MIRAJ ELECTRICAL & MECHANICAL CO. P LTD,MUMBAI vs. DCIT 10(2)(2), MUMBAI

O R D E R आदेश आदेश PER RAJESH KUMAR (AM) : These appeals are directed against the orders dated 27/02/2017 of the CIT (A)-17, Mumbai. Since both the appeals relate to the same assessee with common issue involved , the same are clubbed together , heard together and are being disposed off by this common order for the sake of convenience.

5.1. During the reassessment proceedings the Assessing Officer observed that the assessee has made purchases from 10 parties to the tune of Rs.2,72,13,601/-. The details thereof is given in para 4.1.1 of assessment order :-

Sl.No. VAT-TIN No. Name of the entity Amount (Rs.) 1. 27080537284V Universal Trading Co. 50,39,144/- 2. 273540548975V Blue Nile Enterprises 13,92,196/- 3. 27740523050V Suraj steel India 12,98,752/- 4. 27980662404V Shalaka International 23,56,987/- 5. 27490290339V Cosmos Enterprises 22,64,062/- 6. 27350391684V Super Sales 47,295/- 7. 27080521085V Base India 10,15,308/- 8. 27120359558V Sunny International 32,14,900/- 9. 27940665724V Osian Steel Impex 43,42,163/- 10. 27310687071V Ratnakar Traders 62,42,794/- TOTAL 2,72,13,601/- 5.2. The said parties were declared as hawala parties by the sales tax department, Govt. of Maharashtra.

Accordingly, the AO called for bills, vouchers, payment details, delivery challans and other documentary evidences to prove genuineness of purchases. Simultaneously Assessing Officer conducted physical enquires and these parties were not found at the addresses given by the assessee.

The assessee replied to various enquiries as called for and submitted therein that all the purchases of hawala dealers were genuine and that assessee has been maintaining quantitative details of purchases, goods manufactured and sold to various parties. The assessee also submitted that when the sales were accepted as genuine, then how corresponding purchases were not genuine. The notice under section 133(6) by AO were issued to 10 parties out of which the parties mentioned at S.No.1-6 and 8 did not reply whereas parties at Sl.No.7,9,8 and 10 the notice were returned unserved. The fact was brought to & 12/M/2017 3 Miraj Electrical & Mechanical Co.Pvt.Ltd. the notice of the assessee and he was asked to produce parties for cross verification. However, when the assessee failed to produce these parties before AO he added entire amount of bogus purchases of Rs.2,72,13,601/- by framing assessment under section. 143(3) r.w.s.147 of the Act vide order dated 28/01/2015.

5.3.In the appellate proceedings the Ld. CIT(A) partly allowed the appeal of the assessee by sustaining the addition to the extent of 25% on bogus purchases after considering various contentions and submissions of the assessee and by observing as under :-

“10. In view of the above discussion it is seen that the assessee is unable to substantiate its purchases from the claim suppliers who had already established hawala dealers by the Sales Tax Department (Government of Maharashtra) and Investigation Wing of the Income Tax Department. The suppliers were neither produced during assessment proceedings nor during appellate proceedings when opportunity was so provided. What is important to find out is the entire benefit derived by the aa company using such accommodation entries and actually using the goods from the grey market. In this case, the book value shown by the assessee company cannot be relied and deserves to be rejected and reasonable profit out of such purchases needs to be estimated. Therefore it is held that the assessee has inflated its expenses by taking bogus bills of purchases from hawala dealers. Going by the ratio of various case laws particularly the discussion and finding of Hon’ble Gujarat High Court in case of Vijay Protein (supra) 25% of the purchases claimed from hawala dealers i.e. 25% of 2,72,13,601/- is disallowed. The Assessing Officer is directed to restrict the disallowance accordingly. As far the issues of VAT and commission paid for purchases are concerned, the above estimation of 25% of profit out of bogus purchases will cover all such related disallowance/additions. Charging of the interest u/s.234B, 234C and 234D of the Income Tax Act, 1961 are concerned, these are mandatory and automatic in nature, hence ground on these issues are Dismissed.”

5.4.We have heard the rival submissions and perused the material on record. We find that in the present case the assessee has availed bogus bills of purchases from 10 parties amounting to Rs.2,72,13,601/-.

During the assessment proceedings, the assessee produced before the Assessing Officer the bills, vouchers, delivery challans, bank statements, quantitative detail of purchases, goods manufactured and sold. However, assessee could not produce parties before the Assessing Officer for cross verification.

The notice issued to these parties were either not served or were not replied to and hence, the Assessing Officer added 100% of the bogus purchases to the income of the assessee. The Ld.CIT(A) reduced the addition to 25% of the bogus purchases by observing that in case of hawala purchases where bills are obtained from hawala traders and simultaneously the goods are purchased from the grey market thereby saving VAT and other incidental charges. We also observed that the Assessing Officer has not doubted the sales of the assessee. During the course of hearing the ld.AR brought to the notice of the & 12/M/2017 4 Miraj Electrical & Mechanical Co.Pvt.Ltd.

Bench that in the AY 2009-10, the assessee had made payment of Rs.24,61,874/- towards VAT on the purchases from hawala dealers and sales tax department has disallowed VAT credit from the hawala parties to the tune of Rs.24,61,874/-. The ld. Counsel for the assessee also submitted that disallowance made by Assessing Officer is inclusive of VAT and further the credit of VAT was denied by the sales tax department and raised a demand which was recovered from the assessee. We find merit in the submission of the ld.AR that the sustenance of 25% of bogus purchases is excessive and unreasonable particularly when the VAT credit was not allowed to the assessee by the sales tax department and demand of VAT on behalf of hawala suppliers was realized from the assessee. If we look at the gross profit disclosed by the assessee, it is 16.78 % which is much more than the disallowance @ 11.50% which is normally made by the coordinate benches in the case of hawala purchases. But to discourage the practice of bogus trading some deterrent has to be there. In the present circumstances we are of the considered view that ends of justice would be met if the addition is sustained equal to an amount arrived at by calculating 11.50% of bogus purchases minus the VAT credit denied to the assessee by the Sales Tax Deptt which comes to Rs. 6,66,690/- (Rs.31,29,564 minus 24,62,874). Accordingly the AO is directed to delete the additions of Rs. 61,36,710/-. Appeal is partly allowed. 6.Facts of this appeal are identical to the one as decided in the . Therefore, our decision in ITA No.3611/Mum/2017 would mutatis mutandis apply to this appeal as well. In this appeal the assessee has shown gross profit rate of 17.80% besides the VAT payment raised by the Sales Tax department by not allowing the vat credit of Rs.21,87,497/-.During the year the amount of alleged bogus purchases are Rs.2,21,56,874/-.Accordingly assessee is allowed relief of Rs.51,78,676/- after sustaining addition of Rs.3,60,543/-. Appeal is partly allowed. In the result both the appeals filed by the assessee are partly allowed.