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Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: SHRI C.N. PRASAD, HONBLE & SHRI RAMIT KOCHAR, HONBLE
PER C.N. PRASAD (JM) 1. This appeal is filed by the Revenue against the order of the Ld. Commissioner of Income Tax (Appeals)-17 dated 27.02.2017 for the Assessment Year 2009-10. The only grievance of the Revenue in its appeal is that Ld.CIT(A) is not justified in restricting the disallowance of non-genuine purchases to 12.5%.
2 ITA.NO.3489/MUM/2017 (A.Y.2009-10) M E Infraproject P.Ltd.
Briefly stated the facts are that the assessment of the assessee was reopened u/s 147 of the Act by issue of notice u/s 148 dated 07.03.2014 for the reason that as per the information received from the investigation wing of the department the assessee entered into transaction with various parties as mentioned in the Assessment Order for purchase of material and these dealers were reflected as hawala dealers in the website of the Sale Tax Department, Investigation Wing, Mumbai, who allegedly provided only accommodation bills. In the course of the re-assessment proceedings the assessee was asked to furnish the details of ledger accounts, copies of bills, invoices, proof of delivery of goods with transportation details rendering of services, bank statements and other documentary evidences to substantiate the genuineness of the transactions. In response the assessee vide letter dated 06.02.2015 submitted ledger accounts bank statements etc., It was also contended before the Assessing Officer by the assessee as under:
“(i) The assessee has procured / purchased materials from various sources mainly through suppliers/brokers/agents. The factum of materials purchased and utilization thereof can be conclusively established from the actual inspection of the sites where projects were carried out, the measurement record, the structural drawings and specificities of the project etc. The assessee would not have been able to carry out the project work awarded by the Government / Semi Government Authorities if it would not have purchased the construction material. The factum of execution of work and the material consumption is determinable on the basis of the payment certificates issued by the Municipal Authorities etc.
3 ITA.NO.3489/MUM/2017 (A.Y.2009-10) M E Infraproject P.Ltd. (ii) Mere appearance of the name of the dealer on the website of the sales-tax authorities cannot be sufficient to treat purchases from him as bogus for income-tax purposes. (iii) Copy of the statement / affidavit made by such dealer before the sales-tax authorities passed on the Assessing Officer cannot be sufficient to hold purchases from such dealer as bogus in the assessee's hands for income-tax purposes. (iv) The purchases made by the assessee cannot be doubted having regard to the fact that on the date of sales by the dealers, the dealers were holding valid TIN No/sales-tax registration number. (v) Though the goods purchased have last identity due to consumption in the construction activity, the actual quantity of materials used in construction can be estimated with precision having regard to the contemporaneous record. Since the corresponding sales and the closing stock are accepted as genuine, the entire amount of purchases cannot be disallowed.”
However, the Assessing Officer not convinced with the reply, issued notices u/s 133(6) to the parties and the notices were returned unserved. Therefore, he concluded that in view of the specific information received from the Sales Tax Department that the alleged purchases made by the assessee from these dealers are not genuine and since notices were returned unserved and since assessee could not prove genuineness of the alleged purchases by producing the parties for examination, Assessing Officer treated the purchases as non-genuine and disallowed entire purchases of ₹.1,69,99,483/- as bogus purchases.
4 ITA.NO.3489/MUM/2017 (A.Y.2009-10) M E Infraproject P.Ltd. 4. On appeal the Ld.CIT(A) restricted the addition to 12.5% of the bogus purchases. The Ld.CIT(A) while restricting the addition to 12.5% considered various decisions of Hon'ble High Courts and the Tribunals and concluded that entire purchases cannot be treated as bogus, but reasonable estimate should be made and he estimated the element of profit out of such unproven purchases @12.5%.
Ld. DR vehemently supported the orders of the Assessing Officer and the Learned Counsel for the assessee supported the orders of the Ld.CIT(A).
6. Further Learned Counsel for the assessee referring to Page 59 submits that in the case of ACIT v. Mr. Pukhraj H. Mehta the Coordinate Bench estimated net profit at 6% before depreciation. He submits that Mr. Pukhraj H. Mehta is the proprietor of Mehta Enterprises and the business of this proprietary concern was taken over by the assessee company. The Learned Counsel for the assessee submits that the assessee in this case also a civil contractor undertaking works for Government and Semi Government agencies. The Tribunal restricted the net profit to 6% without depreciation. Learned Counsel for the assessee further submits that assessee is primarily undertaking the contract works from Government and Semi-Government Departments, Local Authorities 5 ITA.NO.3489/MUM/2017 (A.Y.2009-10) M E Infraproject P.Ltd. and Private Parties. Therefore, if the net profit of the assessee is estimated at 6% without depreciation it will be less than the 12.5% adopted by the Ld.CIT(A). Therefore, prays that the percentage adopted by the Ld.CIT(A) at 12.5% may be sustained.
Heard rival submissions, perused the orders of the authorities below. The contention of the assessee is that the purchases are genuine has been rejected by the Ld.CIT(A). However, the profit element in such non proven purchases was estimated at 12.5% as reasonable observing as under: - 6.2.9 Conclusion on case laws: The net conclusion that can be arrived at from the above discussion is that where the sales and purchases are verifiable and proven e.g. to or from government bodies or agencies etc no addition may be made. If however, the purchases are bogus but the direct sales are proved, the assumptions are that the purchases were made from unknown pares and the AO can apply a profit rate to determine the liability of the assessee. It is also seen that putting an onus on the AO to trace the money trail or verify the withdrawals from the banks etc may give more pointers but it is not sufficient by itself and the ITAT has not accepted such an argument in the case of Shri Ganpatraj A Sanghavi (supra). If the bogus purchases are unproved and are declared consumed by assessee itself in its trading, manufacturing or non- trading activities, the entire addition can be made as it only goes to inflate the expenses of the assessee. (refer M/s. Shoreline Hotel Pvt. Ltd vs. CIT Central-I in dated 19.06.2015) 6.2.10 In view of the above discussion it is seen that the assessee is unable to substantiate his purchases from the 6 ITA.NO.3489/MUM/2017 (A.Y.2009-10) M E Infraproject P.Ltd. hawala suppliers who has already been established as hawala dealers by the Sales Tax Department (Government of Maharashtra) and Investigation Wing of the Income Tax Department The suppliers were neither produced during the assessment proceedings nor during appellate proceedings when opportunity was so provided. The consumption pattern was also not proved nor has even the confirmation from the suppliers been filed. However, as held in various case laws discussed above, the addition of entire purchases as unexplained purchase is hot justified. What is important to find out is the entire benefit derived by the assessee company by using such accommodation entries and actual using the goods from 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. 6.2.11 During the appellate proceedings, AR of the assessee company further submitted that the assessee company has went into the Settlement Commission for the assessment years AY 2010-11, 2011-12 where it offered Net Income on percentage basis. Different rate were taken on different type of contracts. Contracts received from MCGM etc and 8% executed by self Contracts received from MCGM etc and 3% sub contracted to others Contracts received from others and 5% executed by the applicant RMC Manufacturing 6% The Hon'ble Settlement Commission accepted the appellant's offer mainly on the grounds that credit has not been challenged and only option left with the revenue is to work out estimated profit on unproved purchases. 6.2.12 Since, the AO has not challenged the credits, and thus, there is no case for the total disallowance of the purchase figure. But, the figure of purchases are certainly exaggerated as held in various judicial scrutiny of cases related to hawala 7 ITA.NO.3489/MUM/2017 (A.Y.2009-10) M E Infraproject P.Ltd. dealers, such purchases do have element of profitability higher than the normal one. Infact, the assessee company itself has taken a ground number 3 that "On the facts and in the circumstances of the case and in law, the AO has not found any infirmity with the books of accounts in terms of purchases or utilization of the materials in different contracts in which the Appellant was engaged. Therefore, the ratio laid down by the Gujarat High Court in the case of CIT vs Simit P Sheth (356 ITR 451) that when the total sales and purchases has been accepted by the AO then it would be reasonable to estimate the profit made on such purchases and that profit has to be added to the income, ought to be applied to the case of the Appellant.” Considering the facts and circumstances of case in totality, the element of profit out of such unproven purchases from hawala dealers is estimated @ 12.5% of Rs.1,69,99,483/-. The AO is directed to modify the disallowance/ additions accordingly.
We also find that the Coordinate Bench of this Tribunal in the case of ACIT v. Mr. Pukhraj H. Mehta the proprietor of Mehta Enterprises which was taken over by the assessee company, the Coordinate Bench for the Assessment Year 2008-09 held as under:
“2. Firstly, we shall take up the appeal filed by the Revenue on 1.12.2011 against the order of the CIT (A) dated 21.9.2011. In this appeal, Revenue raised the following grounds which read as under: "1. On the facts and in the circumstances of the case and in law, the CIT (A) has erred in directing the AO to restrict the addition of Rs. 2,80,337/- without appreciating the fact that the assessee was unable to produce two parties namely N/s. Bhakti Trading Co. and N/s. Sunrise Enterprises 8 ITA.NO.3489/MUM/2017 (A.Y.2009-10) M E Infraproject P.Ltd.
2. On the facts and in the circumstances of the case and in law, the CIT (A) has erred in directing the AO to allow depreciation on machinery amounting to Rs. 1,35,421/- without appreciating the fact that the assessee did not have ownership title over the machinery."
3. Briefly stated relevant facts of the case are that the assessee is an individual engaged in the business of civil contractor. Assessee filed the return of income declaring the total income of Rs. 2.19 Crs. Assessment was completed u/s 143(3) of the Act. In the assessment, AO made an addition of Rs. 76.85 lakhs on account of 'purchases' (para 6 of the assessment order is relevant in this regard). During the assessment proceedings AO noticed that the assessee made purchases from 13 parties. AO undertook the exercise of verification invoking the provisions of section 133 (6) of the Act. 11 of the parties were responded to the AO and confirmed the sales. Two parties out of 13 namely M/s. Bhakti Trading Co and M/s. Sunrise Enterprises not attended and confirmed the purchases. The total sales by these two parties amount to Rs. 76.85 lakhs and the same was treated as unexplained sales. It is the finding of the AO that no evidence was furnished by the assessee during the assessment proceedings. There were other expenses incurred in cash. Considering the peculiar circumstances of the case, AO made a disallowance of Rs. 80 lakhs of expenses in toto. Matter travelled to the first appellate authority.
4. During the proceedings before the first appellate authority, regarding the said two parties i.e., M/s. Bhakti Trading Co and M/s. Sunrise Enterprises, assessee made various submissions furnishing the banking transactions involving these two suppliers and submitted that the payments were made by these parties through account payee cheques, the copies of the invoices were also furnished. Regarding the failure of the parties to attend before the AO, it was submitted that these parties were having transactions with the assessee therefore it is difficult for him to produce them personally as there was a gap of three years. The fact that the genuineness of the transactions not doubted was also explained. CIT (A) appreciated the submissions made by the AO vide the discussion given in para 3.3 of the impugned order and 9 ITA.NO.3489/MUM/2017 (A.Y.2009-10) M E Infraproject P.Ltd. deleted the addition made by the AO. However, after making some discussion with regard to the Net Profit (NP) of the assessee, CIT (A) held that the assessee has declared the profits before depreciation @ 5.94%, assessing the assessee's profit applying flat rate @ 6% before depreciation will meet the ends of justice. He accordingly confirmed the addition of Rs. 2,80,337/- against the said addition of Rs. 80 lakhs. Relevant discussion is given in page 7 and 8 of para 3.3 of the CIT (A)'s order.
5. During the proceedings before us, Revenue is in appeal against the relief granted by the CIT (A) and Ld DR relied on the order of the AO. He has not disputed the conclusions of the CIT (A) that the assessee made the payments to the said two parties by account payee cheques. Invoices raised by the assessee were also not doubted. No evidence is brought on to the record to demonstrate that the transactions in question were not genuine. Merely for not making appearance before him, AO made addition of Rs. 80 lakhs and the same is unsustainable.
On the other hand, Ld Counsel for the assessee heavily relied on the order of the CIT (A) and reiterated the submission made before the lower authorities.
7. We have heard both the parties and perused the orders of the Revenue Authorities as well as the relevant material placed before us. On perusal of the order of the CIT (A) in general and para 3.3 in particular, we find the same is relevant in this regard. For the sake of completeness of this order, relevant portions from the para 3.3 of the CIT (A)'s order are reproduced here which read as under: "3.3. ........ In fact, operational profits of past 4 years before depreciation are as under: Profit before AY Turnover depreciation 2004-05 10,28,11,690 4.98% 2005-06 11,17,18,002 5.14% 2006-07 14,38,46,800 6.5% 2007-08 22,85,07,658 6.5% 2008-09 49,80,65,227 5.94% Average 5.81% 10 ITA.NO.3489/MUM/2017 (A.Y.2009-10) M E Infraproject P.Ltd. Thus, from the above past results also it is noted that the average operational profits (before depreciation has been around 5.81% and hence it is clear that the appellant agreed for net income 6% before depreciation only. Even otherwise there is no element of profit in depreciation and hence even if for any reasons the profits have to be estimated, the same has to be estimated only prior to depreciation and not after depreciation once the assessment is not being made under provisions of section 44AD. Further, in earlier 2 years, the net profit of 4.77% after depreciation has already been accepted by the A 0 u/s 143(3) in the immediately preceding year, hence there is no justification for assessing the net profit after depreciation 6% ignoring the past results and that too in absence of any specific material discrepancy noted by the AO. Thus, the disallowance of to the extent of Rs. 76,86,406/- on account of purchases made from the two parties out of total disallowance of expenditure of Rs. 80 lakhs, made by the AO cannot be sustained. However, it is noted that substantial portion of the labour expenses are incurred in cash which are not open to verification. Since, the assessee himself had agreed during the assessment proceedings to be taxed at the net income 6% before depreciation as against the declared profit before depreciation @5.94%. Therefore, if the assessee is assessed at income 6% before depreciation, it will cover up the leakage of revenue on account of non-verifiability of cash expenses on labour claimed by the appellant. On the turnover of Rs. 49,80,65,227/- the profit before the depreciation 6% comes to Rs. 2,98,83,913/-. Since, the appellant has disclosed the profit before depreciation at Rs. 2,96,03,576/- only, therefore, the difference in estimated profit before depreciation and the profit before depreciation as declared by the assessee comes to A's. 2,80,337/- (29883913 - 29603576). Hence, the addition of Rs. 80 lakhs made by the AO is reduced to Rs. 2,80,337/- only and balance is directed to be deleted.
8. From the above, it is evident that the assessee has registered the average NP @ 5.81% before depreciation. Assessee also agreed for taxing of net income @ 6% before depreciation. The fact of profit element on depreciation was also discussed by the CIT in the above extracted portion of 11 ITA.NO.3489/MUM/2017 (A.Y.2009-10) M E Infraproject P.Ltd. the CIT (A)'s order. Considering the same, we are of the opinion that the discussion given by the CIT (A) is fair and reasonable and it does not call for any interference. Accordingly, ground no.1 is dismissed.
Therefor in view of the order of the Coordinate Bench in assessee’s own case for the Assessment Year 2008-09, wherein the net profit was estimated at 6% before depreciation, we are of the view that the estimation made by the Ld.CIT(A) @12.5% appears to be reasonable and the Learned Counsel for the assessee also submitted that the percentage adopted by the Ld.CIT(A) at 12.5% be sustained though the addition would result in less than the 12.5% if net profit is adopted at 6%, if followed the order of the Coordinate Bench in assessee’s own case. In the circumstances and taking the totality of the facts into consideration we uphold the order of the Ld.CIT(A) and reject the grounds of the Revenue.
In the result appeal of the Revenue is dismissed.
Order pronounced in the open court on the 13th September, 2017.