,23,12,978/-. It is not in dispute that the case of the assessee was reopened on the basis of the information received from the Sales Tax Department through DGIT(Inv.), Mumbai in which it came into notice that the assessee has raised the claim of bogus purchases to the tune of Rs.3,23,12,978/-. The Assessing Officer on seeing the facts and circumstances of the case added the profit element to the extent of 15% of the bogus purchases i.e., an amount of Rs.48,46947/- and added to the income of the assessee. The CIT(A) reduced the 15% to 12.5% of the profit element of bogus purchases. It is to be seen in which circumstances the CIT(A) has reduced the profit element of the bogus purchases. The finding of the CIT(A) in this regard is hereby reproduced as under:- “I have considered the facts, oral contention and written submissions of the appellant as against the observation/findings of the AO in assessment order. The submissions and contentions of the appellant are being discussed and decided as under:- In the instant case ground no. 1 to 3 are related to addition of Rs.48,46,947/-. For the sake of convenience, all the three grounds are disposed together. In this case information was received from Sales Tax Authorities, Mumbai that the appellant has obtained bogus bills from aforesaid party without any supply of goods from them. The AO asked the Anil Jain appellant to produce the sufficient evidence and establish the genuineness of transactions said party before him. However, the appellant failed to do so. The sales shown by the appellant are not doubted or proved non genuine by the AO. The logical corollary of this is that the appellant must have made purchases or elese where from he could have effected the sales. In this regard it is submitted by the Ld. A.R. that he had submitted the details of purchase, details of sales, proof of physical receipt of material, quantity details and invoice bills along with the detail of the bank transaction before the assessing officer. Further the appellant had also explained that the payments have been made by account payee cheques. During the appellate proceedings, the appellant has vehemently argued that the appellant had submitted sufficient documents and payment by banking channel, wherein these payments made to these parties through normal banking channel have been reflected were submitted during the asessmdent proceedings. Identical issue came up before the Hon’ble High Court of Gujarat in the case of CIT v. Bholanath Poly Fab. P. Ltd. Reported in 355 ITR 290 (guj) In this case. The assessee was engaged in the business of trading in finished fabrics. The AO disallow3ed purchase amounting to Rs.40,69,546/- as bogus /unexplained. The CIT(A) confirmed the action of the AO. The issue was carried in appeal befoe the Hon’ble Tribunal which concurred with the finding of the frevenue authorities below the Hon’ble Tribunal which concurred with the finding of the revenue authorities below that such purchase was made from bogus parties. After adverting to the facts and data placed before it, the Hon’ble Tribunal noted that the entire cloth of 1,02,514/- metres was sold during purchased by the appellant may not be from the parties shown in the accounts but margin embedded in such purchases would be subjected to tax. The Hon’ble Tribunal relied on its earlier decision in the case of M/s. Saket Steel Traders v. ITO dated 20.05.2008 and also made reference to the decision in the case of Vijaya Protein v.CIT58 ITD 428(Ahd). On appeal by the department the Hon’ble High Court of Gujarat, dismissed he appeal. The head note is as under: “Income from undisclosed sources- Assessment- Assessee trading in finished fabric-whether purchases themselves bogus whether parties from whom such purchases were made bogus Anil Jain question of fact- Tribunal finding assessee did purchase cloth and sell finished fabrics. Not entire purchase price but profit element embedded in purchases liable to tax I.t. Act. The assessee for the assessment year 2005-06 was engaged in he business of trading in finished fabrics. The assessing officer held that purchases worth Rs. 40,69,5461- Were unexplained end disallowed the expenditure claimed by Me assessee and computed the total income ofRs.41,1 0 187/-. In so far as the question of bogus purchases was concerned the Tribunal concurred with the revenue views that such purchases were allegedly were revenue a unserved the postal authorities the remark that the addresses were incomplete. The inspector deputed but the Income Tax Department also could not One find any of the parties available at the given addresses. The assessee was unable to produce any confirmation from any of the parties. Though the assessee had claimed to have made payment by account payee cheques, upon verification it was found that tile were encashed by same other parties and not by the supposed seller. However, the Tribunal was of the opinion that though the purchases might have been made from bogus parties the purchases themselves were not bogus adverted to the facts and circumstances data on record and came to the conclusion that the entire quantity of opening stock, purchase manufactured during the year 2005-06 were sold by the assessee. therefore, the purchases of the entire 1,02,514 mtres of cloth were said during the year 2005-06. The Tribunal therefore occulted the assesses contention tiler the Sn/shed goods were purchased by the assessee though not from the parties shown in the accounts but timer usher sources. The Tribunal was of the opinion that not the entire amount but she profit would be in such amount would an subject to tax. 5.6 In the ease or M/s. Sanjay Oilcake Industries V. commissioner of Income tax reported in 316 ITR 274 (Cu)) The Hon’ble Court had upheld the action of the CIT(A} and ITAT in determining estate) addition of 25% of the purchases in cases involving bogus purchases. the head note is as under:- 'Assessment income from undisclosedsource – addition on account of inflated purchase price- Estimate-Not a question of law- No material produce by assessee to disprove inflated purchases- Tribunal’s order in accordance with law- I.T. Act, 1961 Whether an estimate should be at a particular sum or at a different sum can never be a question of law.

Anil Jain For the A.Y. 1084-85 and 1985-86 the Assessing Officer made additions to the income assessee on account of inflated purchase price of oilcakes. The CIT(A) held that 25 per cent of the value of the purchase price was not genuine and the addition made by the AO was accordingly restricted to 25%. On cross appeals by the assessee and he revenue the Tribunal confirmed the order of the CIT(A). the assessee sought modification of the order on the ground that the tribunal had failed to consider various pieces of evidence enumerated by it in the application. The tribunal rejected the application holding that there was no apparent error or to the high Court: held that the finding of the AO had ben ac captive by the to High Court an the tribunal that the apparent seller s who had issued sale bills were not traceable. The goods were issued bills for such goods. Though the purchases were shown to have been made by makingPayment therefore by account payee cheques and the cheques had been deposited ion bank accounts ostensibly in the name of the apparent The assessee had by evidence available on record made it possible for the recipients not being traceable for the purpose of inquiry as to whether the payments made by the assessee had been actually received by the apparent seller. hence. The estimate made by the appellate authorities did not warrant interference. 5.7 Recently,in the case of commissioner or Income tax v Simit p Sheth 356 )ITR 451 Guj) the Hon’bleCourt has given a finding that estimation of rate of profit return must necessary very with the nature, of business andno uniform yardstick could be adopted and finally confirmed the action of the ITAT in determining 12.5% of the bogus purchase as profit embedded in such transaction.The head note is CIT fraud undisclosed sources Assessee trading in steel finding that purchase recorded by it were not bogus but from other parties not recorded in books; Estimation of profit element embedded in purchases Tribunal justified in estimation on the basis of facts income tax Act, 1961. The assessee was engaged in the business of trading in steel on wholesale basis. During the course of the reassessment procedings for the year 2006-07, the AO noticed that some of the supplies 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 concluded that the total purchase of Rs.41,04,903/- cumulatively made from the three parties were bogus. He thus the gross profit of the assessee. He also rejected the books of account and estimated the had made purchases from other parties in the open market. Therefore, he retained 30 percent Rs.41,04,903/- to Rs.12,31,471/- and deleted the balance of Rs.28,73,432/- while doing so he deleted the addition of Rs.5 lakhs as made by the assessing officer on the ground that the opinion that twelve and half percent of the disputed purchases should be retained in the hands of the assesse as business profit. On appeal to the High Court.

Anil Jain Held dismissing the appeal that the CIT(A) believed that the purchases were not bogus but were made fom the parties other than those mentioned in the books of account. That being the position, not the en tire purchase price but only the profit element emebeddeed in such purchases could be added to thein come of the assessee. In essence the Tribunal only estimated the possible profit out of purchases made through non genuine.parties. The estimation of rate of profit return must necessarily vary with the nature business end no uniform yardstick,could do adopted, 5.8 On consideration of the facesavailable on record it is seen that information uploaded by the State Sales Tax authorities wherein the said Department put up lists of parties round to be engaged in issuing false bills without actual sale of goods, as tie point of genesis for enquiry related to possible bogus purchases 11 a number of cases. In case, of a manufacturer, if the purchases are bogus, It must be possible to produce the goods as shown, even without use of materials, the purchase of whichsuspicious. If it is not possible to produce the g000s as shown without consumption of those materials, these suspicious purchases cannot be half ought unless production is also held bogus Where purchase is head as bogus then the corresponding sales flue: also so held bogus as without the material being purchased) production/sales is not possible. Therefore, without the corresponding production/Sales being held basis it cannot be a one of bogus bases. bill other so US in a case where the purchases is shown being bogus and it is not possible to complete tie corresponding Se' transaction without a genuine purchase of such material, the sale must also be bogus. However, it is possible to complete the sales or the production as shown, even without To the I Involved the suspicious purchase, it hawala to be purchased,rather the sale transaction was effected or production was done even without use no such material: or whether such material were also used Unless it is shown that such materials were not used In corresponding sales or the Crookston as shown) Purchases ,1cannoLe held bogus and it will be a case of purchase from bogus parties. However, then material has been used in the sales o as she case may be in production, it cannot be a case of bogus purchases material it will be can or purchase from bogus parties. statements of hawala providers recorded by Sales 'tax Authorities activities by such suppliers before Sales lax Authorities, absence of evidence in support Of transportation delivery of material our have been held less relevant –as mere Anil Jain indictors and not decisive as factors, [0 draw a conclusion regarding sent genuineness of purchases. 5.9 The Suppliers were found to be engaged in providing bogus bill without bill actual of goods. The appellant made payments for these purchases by account payee cheques duly deed record through normal I can king channel; and are duly bill in the appellant’s bank statement. Before the AD, toe appellant produced documentary evidence like copies of nice IDEA o od ledger accounts of the vendors in tie appeal unit books of account according these purchases to sustain the genuineness of used Purchases. Since roe sales rece1pts was not doubted or dispute by the AD and ne has accepted the sales sales receipts of the appellant -.t as it is there. the AD cannot deny thethat end Bog work not made by the appellant and the material was and that purchases was not used for its contract work. What is under dispute is the. purchasefrom the parties from whom bills have been ta Ken and cheques have been issued to then'. purchases are not in dispute but the parties from whom purchase are shownto have been made are disputed and suspicious. 5.10 The Ao had made the addition as some of the Suppliers were declared hawala dealers by the VAT Department. This may be a good reason for making further investigation but rho 40 did not make try further investigation. and me cry correlated Its assessment on suspicious. Once the assesses has brought on record the details of payments by account payee Cheque, it was incumbent. on the 40 to have verified the payment data Is from the bank of the a assessee one a so from the bank of the supplies to vehemently whether there was no detailed investigation made by the AO himself. No such exercise has been gone or findings recorded. There was no detailed investigation made by the AO Tribunal. It is also found that the payments have been made by account payee cheque which are duly reflected in the bank statement of The assessee. There Is no evidence In show that the assessee has received cash book from the suppliers. Merely because the suppliers did rot He some confirmation and document, one cannot conclude that the on in case were not made by the assesses This view is supported by the decision of Nikunj Eximp Enterprises Vs. CIT 216 Taxman 171 (Bom) To to this extent tern in view with the appellant, if appellant has fulfilled is onus flaking the payment by cheque and has supplied the addresses of the sellers then it cannot be presumed to supplier were bogus 0:000ly Anil Jain because the sellers were not found at the even address. There Is a considerable time gap between the period of purchase transaction and period be scrutiny proceedings. The 40 has not brought any material on record to show that there is suppression of sales. It Is basic rule of accountancy as well as of taxation laws that profit from business cannot he be ascertained without deducting cost of purchase from sales. Estimation of profit belonging from 12.5 no 15% has been upheld by the Hon’ble gujarat High Court in the case of CIT VS. Simit P. Sheth 356 ITR 451 (Gui.) depending upon the nature of business. 5.11 Considering the totality of the Facts before me, as well as the judicial opinion available, I am inclined to agree with the appellant’s stand that the addition is excessive. The AO has disallowed the amount of Rs.48,46,947/- on account of bogus purchases. The total purchases debited to the trading account from these parties are Rs.3,23,12,978/-. I am of the view that estimation of profit at 12.5% would meet the ends of justice. Therefore, I direct the AO to estimate profit of 12.5% on the total purchases in question which work out to Rs.40.39,133/-(12.5% of Rs.3,23,12,978/- The appellant therefore gets relief of Rs.8,07,825/- (Rs.48,46,947/- minus Rs.40,39,122/-. The grounds raised are partly allowed.”

6. On appraisal of the above said finding, we noticed that the CIT(A) has gone through the various finding given by the Hon’ble High Court and other case. The CIT(A) mainly relied upon the decision of the Gujarat High Court in the case of CIT Vs. Simit P Sheth 356 ITR, 451 (Guj). The factual position is not in dispute. The profit element was taken into consideration to the extent of 12.5% of the bogus purchases which does not seem unjustifiable. Since, the matter of controversy has been detected by the CIT(A) by considering the decision of the Hon’ble High Court of Gujrat in the case of CIT Vs. Bholanath Poly Fab. P. Ltd. Reported in 355 ITR 290 (Guj)