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Income Tax Appellate Tribunal, MUMBAI BENCH “H”, MUMBAI
Before: SHRI C.N. PRASAD, HONBLE & SHRI G. MANJUNATHAN, HONBLE
PER C.N. PRASAD (JM) 1. These two appeals are filed by the Revenue against the order of the Commissioner of Income Tax (Appeals)- 24, Mumbai in estimating the profit @12.5% of the purchases treated as bogus purchases by the Assessing Officer.
2 & 5405 /MUM/2016 Ravindra Ganesh Nene 2. Briefly stated facts are that the assessment of the assessee was reopened u/s 147 and re-assessment was completed on 26.03.2014 determining the income of the assessee at ₹.2,43,17,838/- While computing the income the Assessing Officer treated ₹.1,49,06,148/- as bogus purchases for the reason that the purchases made by the assessee from some of the dealers referred to in Page No. 2 of the Assessment Order are non-genuine. According to A.O the dealers are providing only accommodation entries as deposed by them before Sale Tax Department, Investigation Authorities and the notices issued u/s. 133(6) of the Act to the dealers by the Assessing Officer were returned unserved and one of the dealers stated that they have no dealings with the assessee company. For these reasons Assessing Officer concluded that the purchases made by the assessee are non-genuine and entire purchases were treated as bogus purchases.
On appeal the Ld.CIT(A) following the decision of the Hon'ble Gujarat High Court in the case of Bholanath Polyfab Pvt. Ltd. [355 ITR 290] estimated the profit margin embedded in the purchase treated as bogus at 12.5% observing as under: - “2.4.25 Having analysed the cases related to onus in bogus purchase transactions, it is apt to refer to Bholanath Polyfab Pvt. Ltd. 355 ITR 290 (Guj), where the facts of the case were that the assessee was engaged in the business of trading in finished fabrics. For the A.Y. 2005-06, the Assessing Officer held that the purchases worth Rs.40,69,546/- were 3 & 5405 /MUM/2016 Ravindra Ganesh Nene unexplained. He, therefore, disallowed such expenditure claimed by the assessee and computed the total income of Rs,41,10,187/-. The issue was carried in appeal by the assessee before the Ld. CIT(A) who rejected the appeal, upon which the assessee went in further appeal before the Hon'ble Tribunal. The Hon'ble Tribunal substantially allowed the assessee's appeal. In so far as the question of bogus purchase is concerned, the Hon'ble Tribunal concurred with the Revenue's views that such purchases were made from bogus parties. The Tribunal noted that the Assessing Officer had issued notice to all parties from whom such purchases were allegedly made. Such notices were returned unserved by the postal authorities with the remark that the address was incomplete. The Inspector deputed by the Income-tax Department also could not 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 the cheques were encashed by some other parties and not by the supposed sellers. 2.4.26 Having come to such a conclusion, however, the Tribunal was of the opinion that the purchases may have been made from bogus parties, nevertheless, the purchases themselves were not bogus. The Tribunal adverted to the facts and data on record and came to the conclusion that the entire quantity of opening stock, purchases and the quantity manufactured during the year under consideration were sold by the assessee. The purchases of the entire 1,02,514 meters of cloth were sold during the year under consideration. The Hon'ble Tribunal, therefore, accepted the assessee's contention that the finished goods were purchased by the assessee, maybe not from the parties shown in the accounts, but from other sources In that view of the matter, the Tribunal was of the opinion that not the entire amount but the profit margin embedded in such amount would be subjected to tax. The Tribunal relied on its earlier decision in the case of Sanket Steel Traders vs. ITO [IT appeal Nos. 2801 & 2937 (Ahd) of 2008, dated 20-05-2011] and also made reference to the Tribunal's decision in the case of Vijay Proteins Ltd. vs. Asstt.CIT [1996] 58 ITD 428 (Ahd). On appeal by the Department, the Hon'ble Gujarat High Court held as follows:
4 & 5405 /MUM/2016 Ravindra Ganesh Nene "We are of the opinion that the Tribunal committed no error. Whether the purchases themselves were bogus or whether the parties from whom such purchases were allegedly made were bogus is essentially a question of fact. The Tribunal having examined the evidence on record came to the conclusion that the assessee did purchase the cloth and sell the finished goods. In that view of the matter, as natural corollary, not the entire amount covered under such purchase, but the profit element embedded therein would be subject to tax. This was the view of this Court in the case of Sanjay Oilcake Industries vs. C/T (2009) 316 ITR 274 (Guj.). Such decision is also followed by this Court in a judgment dated August 16, 2011, in Tax Appeal No. 679 of 2010 in the case of C/T vs. Kishor Amrutlal Patel. In the result, tax appeal is dismissed". 2.4.27 The facts in the present case are similar to the facts in the above mentioned case. In the present case, the Ld. AO has shown that the parties in question were non-existent. The appellant has not been able to disprove the findings of the Ld. AO regarding the non-existence of the parties. However, Ld. AO after examining the evidences did not give any adverse finding that the appellant had not shown consumption/sales of the goods and that he had not offered the income on such sale of goods. In this case, Ld. A.O. not having doubted the genuineness of sales could not have gone ahead and made addition in respect of the entire purchases as it would lead to absurd profits. Thus, the issue would boil down to finding out the element of suppressed profit embedded in purchases which the appellant would have made from some unknown or bogus entities. Hence, following the decision of the Hon'ble Gujarat High Court in Bholanath Polyfab Pvt. Ltd. (supra), the estimated suppressed profit margin embedded in such amounts of purchases could only be disallowed and subjected to tax. 2.4.28 Similarly, in yet another decision of Hon'ble Gujarat High Court in the case of CIT vs. Simit Sheth (2013) 38 Taxmann.com 385 (Guj), Hon'ble Court was seized with a similar issue where the A.O. had found that some of the alleged (suppliers of steel to the assessee had not supplied any goods but had only provided sale bills and hence, purchases from the 5 & 5405 /MUM/2016 Ravindra Ganesh Nene said parties were held to be bogus. The A.O in that case added the entire amount of purchases to gross profit of the assessee. Ld. CIT(A) having found that the assessee had indeed purchased though not from named parties but other parties from grey market, partially sustained the addition as probable profit of the assessee. The Tribunal however, sustained the addition to the extent of 12.5%. Taking into account the above facts, the Hon'ble Gujarat High Court held that since the purchases were not bogus, but were made from parties other than those mentioned in books of accounts, only the profit element embedded in such purchases could be added to the assessee's income and as such no question of law arose in such estimation. While arriving at the above conclusion, the Hon'ble Court also relied on the decision in the case of Vijay M. Mistry Construction Ltd. 355 ITR 498 (Guj) and further approved the decision of Ahmedabad Bench, ITAT in the case of Vijay Proteins 58 ITD 428. 2.4.29 In the case of Vijay Proteins (supra), the Hon'ble ITAT was seized with a case of bogus suppliers of oil cakes where 33 parties were found to be bogus by the departmental authorities even though payments were made to the said parties by cross cheques and in fact the A.O. in that case had brought adequate material on record to prove that the cross cheques had not been given to parties from whom supplies were allegedly procured but these were encashed from a bank account in the name of another entity, possibly hawala dealer. Subsequently, the money deposited in that account was withdrawn in cash almost on the same day. The Tribunal however, held that if the purchases were made from open market without insisting for genuine bills, the suppliers may be willing to sell the product at a much less rate as compared to a rate which they may charge in which the dealer has to give genuine sale invoice in respect of that sale. Keeping all such factors in mind, the Tribunal estimated an element of profit percentage of the overall purchase price accounted for in the books of accounts through fictitious invoices. 2.4.30 Further, in the case of M/s. Sanket Steel Traders (ITA No. 2801/Ahd/2008 dated 20-05-2011 it was, inter-alia, stated as under:
6 & 5405 /MUM/2016 Ravindra Ganesh Nene “3. At the time of hearing before us, it is submitted by the Learned Counsel that the addition sustained is excessive. In support of this contention he referred to the decision of the Tribunal in the case of ITO vs.Sun Steel 92 TTJ (Ahd) 1126 wherein the Tribunal has sustained the addition of Rs 50,000/- on account of bogus purchases. However, we find that the facts in the above case were different. In the above case, the assessee has shown purchases of Rs.27,39,410/-, sale of Rs.28,17,207/- and Gross Profit at Rs. 94,740/-. The Assessing Officer made the addition of Rs.27,39,407/- for bogus purchases. If the above sum is added to the Gross Profit, the Gross Profit works out Rs.2,83,41,247/-. which was more than the sale itself. The Tribunal held that it is impossible that the Gross Profit is more than the sale itself. The Tribunal also found that the assessee has maintained the quantitative details in respect of materials purchased and sold. Considering peculiar facts of that case, the Tribunal arrived at the conclusion that it would be fair and reasonable to estimate the addition at Rs.50,000/- as against the addition of Rs.27,39,407/- made by the Assessing Officer. However, the Learned Commissioner of Income- tax (Appeals) considering the facts of the assessee's case, has sustained the addition at 12.5%. While doing so, he has also relied upon the decision of the Tribunal in the case of M/s. Vijay Proteins Ltd. 55 TTJ (Ahd) 76. In the case of M/s. Vijay Proteins Ltd. the Tribunal has sustained the addition of 25% of the bogus purchases. However, considering the facts of the assessee's case the CIT(A) restricted the disallowance to 12.5% as against 25% made in the case of M/s. Vijay Proteins Ltd. From these facts it is evident that the CIT(A) has sustained the addition at 12.5% of the non- genuine purchases considering the facts of the assessee's case. We, therefore, do not find any justification to interfere with the order of the CIT(A) in this regard. The same is sustained." After considering the facts and the arguments of both the sides, we are of the opinion that it would meet 7 & 5405 /MUM/2016 Ravindra Ganesh Nene ends of justice, if the disallowance is sustained at 12.5% of the purchase from these two parties. The Assessing Officer is directed to work out the disallowance accordingly." Since the facts of the assessee's case are identical, we respectfully following the above decision of the 1TAT, direct the Assessing Officer to disallow 12.5% of the purchases made during the year under consideration." 2.4.31 As narrated earlier, the Ld. A.O. in this case has held that the parties from whom the purchases were made by the appellant were found to be bogus and that is the reason for which they were not produced during the assessment proceedings. Not having doubted the consumption/sales, the motive behind obtaining bogus bills thus, appears to be inflation of purchase price so as to suppress true profits. Considering the facts of the case as well as the various case laws cited (supra) especially in the cases of CIT vs. Simit P. Sheth, Bholanath Poly Fab and Sanket Steel Traders (supra), I estimate the suppressed profit to the extent of 12.5% of the purchases made from the bogus entities, as the suppressed profit element embedded in such purchases. This estimation is in addition to the GP shown by the appellant. Accordingly, the ground raised is partly allowed.”
4. The Ld. DR vehemently supported the order of the Assessing Officer in being to tax the entire purchases from the dealers referred to in the Assessment Order as bogus purchases.
The Learned Counsel for the assessee strongly placed reliance on the order of the Ld.CIT(A) in estimating only the profit embedded in the said purchases at 12.5%.
8 & 5405 /MUM/2016 Ravindra Ganesh Nene 6. We have heard both parties and perused the orders of the authorities below and the case laws relied on. In the case of Bholanath Polyfab Pvt. Ltd (supra) relied on by the Learned Counsel for the assessee it was held that only the profit element embedded in the purchase should be brought to tax and not the entire purchases. Similar view has been taken by the Hon'ble Gujarat High Court in the case of CIT v. Simit P. Seth [38 taxman.com 385]. We also see that the assessee is mostly doing works for local authorities, Government/Semi-Government entities and there is no dispute that the assessee’s execution of works for such Government Entities. Simply because the parties were not produced the entire purchases cannot be added as held by the Bombay High Court in the case of CIT v. Nikunj Eximp [216 Taxman.com 171]. Thus, we do not see any infirmity in the order passed by the Ld.CIT(A) in sustaining the addition to the extent of 12.5% of the purchases treated as non-genuine.
In the result, Revenue’s appeals are dismissed.
Order pronounced in the open court on the 13th September, 2017.