R.R.CHEMICALS & INDUSTRIES P.LTD,MUMBAI vs. ITO 13(3)(2), MUMBAI

The assessee is engaged in the business of manufacturing textile auxiliary and chemicals. Consequent to the information received from Sales tax department that certain parties (called hawala parties) are indulging in providing only accommodation bills without actually supplying the materials, the revenue examined those details. It was noticed that the assessee herein have purchased goods during the year under consideration from the parties listed as hawala parties. The assessee had purchased Light Diesel Oil from four parties aggregating to Rs.5,79,150/- and Stearic Acid from one party for Rs.2,84,960

Before AO, the assessee only furnished purchase bills, bank statements. The assessee could not furnish evidences for transportation of goods, payment of Octroi etc to substantiate its purchases. The notices issued by the AO u/s 133(6) of the Act to the suspicious suppliers have been returned back unserved. The AO took the support of decisions rendered by Hon’ble Gujarat High Court in the case of CIT Vs. Chandravilas hotel (164 ITR 102), Delhi high Court in the case of Modi Stone Ltd (203 Taxman 123), Punjab & Haryana High Court in the case of J.R Solvent industries P Ltd (209 Taxman 18) and the decision rendered by Jaipur bench of ITAT in the case of Champa Lal Choudhary (54 SOT 398) and observed that the onus to prove the genuineness of purchases lie upon the assessee and mere production of vouchers would not prove the genuineness of purchases. The AO also placed reliance on the decision rendered by Delhi High Court in the case of CIT Vs. La Medica (250 ITR 575), wherein it was held that the purchases claimed to have been made from non-existing concern is liable to be disallowed. The AO also placed reliance on the decision rendered by Hon’ble Supreme Court in the case of Sumati Dayal (214 ITR 801), wherein it was held that the issue may be considered in the light of human probabilities. Accordingly the AO took the view that the purchases have been claimed to have been made from non-existent parties should be disallowed. Accordingly he disallowed the entire amount of purchases of Rs.8,64,110/- in AY 2009-10 and Rs.1,78,200/- in AY 2010-11.

Since the assessee could not give quantity details and since the suppliers could not be traced, the Ld CIT(A) confirmed the additions made in both the years.

The Ld A.R submitted that the Light Diesel Oil purchased by the assessee is a consumable item for the assessee. The Ld A.R further submitted that the ratio of Light diesel oil on Sales turnover has been consistently at an average rate of 2.51%. He submitted that the ratio was slightly lower at 2.43% and 2.47% during the two years under consumption. Accordingly he submitted that these ratio shows that the purchases were genuine. Accordingly, the Ld A.R submitted that the tax authorities are not justified in disallowing the entire amount of purchases.

On the contrary, the Ld D.R submitted that the assessee has failed to prove the genuineness of purchases. Further the expenditure shown under the head Power and Fuel was only Rs.1,50,434/- and Rs.3,93,131/- respectively in AY 2009-10 and 2010-11.

In the rejoinder, the ld A.R submitted that the impugned purchases have been included in Purchases account and the expenditure booked under the head “Power and Fuel” consists of only electricity bills.

I heard the parties and perused the record. I notice that the assessee could produce only purchase bills and payment details. The Light diesel oil was said to be a consumable item for the assessee. Since it did not maintain stock register, the claim of consumption of Light Diesel/stearic acid could not be proved by the assessee conclusively. I notice that the AO has taken support of various case laws to buttress his view for disallowance of entire amount of purchases. A perusal of the case laws would show that they are discussing

In the instant case, the assessee could not correlate purchases with consumption details, in the absence of stock register. However, the assessee was able to show that the ratio of consumption of light diesel oil over sales is comparable. Viewed from this angle, in my view, it cannot be said that the assessee has booked bogus expenditure. In fact, the ratio has come down during the year under consideration. Hence there is a possibility that the assessee could have sourced the materials from some other sources. In this scenario, in my view, the disallowance of entire amount of purchases is not called for. Since the assessee could have saved VAT tax which is 12.5% and further since there was a possibility to procure goods at a lower rate, I am of the view that the disallowance may be restricted to 20% of the value of suspicious purchases in both the years and the same would meet the ends of justice. Accordingly, I modify the orders passed by Ld CIT(A) in both the years under consideration and direct the AO to restrict the addition to 20% of the value of suspicious purchases in both the years.