ITO WD 3(4), KALYAN vs. HARESH M VALIYA, DOMBIVALI

I have carefully considered the appellant's submissions, observations of the AO in the assessment order and the facts of the case. The appellant had shown purchases amounting to Rs. 30,25,627/- from the above listed parties which were appearing in the list of hawala dealers as per information received from the Sales-tax authorities of Maharashtra Government. The hawala dealers had admitted before the Sales-tax authorities in their statement/ affidavit that they were providing only accommodation bills without there being any actual purchase/ sale of goods. Though the payment was received by the said parties from their Haresh M Valiya customers through banking channels, however, after clearing of the cheques cash was withdrawn and handed over to the customers after deduction of nominal commission charges. On being asked to establish the genuineness of the purchases, the appellant attended before the AO only once and filed only part information before the AO. The AO therefore, added the amount of Rs. 30,25,627/- to the appellant's income on account of unproved purchases. The AO also disallowed the amount of Rs.23,11,276/- being 20% of the expenses claimed in the P & L account (excluding unproved purchases i.e. Rs. 1,45,82,008/- less Rs, 30,25,627/-) as the appellant had not filed any details in support of claim of these expenses.

During the course of the present proceedings the appellant filed written submissions which have already been reproduced above. Though the appellant has filed copy of ledger accounts of the above listed parties, no documentary evidence to establish the genuineness of the purchases shown from the above listed parties like copies of purchase bills, copy of bank account of the appellant showing payment to the said parties through banking channels, transportation of goods from the premises of the said parties to the appellant's premises etc. have been filed. In the submissions the appellant has submitted that month- wise details of opening stock, purchases, sales and Haresh M Valiya closing stock were being filed. On perusal of these details, it is seen that only figures have been mentioned without mentioning any name of the item purchased/ sold and without providing any quantitative details. In fact the appellant does not maintain any day to day stock register and therefore, no quantitative details of opening stock, purchases and sales and closing stock are available with the appellant. In the audit report in Col. 28(a) against quantitative details it has been mentioned at "NA". A note below column 28(a) reads as under - "It is not practicable to maintain quantitative details of stock in trade. However, as certified by the assessee the closing stock in trade as on 31.32010 has been physically verified by the management and the same has been valued in accordance with the accounting policy regularly."

Thus, the facts of the appellant's case are different from the facts of various decisions relied by the appellant as listed above in the appellant's submissions. Therefore, the appellant's books of accounts are rejected uls. 145(3) of the I.T. Act for being incomplete and unreliable. However, it is seen that if whole of the unproved purchases amounting to Rs. 30,25,627/- and disallowance of expenses amounting to Rs. 23,11,276/- is added to the appellant's income, the net profit of the appellant will Haresh M Valiya go upto Rs.56,22,543/- i.e. 37.80% which is unrealistically high in the appellant's line of business of being a trader in electrical goods. As the appellant's books of accounts have already been rejected, guidance is taken from section 44AD of the I.T. Act and a net profit rate of 8% is applied to the appellant's trading results. This results in a net profit of Rs.1 1,89,4 1 1/- on the appellant's turnover of Rs.1,48,67,648/-. As the appellant has already shown a net profit of Rs. 2,85,640/-, the balance amount of Rs. 9,03,771/- is added to the appellant's income being part disallowance on account of unproved purchases (disallowance being about 30% of the unproved purchases). As far as disallowance out of expenses is concerned, it is seen that as the net profit rate has been applied to the appellant's results, no further disallowance is called for out of the expenses. The AO is directed accordingly.

The facts of the appellant's case for the AY. 2011-12 are similar to the facts of the AY 2010-11. For AY 2011-12 the appellant had shown a turnover of Rs. 1,64,07,006/- on which gross profit of Rs.8,02,945/- and net profit of Rs. 3,20,160/- was declared giving the gross profit rate of 4.89% and net profit rate of 1.95%. The addition on account of unproved purchases was made at Rs. 2,79,547/- and disallowance out of expenses was made at Rs.31,61,4591-. As the facts for Haresh M Valiya the AY 2011-12 are similar to the facts of the AY. 2010-11, net profit rate of 8% is applied for this year also after rejecting the appellant's books of accounts uls 145(3) for being incomplete and unreliable. This results in a net profit of Rs. 13,12,560/- on the appellant's turnover of Rs. 1,64,07,006/-. As the appellant has already shown a net profit of Rs. 3,20,160/-, the balance amount of Rs. 9,92,400/- is added to the appellant’s income on account of unproved purchases and part disallowance out of expenses. The AO is directed accordingly.

After analyzing the aforementioned order passed by Ld. CIT(A) and hearing Ld. DR at length, we find that as per the facts of the present case, no documentary evidence has been placed on record by the assessee to establish the genuineness of the purchases shown from the parties such as copies of purchase bills, copy of bank accounts showing payment to the said parties through banking channels, transportation of goods from the premises of the said parties to the assessee’s premises. We have further noted from the record that the assessee had not maintained any day to day stock register and therefore, no Haresh M Valiya quantitative details of opening stock, purchases and sales and closing stock are available with the assessee. Therefore cosindering the peculiar facts and circumstances of the present case and while relying upon the following judgments:- 1) ClT vs Bholanath Poly Fab Ltd. (2013) 355 ITR 290 (Guj). (HC), 2. CIT v Simit D, Sheth (2013) 356 ITR 451 (Guj)-(HC) and 3. CIT vs. Sanjay Oil Cake Industries (2009) 316 ITR 274 (Guj) (1C) and taking into consideration the facts of the present case, and to account for the profit element embedded in these purchase transactions to factorize profit earned by assessee against purchase of material in the grey market and undue benefit of VAT against bogus purchases, we are of the considered view that restricting the additions @ 8% of purchases by Ld. CIT(A) is unreasonable. The ends of justice would be met in case the additions are restricted @ 12.5 % of bogus purchases. Consequently orders passed by Ld. CIT(A) are set aside. Hence we direct the AO to restrict the additions to the extent of 12.5% of the bogus purchases made from the parties. Accordingly this ground raised by the revenue is partly allowed.