LAXMIPATI IMPEX PRIVATE LIMITED,MUMBAI vs. ITO, WARD-1(2)(2), MUMBAI

The learned assessing officer has noted that assessee has paid a sum of ₹ 980,000 to M/s Ankita enterprises for bogus purchases. The learned assessing officer noted that the genuineness of the purchases have not been proved by the assessee and also could not show any corresponding sales of purchases made from these parties. There is no availability of corresponding sales bill, entries in the stock register, goods inward register, stock register et cetera and the corresponding sales made to the parties. In absence of this primary evidences it is not possible to accept that the transaction of purchase claim to have been made by the assessee has also gone into sale of those items which are recorded in the books of assessee and therefore neither the purchases are genuine nor the benefit of sales is required to be given to the assessee. The AO further held that assessee has also not made any effort to show that the statement made by parties before the Deputy Director of income tax (investigation) are in any way incorrect. Accordingly the learned assessing officer passed an assessment order under section 147 read with section 144 of the act on 26/12/2017 Page 3 of 8 Laxmipati Impex private Limited V ITO ward 1 (2) (2), Mumbai determining total income of the assessee at ₹ 980,000. The AO also did not give any benefit of the losses per computation of total income of ₹ 3,795,792 as the addition was made under section 69C of the act.

The assessee aggrieved with the assessment order preferred an appeal before the learned CIT – A wherein the learned CIT – A issued seven notices to the assessee and none of these notices were complied with. Therefore by order passed by the learned CIT – A the addition made by the AO was confirmed.

Aggrieved by that appellate order the assessee preferred an appeal before us. Despite notice none appeared on behalf of the assessee, assessee has submitted a written reply, and therefore the issue needs to be decided on the merits of the case considering those written replies.

The learned departmental representative vehemently supported the order of the lower authorities and submitted that the assessee has not furnished any information about the genuineness of the purchases and therefore the addition has been correctly made under section 69C of the act. It was further stated that the set off of loss also cannot be granted to the assessee because the addition has been made under section 69C of the act. He further stated that the assessee cannot be given the benefit of the applicability of the gross profit only for the simple reason that assessing officer has categorically noted that assessee has failed to show that there is any sales of the alleged bogus purchases product. When the sales is not shown by the assessee out of the alleged bogus purchases, the benefit of the gross profit cannot be allowed. He otherwise submitted that assessee has failed to appear before the assessing officer, before the CIT appeals and therefore assessee does not deserve any relief.

We have carefully considered the rival contention and perused the orders of the lower authorities. Ground number 1 of the appeal is Page 4 of 8 Laxmipati Impex private Limited V ITO ward 1 (2) (2), Mumbai stated to be general in nature and written submission filed by the assessee and therefore same is dismissed.

In Ground number 2 the assessee has submitted that the addition made by the learned assessing officer of ₹ 980,000 on account of purchases made from Ankita enterprises has been made only on the basis og finding of the investigation Wing that party was engaged in providing bogus bills without actual sales. The assessee has produced the purchase bills, and ledger account of the above party showing that the payment have been made to these parties through account payee cheque. It was the claim of the assessee that assessee has incurred losses of ₹ 3,795,790/– and therefore there is no reason to obtain any bogus purchases bill by the assessee. It was further stated that the addition has been made on the basis of the statement of third party itself and therefore such addition cannot be sustained. Assessee relied on several judicial precedents. In the end it was submitted that the entire purchases cannot be added but only the profit embedded in such purchases can at the most be added and further the addition is beyond the scope of section 69C of the act. It was also the claim of the assessee that the reassessment proceedings are taking place after almost 8 years and due to heavy losses suffered by the assessee the business was already closed. The assessee could not produce the books of accounts but that does not mean that these purchases are bogus. With respect to the corresponding sales it was submitted that appellant could not show corresponding sales but it is submitted that as per the audited accounts and return of income, total sales and closing stock is of ₹ 8.44 crore and ₹ 1.35 crores respectively. As the sales are very small amount of purchases of ₹ 980,000 which was made at the end of the year and were included in the closing stock hence this basis is also incorrect. It was stated that the purchases of ₹ Laxmipati Impex private Limited V ITO ward 1 (2) (2), Mumbai 980,000 has been shown in the closing stock. And therefore the addition could not have been made.

We find that only the gross profit embedded in such purchases could have been added at the most to the total income of the assessee. The purchases of the assessee are made on 25/3/2010 as per bill number 98 of Ankita enterprises of polyester fabrics of 3927.50 m at the rate of ₹ 78 per meter. Another bill number 100 was also dated 27/3/2010 of 4652 m of polyester fabrics at the same rate and further bill number 103 dated 30/3/2010 was also 3984.75 polyester fabrics meter at the same rate. The total amount of purchases is ₹ 980,012/–. The amount was outstanding as on 31/3/2010 in the books of the assessee. This sum was paid on 1/10/2010 by the assessee by account payee cheque. Quantity of purchases in the above transaction is shown by the assessee stated to be in closing stock and valued at the same rate. Assessee has stated that it has the closing stock of ₹ 1.35 crores. It is not the claim of the learned assessing officer that the purchases shown by the assessee are not at market rate. It is claimed by the assessee that above amount is also standing in the books of accounts in the closing stock at the same rate. Therefore, only the appropriate amount of the gross profit involved in the above transaction needs to be added to the total income of the assessee. As there is no information available with the assessing officer due to non-compliance by the assessee, non-compliance before the CIT appeal and also not producing any details except written submission before us, we are constrained to adopt 12.5% of the bogus purchases as income of the assessee. Accordingly the AO is directed to restrict an addition of 12.5% of ₹ 980,000 of the bogus purchases made by the assessee from Ankita enterprises. Accordingly ground number 2 of the appeal is allowed to that extent.

Ground number 3 of the appeal is against the set-off of loss of ₹ 3,795,790 as per return of income. The claim of the assessee is that such loss should be set off against any income held to be chargeable on account of this bogus purchases in view of CBDT circular number 11 of 2019. The above circular shows a clarification regarding non- allowability of set-off of losses against the deemed income under section 115BBE of the income tax act prior to assessment year 2017 – 18. The circular states that there was an uncertainty on the issue of set off of losses against the income referred to under section 115BBE. As per paragraph number 4 of that circular it was stated that to remove any ambiguity of interpretation set off of any losses was specifically inserted only by the finance act 2016 with effect from 1/4/2017, therefore assessee is entitled to claim set off of loss against income determined under section 115BBE of the act in the assessment year 2016 – 17. Thus the claim of the assessee is covered by the circular as the impugned assessment year is 2010 – 11. Accordingly ground number 3 of the appeal is allowed.

In the result appeal filed by the assessee is partly allowed.