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Order Under Section 254(1) of Income Tax Act PER PAWAN SINGH, JUDICIAL MEMBER: 1. These cross appeals under section 253 of the Income-tax Act (the Act) are directed against the order of ld. CIT(A)-2, Thane dated 14.06.2016 for the & 5364/M/2016- M/s Shreya Trading Company Assessment Year (AY) 2010-11. The assessee has raised the following grounds of appeal.
1) On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the learned Assessing Officer's stand of reopening the assessment u/s 147 of the Income Tax Act. The appellant prays that the reopening of assessment u/ s 147 of the Income Tax Act may be declared bad in law and reassessment order may please be cancelled. 2) On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the Learned Assessing Officer's stand for not providing the documentary evidence and cross examination so called hawala dealer or bogus supplier of goods which had been sought by the appellant during the course of assessment proceedings further FAA also ignoring the appellant plea and request to provide documentary evidence and cross examination of the said dealer in the light of above fact declared assessment order bad in Law void ab initio and illegal and order of the first Appellate Authority liable to quash for the assessment year 2010-11. 3) On the facts and in the circumstances of the case and in law, the learned CIT(A) erred by rejecting the books of accounts u/s 145(3) of Income Tax Act 1961 without issuing a Show Cause Notice to the appellant nor provided an opportunity of hearing. The appellant request to declared invoked Section 145(3) of Income tax Act 1961 is bad in Law and order of the first Appellate Authority liable to quash for the assessment year 2010-11. 4) On the facts and in the circumstances of the case and in law, the learned CIT(A) erred by determining the estimated of profit after rejecting the books of accounts by ignoring settled Law that estimates framed without giving the basis for their fixation or without furnishing to the appellant the material on which the rate of gross profit is arrived at or without giving an opportunity to the assessee to rebut it are bad. [Dhakeswari Cotton Mills Ltd., v/s, CIT (1954) 26 ITR 775]. 5) On the facts and in the circumstances of the case and in law, the learned CIT(A) erred by neither applying any scientific method nor comparative net profit of similar type of business at the time of determining the net profit of the appellant & 5364/M/2016- M/s Shreya Trading Company after rejecting the books of account is Rs 26,41,473/- for the A.Y. 2010 - 11 against the assessee declared the profit of Rs 22,09,270/-. 6) On the facts and in the circumstances of the case and in law, the learned CIT(A) erred disallowance of purchases on adhoc basis without any justification. 7) The learned CIT(A) has been in absolute confused state of mind while concluding the appeal which is clearly seen from the Para 7.13 "Considering the facts as discussed above and on account of appellant's non furnishing of required details in prescribed format, as above, in my considered opinion, the estimation of GP @ 13.54% as declared in the A. Y. 2011 - 12, will be justified in the case of appellant. Since the suppressed GP i.e. Rs 26,41,473/- (Rs 13,90,24,930/- x 1.9/100), is more than 25% of bogus purchases, i.e. Rs 17,40,031/- (25% of Rs 69,60,124), therefore the disallowance to the extent of Rs 26,41,473/-, as against total disallowance of Rs 69,60,124/-, made by the AO, is sustained and the balance amount of Rs 43,18,651/- is deleted. This ground of appeal is, therefore, partly allowed." From the above paragraph its crystal clear that order had been passed without application of mind on adhoc basis by ignoring principle of natural justice and tax jurisprudence to be declared bad in law and liable to quash. 8) The order appeal against is bad in Law and against the principle of natural justices and tax jurisprudence. 9) The order appeal against is based on surmises and conjectures.
The Revenue in its cross appeal has raised the following grounds of appeal. (i) On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in relying on the decision of Supreme Court in the case of Kanchwala Gems Vs. JCIT 288 ITR 10(SC) and Hon'ble High Court's decision in the case of Vijay Protein, Sanjay Oil Cake Industries, etc. (ii) On the facts and in the circumstances of the case, and in law, the Hon'ble CIT(A) erred in not following the order of ITAT, Pune in dated 20.02.2015 in the case of M/s. Kolte Patil Developers Ltd. wherein 100% addition of bogus purchases was confirmed. & 5364/M/2016- M/s Shreya Trading Company
(iii)On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in giving relief to the assessee to the extent of suppressed G.P. out of total bogus purchases even though- (i) The assessee could not produce primary evidences like Octroi Receipts, Delivery Challan etc. evidence to prove the genuineness of the purchases before the AO and before CIT(A). (ii) The affidavits filed by the entry providers before Sales Tax Authorities cannot be ignored having evidentiary value. (iv) The order of the CIT (A) may be vacated and that of the Assessing Officer may be restored.
Brief facts of the case are that the assessee is a Partnership Firm engaged in the business of trading of Coal and Chemicals, filed its return of income for relevant AY on 16.10.2010 declaring total income of Rs. 22,09,270/-. The return was processed u/s 143(1) of the Act. Subsequently, the assessment was reopened u/s 147 of the Act. The assessment was reopened on the basis of information received from Sale Tax Department that the assessee is one of the beneficiary who have availed the bogus bills from the hawala dealers.
The notice under section 148 was served on the assessee. The assessment was completed u/s 143(3) r.w.s. 147 of the Act on 20.03.2015. The Assessing Officer (AO) while passing the assessment order made the addition of Rs. 69,60,124/- on account of bogus purchases. The AO made the addition of 100% of the cost of the alleged bogus purchases . On appeal before the ld. CIT(A), the addition was restricted @ 13.54% of the purchases on the basis of gross profit (GP) declared in subsequent AY. The & 5364/M/2016- M/s Shreya Trading Company ld. CIT(A) further held that the Gross Profit (GP) is Rs. 26,41,473/- (13,90,24,930 x 190/100) is more than the 25% of the bogus purchase i.e. Rs. 17,40,031/- (25% of Rs. 69,60,124/-), therefore, disallowed Rs. 26,41,473/-. Further aggrieved by the order of ld. CIT (A), both the parties have filed their cross appeal by raising the grounds of appeal as referred as above.
4. We have heard the ld. Authorized Representative (AR) of the assessee and ld. Departmental Representative (DR) for the Revenue and perused the material available on record. The ld. AR of the assessee argued that the AO identified the bogus purchase of Rs. 69,60,124/-. The AO disallowed 100% of the cost of the purchases. The ld. CIT(A) on the basis of estimation of GP declared for AY 2011-12 @ 13.54% restricted the disallowance of Rs. 26,41,473/-. The disallowance restricted by ld. CIT(A) is about 38% of the aggregate of the alleged bogus purchases. The ld. AR of the assessee further argued that the AO made the addition on the basis of third party information without making any independent enquiry. The assessee has furnished necessary evidence in support of his expenditure incurred on purchase during the relevant financial year. It was argued that the disallowance is on very higher side and may be restricted on the reasonable basis. On the other hand the ld. DR for the Revenue argued that Investigation Wing of the Income-tax Department made full-fledged enquiry. The parties from whom ITA No.5051 & 5364/M/2016- M/s Shreya Trading Company assessee has shown the purchases were hawala dealer. Those dealers were indulged in issuing bogus bill without delivery of any material or goods. The assessee obtained accommodation bill only in order to inflate the expenses and to bring down the profitability in order to avoid the tax. The ld. DR for the Revenue prayed for dismissal of the appeal of the Revenue and further prayed for upholding the addition made by AO.
5. We have considered the rival submission of the parties and have gone through the orders of authorities below. We have seen that the assessee has raised as many as ten grounds of appeal. However, as per our considered view, the assessee has raised only two grounds of appeal which are as under: (i) Whether the ld. CIT (A) erred in confirming the order of re-opening u/s 147 of the Act. (ii) Whether the ld. CIT (A) erred in confirming the partial addition made by AO.
Similarly, the Revenue has raised as many as four grounds of appeal.
However, as per our considered view, the only substantial ground of appeal raised by Revenue is “Whether the ld. CIT(A) erred in sustaining the partial addition to the extent of suppressed GP out of total bogus purchases”. Rest of the grounds of appeal in both the appeals are either argumentative in nature or narration of facts.
7. The Ground No. 1 in assessee’s appeal relates to re-opening of assessment u/s 147 of the Act. The ld. AR of the assessee has not argued anything & 5364/M/2016- M/s Shreya Trading Company against this ground of appeal. Hence, this ground of appeal is dismissed as not pressed.
8. Second substantial Ground of appeal raised by assessee and the sole ground of appeal raised by Revenue are interconnected. The AO while framing the assessment order observed that the assessee has shown the purchases of Rs. 69,60,124/- from 11 parties whose name are appeared in the list of persons who were indulged in providing the bogus bills without delivery of goods.
The assessee was asked to produce the details of purchases. The assessee could not produce satisfactory evidences with regard to transportation, delivery challan, goods receiving note and Octroi receipt. Notice u/s 133(6) sent to those parties were returned unserved. Thus, the AO made the disallowance of aggregate of the purchases from all 11 parties of Rs.69,60,124/-. The ld. CIT(A) after considering the GP for two years prior to the AY under consideration and two subsequent years restricted the addition to Rs. 26,41,473/-. The ld. CIT(A) passed the following order:
“7.13 Considering the facts as discussed above and on account of appellant's non furnishing of required details in the prescribed format, as above, in my considered opinion, the estimation of GP @13.54%, as declared in 2011-12, will be justified in the case of appellant. Since the suppressed GP i.e. Rs. 26,41,473/- (Rs. 13,90,24,9301- x 1.90/100), is more than 25% of bogus purchases, i.e. Rs 17,40,031/-(25% of 69,60,124), therefore, the disallowance to the extent of Rs 26,41,473/-, as against total disallowance of Rs 69,60,124/-, made by the AO, is sustained and the balance amount of Rs 43,18,651/-, is deleted. This ground of appeal is, therefore, partly allowed.”
& 5364/M/2016- M/s Shreya Trading Company
The perusal of conclusion arrived by ld. CIT(A) reveals that the addition was restricted to Rs. 26,41,473/- which is about 37.95% of the total alleged bogus purchases. In our considered view, the disallowance on account of bogus purchase is on higher side. In view of the fact that the AO has not disputed the sale/consumption of the material nor rejected the books of account. The addition was made on the basis of third party information. In our view, under the Income-tax Act only the real income can be taxed by the Revenue. Even if the transaction is not verifiable, the only taxable is the taxable income component and not the entire transaction. We are of the considered view that in order to fulfill the gap of revenue leakage, the disallowance of reasonable percentage of alleged bogus purchases would meet the end of justice. Considering the facts of the present case, we restrict the addition @ 12.5% of alleged bogus purchases (Rs. 69,60,124/-). The AO is directed accordingly. Hence, the second substantial ground of appeal
raised by assessee is allowed and the ground of appeal raised by Revenue is dismissed.
10. In the result, appeal filed by the assessee is partly allowed and the appeal of Revenue is dismissed.