ASSISTANT COMMISSIONER OF INCOME TAX, THANE vs. KONARK INFRASTRUCTURE (WATER SUPPLY-UMC)(JV) , ULHASNAGAR

11. It is to be noted that an order u/s 245D(4) of the Act is not an order of regular assessment. It is neither an order under section 143(1) or section 143(3) or section 144 of the Act. Under sections 139 to 158, the process of assessment involves the filing of return under sections 139 or 142 of the Act; inquiry by the Assessing Officer under sections 142 and 143 and making of the order of assessment by the Assessing Officer under sections 143(3) or 144 and issuing of notice of demand under section 156 on the basis of the assessment order. No such steps are required to be followed in the case of proceedings under Chapter XIX-A (Settlement Commission). The said Chapter contemplates the taxability determined with respect to undisclosed income only by the process of settlement/arbitration. Thus, the nature of the orders under sections 143(1), 143(3) and 144 is different from the orders of the Settlement Commission under section 245D(4) of the Act.

12. Section 245-I of the Act, which bears the heading "Order of settlement to be conclusive", postulates that every order of settlement passed under sub-section (4) of section 245D shall be conclusive as A.Ys. 2013-14 to 2015-16 Konark Infrastructure., to the matters stated therein and no matter covered by such order shall, save as otherwise provided in that Chapter, be reopened in any proceeding under the Act or under any other law for the time being in force. An application under section 245C of the Act is akin to a return of income, wherein the assessee is required to make a full and true disclosure of his income and the order under section 245D(4) of the Act is in the nature of an assessment order. Therefore, assessment of the total income of the assessee for the assessment year in relation to which the Settlement Commission has passed the order under section 245D(4) of the Act stands concluded and in terms of section 245I of the Act, such order shall be conclusive as to the matters stated therein and no matter covered by such order shall, save as otherwise provided in Chapter XIX-A, be reopened in any proceeding under the Act or under any other law for the time being in force. Therefore, once an order is passed by the Settlement Commission under section 245D(4) of the Act, the same is conclusive insofar as the assessment year involved is concerned. Therefore, once an order has been passed under section 245D of the Act by the Settlement Commission, the assessment for the year stands concluded and the Assessing Officer thereafter has no jurisdiction to reopen the assessment.

“7.4 Thus, in Brij Lal (supra), the Supreme Court has held that under the Act, there is a difference between A.Ys. 2013-14 to 2015-16 Konark Infrastructure., assessment in law [regular assessment or assessment under section 143(1)] and assessment by settlement under Chapter XIX-A. The order under section 245D(4) of the Act is not an order of regular assessment. It is neither an order under section 143(1) or section 143(3) or section 144 of the Act. Under sections 139 to 158, the process of assessment involves the filing of return under sections 139 or 142 of the Act; inquiry by the Assessing Officer under sections 142 and 143 and making of the order of assessment by the Assessing Officer under sections 143(3) or 144 and issuing of notice of demand under section 156 on the basis of the assessment order. The making of the order of assessment is an integral part of the process of assessment. No such steps are required to be followed in the case of proceedings under Chapter XIX-A. The said Chapter contemplates the taxability determined with respect to undisclosed income only by the process of settlement/arbitration. Thus, the nature of the orders under sections 143(1), 143(3) and 144 is different from the orders of the Settlement Commission under section 245D(4) of the Act.

7.5 Moreover, the Supreme Court, in the above decision has held that the scheme of the said section is based on computation of total income and in that sense it has stated that such application for settlement is akin to a return of income. The said provision deals with 'total income'. Therefore, when section 245C deals with total income, all matters falling within the ambit of total income would stand concluded once the Settlement Commission settles a case and passes an order under section 245D(4) of the Act. A.Ys. 2013-14 to 2015-16 Konark Infrastructure., The order of the Settlement Commission would be final and conclusive subject to two qualifications, viz. fraud or misrepresentation. Moreover, when the settlement becomes void under section 245D(7) of the Act, the matters covered by the settlement shall be deemed to have been revived from the stage at which the application was allowed to be proceeded with by the Settlement Commission.

7.6 Section 245-I of the Act, which bears the heading "Order of settlement to be conclusive", postulates that every order of settlement passed under sub-section (4) of section 245D shall be conclusive as to the matters stated therein and no matter covered by such order shall, save as otherwise provided in that Chapter, be reopened in any proceeding under the Act or under any other law for the time being in force.

7.7 An application under section 245C of the Act is akin to a return of income, wherein the assessee is required to make a full and true disclosure of his income and the order under section 245D(4) of the Act is in the nature of an assessment order. Therefore, assessment of the total income of the assessee for the assessment year in relation to which the Settlement Commission has passed the order under section 245D(4) of the Act stands concluded and in terms of section 245I of the Act, such order shall be conclusive as to the matters stated therein and no matter covered by such order shall, save as otherwise provided in Chapter XIX-A, be reopened in any proceeding under the Act or under any other law for the time being in force. Therefore, once an order is passed by the Settlement A.Ys. 2013-14 to 2015-16 Konark Infrastructure., Commission under section 245D(4) of the Act, the same is conclusive insofar as the assessment year involved is concerned. When the section refers to matters not covered by such order, it refers to matters other than that covered under the assessment, viz. other than determination of the total income of the assessee for that assessment year. There may be matters in respect of the very assessment year which do not touch the determination of the total income of the assessee, like non-payment of advance tax or the like, which have no direct connection with the determination of the total income for that assessment year, which would not stand concluded by the order of the Settlement Commission. However, when section 245C of the Act requires the assessee to make a full and true disclosure of his income for the period in respect of which he has made such application, the order under section 245D(4) of the Act would relate to the determination of the total income of the assessee for that assessment year and such order is conclusive and cannot be reopened except as provided in that Chapter.

7.8 As to how the proceeding can be reopened is provided under section 245D(6) of the Act, which says that every order passed under section 245D(4) of the Act shall provide for the terms of settlement, including any demand by way of tax, penalty or interest, the manner in which any sum due under the settlement shall be paid and all other matters to make the settlement effective and shall also provide that the settlement shall be void if it is subsequently found by the Settlement Commission that it has been obtained by fraud or misrepresentation of facts. A.Ys. 2013-14 to 2015-16 Konark Infrastructure., Therefore, the only ground on which an order of settlement made under section 245D of the Act can be reopened is that if it is subsequently found by the Settlement Commission that the order under section 245D(4) of the Act had been obtained by fraud or misrepresentation of facts. Therefore, once an order has been passed under section 245D of the Act by the Settlement Commission, the assessment for the year stands concluded and the Assessing Officer thereafter has no jurisdiction to reopen the assessment.

7.9 This court is in agreement with the view of the Bombay High Court in Mandhana Industries Ltd. (supra) and the Delhi High Court in case of Omaxe Ltd. (supra) wherein, the court held that the provisions of Chapter XIX-A of the Act make it abundantly clear that a case could either be dealt with by the concerned income tax authority or the Settlement Commission and not by both. The Act does not envisage a return of an assessee to be split into two parts, one for consideration before the Settlement Commission by way of settlement and another for normal assessment at the hands of the Assessing Officer or the appellate or revisional authority. In other words, if an application for settlement is allowed and the case is settled, the entire assessment for the assessment year in question would stand settled. The court held that the Act does not envisage parallel proceedings for the same assessment year concerning the same assessee.

7.10 The upshot of the above discussion is that once an order has been made by the Settlement Commission under section 245D(4) of the Act, the same is conclusive and A.Ys. 2013-14 to 2015-16 Konark Infrastructure., final in respect of the assessment for the assessment year in relation to which such order was passed and the Assessing Officer has no jurisdiction under section 147 of the Act to reopen an assessment made under section 245D(4) of the Act. That, however, does not mean that the Revenue is without remedy if at a subsequent stage it is noticed that the assessee had suppressed its actual income before the Settlement Commission. In view of the provisions of sub-section (6) of section 245D of the Act, an order made by the Settlement Commission under section 245D(4) of the Act shall provide for the terms of settlement, which should inter alia provide that the settlement shall be void if it is subsequently found by the Settlement Commission that it has been obtained by fraud or misrepresentation. Section 245D(7) of the Act provides that where the settlement becomes void, as provided in sub-section (6) of section 245D, the proceedings in respect of the matters covered by the settlement shall be deemed to have been revived from the stage at which the application was allowed to be proceeded with by the Settlement Commission. The remedy, therefore, is not under section 147 of the Act, but under section 245D(6) read with section 245D(7) of the Act.

7.11 In the facts of the present case, since the Settlement Commission has passed an order under section 245D(4) of the Act in respect of the assessment year in relation to which the assessment is sought to be reopened, the Assessing Officer has no jurisdiction to invoke the provisions of section 147 of the Act and reopen an assessment, which has become conclusive. Such A.Ys. 2013-14 to 2015-16 Konark Infrastructure., concluded assessment can only be reopened in case of fraud or misrepresentation of facts, as contemplated under sub-section (6) of section 245D of the Act. The assumption of jurisdiction on the part of the Assessing Officer under section 147 of the Act by issuing the impugned notice under section 148 of the Act is, therefore, invalid and without authority of law.”

14. Gainful reference may also be made to the decision of the Hon’ble jurisdictional Bombay High Court in Madhana Industries Ltd. v. Pr. CIT (103 taxmann.com 301) wherein the Court has held that the Act does not envisage a return of an assessee to be split into two parts; one for consideration before the Settlement Commission by way of settlement and another for normal assessment at the hands of the Assessing Officer or the appellate or the revisional authority. In other words, if an application for settlement is allowed and the case is settled, the entire assessment for the assessment years in question would stand settled and the same cannot be reopened again. Identical view is noted to have been expressed by the Hon’ble Delhi High Court in Omaxe Ltd. v. Asstt. CIT (209 Taxman 443).

19. We now take up the appeal of the assessee and Revenue in & 3061/Mum/2023 for AY 2014-15. Ground Nos. 1, 2 & 4 of the Revenue’s appeal and all the grounds taken by the assessee in their appeal relates to the addition of Rs.21,76,83,384/- made by the Assessing Officer in AY 2014-15 out of bogus purchases of Rs.37,95,26,087/- identified to have been made from thirty (30) vendors. The facts leading to the impugned addition are that, the Investigating authorities in the course of search had found and seized Page Nos. 18, 19, 20, 21 & 22 of Loose Paper Bundle No. 3, which according to them, suggested that the assessee JV had made bogus purchase payments to thirty (30) vendors aggregating to Rs.37,95,26,087/- across AYs 2014-15 & 2015-16. In the course of assessment, the AO first examined the document found and seized at Page No. 18 of Loose Paper Bundle No. 3. Analyzing the same, the AO noted that the first two columns contained the name of vendor and amount of purchases and that the third column represented the percentage of commission and the fourth column indicated the resultant figure after applying the percentage of commission to the amount paid. The relevant seized document has been extracted by the AO at Page 7 of the assessment order. A.Ys. 2013-14 to 2015-16 Konark Infrastructure., 20. The AO had noted that, before the Investigating authorities, the Director of KIL was unable to explain the notings on the above Page. He further observed that, bills of only nine (9) parties out of the thirty (30) vendors were found in the course of search. It was also noted that, six (6) out of these nine (9) parties belonged to one Gursahani family and upon enquiry, Shri Gursahani failed to provide the relevant details viz., invoices, contract, work performed, ledger, labour register, books of accounts etc. citing that the records were stolen from him on 15.12.2014 and for which he provided an FIR copy as well. Since these six (6) parties were unable to provide any evidence of work performed and that the summons issued by the Investigating authorities were not complied with, the AO inferred that none of these thirty (30) vendors did any work for the assessee. The AO further noted that the assessee was only able to provide regular documents viz., bills, ledgers, proof of payments etc. in relation to all these vendors, but no evidence of the actual work performed was provided by the assessee.

21. The AO is noted to have further correlated Page No. 18 of Loose Paper Bundle No. 3 with Page Nos. 19, 20, 21 & 22 of Loose Paper Bundle No. 3. His analysis revealed that the figures mentioned on Page 19 correlated with the aggregate value of purchases & commission mentioned on Page No. 18. It was further noted that, the left hand side of Page No. 19, contained the aggregate value of purchases which suggested availability of cash funds, and the right hand side, which inter alia included commission value (found mentioned in Page No. 18), indicated utilization of these cash funds. A.Ys. 2013-14 to 2015-16 Konark Infrastructure., The other Page Nos. 20, 21 & 22, according to him, represented the actual affairs between the JV partners of the assessee which inter alia included the actual cash investment and withdrawals made by them. The AO noted that the amount of purchases found mentioned in Page No. 18 matched with the amount indicated as withdrawn in cash on the Page No. 19, which according to AO corroborated their suspicion that the payments made to the thirty (30) vendors were fake. The AO further analyzed the profitability of the assessee JV over the years and noted that the net profit ratio was very low which, according to him, further supported his foregoing analysis that the assessee had booked fake purchases to suppress its profits. Overall therefore, the AO concluded that the thirty (30) vendors found mentioned on Page No. 18 of Loose Paper Bundle No. 3 had not done any work for the assessee and that they were fake/accommodation entries meant only to evade the legitimate taxes payable. The AO accordingly disallowed the entire value of these purchases booked across AYs 2014-15 & 2015-16.

22. On appeal, the Ld. CIT(A) is noted to have called for two separate remand reports from the AO. After analyzing the submissions & rejoinders of the assessee in light of the above findings of the AO and his comments in the remand reports, the Ld. CIT(A) is noted to have passed a common appellate order for all the AYs before us. On the issue of fake purchases of Rs.37,95,26,087/-, the Ld. CIT(A) upheld the findings of the AO to the extent that, the assessee had failed to substantiate the genuineness of these expenses. The Ld. CIT(A) however held that, the disallowance of entire value A.Ys. 2013-14 to 2015-16 Konark Infrastructure., of these expenses was excessive and did not corroborate with the actual operating results of the assessee. The Ld. CIT(A) following several decisions of Hon’ble High Courts held that only profit element embedded in these bogus purchases ought to have been taxed by the AO. Taking into account the overall profitability and having regard to the order of ITSC in assessee’s own case for earlier years, the Ld. CIT(A) held that net profit rate of 15% ought to have been earned from this water pipeline project. The Ld. CIT(A) accordingly restricted the quantum of addition viz., the profit element embedded in the purchases, to 15% of the contractual receipts across the years. Aggrieved by this order of the Ld. CIT(A), both assessee and Revenue are in appeal before us.

(30) vendors.

87.1 In the case of PCIT vs Mohommad Haji Adam & Co 103 taxmann.com 459 (Bombay HC), the Hon’ble jurisdictional High Court has held as under:-

8. In the present case, as noted above, the assessee was a trader of fabrics. The A.O. found three entities who were A.Ys. 2013-14 to 2015-16 Konark Infrastructure., indulging in bogus billing activities. A.O. found that the purchases made by the assessee from these entities were bogus. This being a finding of fact, we have proceeded on such basis. Despite this, the question arises whether the Revenue is correct in contending that the entire purchase amount should be added by way of assessee's additional income or the assessee is correct in contending that such logic cannot be applied. The finding of the CIT(A) and the Tribunal would suggest that the department had not disputed the assessee's sales. There was no discrepancy between the purchases shown by the assessee and the sales declared. That being the position, the Tribunal was correct in coming to the conclusion that the purchases cannot be rejected without disturbing the sales in case of a trader. The Tribunal, therefore, correctly restricted the additions limited to the extent of bringing the G.P. rate on purchases at the same rate of other genuine purchases.

87.2 Similar principle was followed by the Hon’ble jurisdictional High Court in the case of PCIT Central-4 vs Paramshakti Distributors Pvt Ltd (ITA No. 413 of 2017) delivered on 15th July, 2019 wherein the Hon’ble HC has held as under:

"2. The first question pertains to restricting the addition of Rs.23.16 Lakhs to Rs.2,21,600/- by the Tribunal. The Assessing Officer had made the said addition on the ground that the assessee's purchases were found to be bogus. The entire purchase amount was therefore, added to the assessee's income. The Tribunal, however, restricted to the said sum of Rs.2,21,600/-. The Tribunal recorded that the Assessing Officer has not rejected either the purchases or A.Ys. 2013-14 to 2015-16 Konark Infrastructure., the sales made out of the said purchases. The Tribunal therefore, was of the opinion that the addition should be restricted to 10% of the total purchases. The Revenue strongly disputes this proposition.

87.3 Similarly in the case of PCIT-13 vs Rishabhdev Technocable Ltd [2020] 115 taxmann.com 333 (Bombay), the Hon’ble Bombay High Court has reiterated the principle that in cases where sales are accepted by the assessing officer, only the profit element embedded in purchases would be subjected to disallowance and not the entire amount of purchases. The relevant portion of the decision is reproduced as under:

15. We have already discussed the context in which the Assessing Officer had made the additions. We have also noted that in the appellate proceedings before the first appellate authority i.e. CIT(A) the quantum of purchases was enhanced from Rs. 24,18,06,385.00 to Rs. A.Ys. 2013-14 to 2015-16 Konark Infrastructure., 65,65,30,470.00. Having raised the quantum of purchases as above, CIT(A) posed a question to itself as to what should be the treatment of purchases; whether the same should be added back to the taxable income of the assessee as a whole or only profit margin should be added back. After referring to various case laws on the subject, CIT(A) returned a finding of fact that assessee had made circular purchases and sales with 12 parties as disclosed in the sales tax return. Though genuineness of the purchases and sales were not proved, yet it was noted that the Assessing Officer had accepted the sales and gross profit declared in the return of income. CIT(A) held that there can be no sales without purchases. When the sales were accepted, then the entire purchases could not be disallowed. Referring to a decision of the Gujarat High Court in the case of CIT v. Bholanath Polyfeb (P.) Ltd . [2013] 40 taxmann.com 494/[2014] 220 Taxman 82/(Mag.)/[2013] 355 ITR 290 (Guj.) CIT(A) held that only the profit element embedded in purchases would be subjected to tax and not the entire amount. Having said so, CIT(A) noted that the gross profit rate of the assessee showed a decreasing trend over the years. In such circumstances, CIT(A) took the view that 2% of the purchases of Rs. 65,65,30,470.00 would be a fair and reasonable profit percentage which should be added to the income of the assessee, deleting the balance amount.

16. While doing so, CIT (A) observed that only reasonable profit on the purchases made from the hawala party should be added back to the income of the assessee. Relevant A.Ys. 2013-14 to 2015-16 Konark Infrastructure., portion of the order of the CIT (A) is extracted hereunder:—

2.7 From the perusal of the decisions of the Hon'ble courts on this issue, specially the decision of the Hon'ble Bombay High Court in the case of CIT v. Nikunj Eximp Enterprises (P.) Ltd. (supra), it was clearly held that the A.O. and the CIT (A) had disallowed the amount of Rs.1.33 crores on account of purchases merely on the basis of suspicion because the sellers and the canvassing agents have not been produced before them. The Hon'ble Mumbai Tribunal in the case of Saroj Anil Steel (P.) Ltd. v. ITO vide order dated 30-10- 2012 has also decided this issue that only profit margin @ 1 % is to be added back. Similar view has been taken by the Hon'ble Tribunal Mumbai in the case of Anil Goyal Exim (P.) Ltd. v. ITO vide order dated 25-04-2005. The Hon'ble Gujarat High Court in the case of CIT v. Bholanath Polyfab (P.) Ltd ., 40 Taxman.com 494 has held that whether the assessee did purchase cloth and sell finished goods and purchasers were not traceable, profit element embedded in purchases would be subject to tax and not entire amount. From the facts of the present case, it is noticed that the assessee has made circular purchases and sales with 12 parties as declared in sales tax return. The genuineness of purchases and sales were not proved before the A.O. and even during the appellate proceedings. The A.O. has treated the purchases as bogus but accepted the sales and gross profit declared in the return of income. Now question arise whether there can be any sales without purchases. The answer is A.Ys. 2013-14 to 2015-16 Konark Infrastructure., always in the negative that no sales can be made without purchases. The situation can be that purchases may not be made from the parties from whom invoices have been obtained as mentioned by the A.O. in the assessment order. But when the sales are accepted then the whole purchases cannot be disallowed as held by various courts stated above. As per the decision of the Hon'ble Gujarat High Court in the case of CIT v. Bholanath Polyfab (P.) Ltd., it is clearly held that only the profit element embedded in purchases would be subject to tax and not the entire amount. Now the question arises how to determine the profit element. For this purpose, the total turnover and percentage of gross profit for the earlier three years was obtained from the AR of the appellant. It is noticed that in earlier years, the main business of the assessee was manufacturing and dealership of all kinds of industrial power control instruments and related items but in the year under consideration it has shown trading of Rs. 65,65,30,470/- out of the total purchases at Rs. 67,34,02,306/-. The gross profit shown in the year under consideration was at 5.71 % as against 8.77% in the preceding year. From the perusal of the submissions made by the AR of the appellant, it is noticed that the contention of the appellant was correct that in the earlier years the main business of the assessee was manufacturing and in the year under consideration the major activity is of trading. The gross profit rate was also decreasing every year and in the year under consideration it has decreased to 3%. It is also an established fact that the gross profit of trading activity is lower than the manufacturing activity. The A.Ys. 2013-14 to 2015-16 Konark Infrastructure., AR of the appellant has also offered that additional gross profit @ ½% of the turnover can be added back. But there is no reasonableness in adopting this ½% G.P. Keeping in view the principles of natural justice and the decision of the Hon'ble Courts on this issue, only the reasonable profit has to be added back on the purchases made from the hawala parties. The gross profit has been reduced from 8.77 % to 5.71% during the year under consideration which is explained as major manufacturing activity in the last year and major part of the trading activity in the year under consideration. Keeping in view of these facts and circumstances, I am of the view that 2% of the purchases made from the hawala parties amounting to Rs. 65,65,30,470/- which works out at Rs. 1,31,30,609/- is air and reasonable, hence, upheld and the balance addition made is deleted. Ground of appeal is partly allowed.

17. Before the Tribunal, Revenue expressed the grievance that CIT (A) had erred in disallowing bogus purchases at 2% being profit on purchases made by the assessee from the grey market. Tribunal vide its order dated 3rd November, 2016 held as under :— "4. We have heard rival contentions and gone through the facts and circumstances of the case. Admitted facts are that the AO neither in the original proceedings nor during remand proceedings objected to sales made by assessee. In that eventuality it is imperative on our part to hold that there must be purchases. Whether the purchases are from Grey Market or whatever the assessee has made purchases although payments are A.Ys. 2013-14 to 2015-16 Konark Infrastructure., made to hawala dealers. In that eventuality it is to be seen whether the payments are recorded in the books of account or not. This fatum is not denied by Revenue, rather the assessee has proved that the payments are made through accounts payee cheques and purchases are entered in its books of account. Once the assessee is able to prove that the purchases were made only in alternative way, the revenue is to estimate the excess profit at a rate. Here, our difference is that 2% is reasonable or some higher profit is to be estimated. We are of the view that the assessee's gross profit varies from 5% to 8.77%, but these purchases are from Grey Market and its profit element is little higher and accordingly, we direct the Assessing Officer to make further addition of 3% of the bogus purchases and accordingly estimate the income. We direct the Assessing Officer accordingly. This issue of Revenue's appeal is partly allowed.".

18. Tribunal noted that it was an admitted fact that the Assessing Officer did not object to the sales made by the assessee. Therefore, it was evident that they were corresponding purchases. Having noted the above, Tribunal examined the books of accounts of the assessee wherefrom it was found that the assessee had made payments on account of the purchases through account payee cheques and the purchases were entered in its books of account. Thus, assessee was able to prove that the purchases were made only in the alternative way. If that be so, then Revenue was only required to estimate the profit at a particular rate. Referring to the figure of 2% arrived by the A.Ys. 2013-14 to 2015-16 Konark Infrastructure., CIT(A), Tribunal observed that assessee's gross profit varied from 5% to 8.77%. Since the purchases were made from the grey market, the corresponding profit element would be little higher. Therefore, Tribunal directed the Assessing Officer to make further addition of 3% on the bogus purchases and to estimate the income on such basis.

19. On thorough consideration of the matter, we do not find any error or infirmity in the view taken by the Tribunal. The lower appellate authorities had enhanced the quantum of purchases much beyond that of the Assessing Officer i.e., from Rs. 24,18,06,385.00 to Rs. 65,65,30,470.00 but having found that the purchases corresponded to sales which were reflected in the returns of the assessee in sales tax proceedings and in addition, were also recorded in the books of accounts with payments made through account payee cheques, the purchases were accepted by the two appellate authorities and following judicial dictum decided to add the profit percentage on such purchases to the income of the assessee. While the CIT (A) had assessed profit at 2% which was added to the income of the assessee, Tribunal made further addition of 3% profit, thereby protecting the interest of the Revenue. We have also considered the two decisions relied upon by learned standing counsel and we find that facts of the present case are clearly distinguishable from the facts of those two cases to warrant application of the legal principles enunciated in the two cited decisions.

20. In Bholanath Polyfeb (P.) Ltd. (supra), Gujarat High Court was also confronted with a similar issue. In that case Tribunal was of the opinion that the purchases might have A.Ys. 2013-14 to 2015-16 Konark Infrastructure., been made from bogus parties but the purchases themselves were not bogus. Considering the fact situation, Tribunal was of the opinion that not the entire amount of purchases but the profit margin embedded in such amount would be subjected to tax. Gujarat High Court upheld the finding of the Tribunal. It was held that whether the purchases were bogus or whether the parties from whom such purchases were allegedly made were bogus was essentially a question of fact. When the Tribunal had concluded that the assessee did make the purchase, as a natural corollary not the entire amount covered by such purchase but the profit element embedded therein would be subject to tax.

21. We are in respectful agreement with the view expressed by the Gujarat High Court.

87.4 Following this principle, the jurisdictional High Court in PCIT vs. Pinaki D Panani (ITA No. 1543 of 2017) (Bombay HC) held that “Even if the purchases made by the assesse are to be treated as bogus, it does not mean that entire amount can be disallowed. As the AO did not dispute the consumption of the raw materials and completion of work, only a percentage of net profit on total turnover can be estimated.” A.Ys. 2013-14 to 2015-16 Konark Infrastructure., 87.5 The Hon’ble Bombay HC in the case of PCIT vs. Jakharia Fabric (P.) Ltd. [2020] 118 taxmann.com 406 (Bombay) held as under:

11. In the assessment proceedings Assessing Officer had relied upon information obtained from the Investigation Wing of the Department at Mumbai which in turn had obtained the information from the Sales Tax Department, Government of Maharashtra. The information was to the effect that the eight parties from whom the purchases were allegedly made were alleged hawala dealers who had issued bogus bills totalling Rs. 1,14,92,970.00.

13. Thus as can be seen from the above, CIT (A) had relied upon the decision of the Gujarat High Court in Simit P. Sheth (supra) and took the view that entire purchases from the eight parties could not be added as bogus but what needed to be added to the total income of the assessee was the profit element embedded in such transaction. CIT(A) noted that assessee carried out only the job work of designing the clothes on contract basis; profit estimation ranged from 12.5% to 25%. In the circumstances of the A.Ys. 2013-14 to 2015-16 Konark Infrastructure., case, CIT(A) took the view that taking of 17.5% as the profit would meet the ends of justice. Accordingly, Assessing Officer was directed to estimate profit of 17.5% on the total alleged bogus purchases and thereafter, to delete the balance amount of addition.

14. In further appeal Tribunal referred to the above finding of the CIT(A), whereafter it was held as under:— "6. Thus, from the aforesaid analysis, conclusions and findings recorded by the Ld. CIT(A), it is evident that total purchases were wrongly disallowed by the Assessing Officer. The Ld.CIT (A) took a reasonable view whereby the disallowance was sustained to the extent of estimated inflation in the amount of purchases made by the assessee. The disallowance sustained by the Ld. CIT(A) @ 17.5% of the purchases have been accepted by the assessee with a view to bury the litigation. Nothing has been brought before us by the Ld. DR to contradict the findings recorded by the Ld.CIT(A). The assessee's counsel has also placed reliance upon the judgment of Hon'ble Bombay High Court in the case of Nikunj Eximp Enterprises Pvt. Ltd. (supra) wherein similar issue has been decided on identical lines by the Hon'ble Bombay High Court. In our view, no intervention is required in the findings of Ld. CIT(A) and, therefore, the same is confirmed. The grounds raised by the revenue are dismissed."

15. Thus, Tribunal concurred with the view taken by the CIT(A) that the Assessing Officer had erred in disallowing the entire total purchases and adding the same to the total A.Ys. 2013-14 to 2015-16 Konark Infrastructure., income of the assessee. View taken by the CIT(A) that 17.5% of the purchases be added to the total income of the assessee as the profit element was a reasonable one. It was also noted that the said percentage was accepted by the assessee with a view to close the litigation. Nothing was brought on record by the Revenue to contradict the findings recorded by the CIT(A). Tribunal had also referred to the decision of this court in CIT v. Nikunj Eximp Enterprises (P.) Ltd. [2013] 35 taxmann.com 384/216 Taxman 171 (Mag.)/[2015]/384 ITR 619. Infact, this court has also held following the decision of Nikunj Eximp Enterprises Pvt. Ltd. that the revenue is required to furnish the information received from the Sales Tax Department or from the Investigation Wing of the Department to the assessee allowing the assessee to test the veracity of such information otherwise such information could not be relied upon. This court in the case of Pr. CIT v. Vaman International (P.) Ltd. [IT Appeal No. 1940 of 2017, decided on January 29, 2020] held as under:-

"17.1 Thus, from the above, it is seen that Tribunal had returned a finding of fact that the assessee had filed copies of purchase bills, copies of purchase/sale invoices, challan cum tax invoices in respect of the purchases, extracts of stock ledger showing entry/exit of the materials purchased, copies of bank statements to show that payment for such purchases were made through regular banking channels, etc., to establish the genuineness of the purchases. Thereafter, Tribunal held that Assessing Officer could not bring on record any material evidence to show that the purchases were A.Ys. 2013-14 to 2015-16 Konark Infrastructure., bogus. Mere reliance by the Assessing Officer on information obtained from the Sales Tax Department or the statements of two persons made before the Sales Tax Department would not be sufficient to treat the purchases as bogus and thereafter to make addition under section 69C of the Act. Tribunal has also held that if the Assessing Officer had doubted the genuineness of the purchases, it was incumbent upon the Assessing Officer to have caused further enquiries in the matter to ascertain genuineness or otherwise of the transaction and to have given an opportunity to the assessee to examine/cross-examine those two parties vis-a-vis the statements made by them before the Sales Tax Department. Without causing such further enquiries in respect of the purchases, it was not open to the Assessing Officer to make the addition under section 69C of the Act.

"19. On thorough consideration of the matter, we do not find any error or infirmity in the view taken by the Tribunal. The lower appellate authorities had enhanced the quantum of purchases much beyond that of the Assessing Officer i.e., from Rs. 24,18,06,385.00 to Rs. 65,65,30,470.00 but having found that the purchases corresponded to sales which were reflected in the returns of the assessee in sales tax proceedings and in addition, were also recorded in the books of accounts with payments made through account payee cheques, the purchases were accepted by the two appellate authorities and following judicial dictum decided to add the profit percentage on such purchases to the income of the assessee. While the CIT(A) had assessed profit at 2% which was added to the income of the assessee, Tribunal made further addition of 3% profit, thereby protecting the interest of the Revenue. We have also considered the two decisions relied upon by learned standing counsel and we find that facts of the present case are clearly distinguishable from the facts of those two cases to warrant application of the legal principles enunciated in the two cited decisions.

87.6 The jurisdictional Bench of Hon’ble ITAT in a recent decision has followed the similar principle in the case of DCIT Vs. DBM Geotechnics and Construction (P.) Ltd [2022] 136 taxmann.com 345 (Mumbai – Trib.) and held as under:

Where assessee’s sales figures are not doubted, 100% disallowance for bogus purchases is not justified by drawing adverse inference on his inability to produce the suppliers. The facts of the case indicate that purchases were made by assesse from grey market. Making purchases through the grey market gives the assesse savings on account of non-payment of tax and others at the expenses of the exchequer. In the circumstances, CIT(A) is justified A.Ys. 2013-14 to 2015-16 Konark Infrastructure., in deleting 100% disallowance of purchases by AO and limiting disallowance to 12.5% out of the bogus purchases.

87.7 The Hon’ble Bombay High Court in the case of PCIT-25 vs Ram Builders (ITA No. 398 of 2018) (Bombay HC) dated 18/07/2022, while upholding the disallowance to the extent of 12.5% of bogus purchases has observed as under:

“7. Accepting the statement of the assessee that the addition be restricted to only proft element on the purchases efected by it, the CIT(A) by following CIT Vs. Bholanath Poly Fab Pvt. Ltd., and considering the facts and circumstances of the case, restricted the addition by estimating profit of 12.5% on the total purchases in question which works out to Rs.59,31,849/-. It thus, granted relief to the assessee to the tune of Rs.4,15,22,944/- (Rs.4,74,54,793/- – Rs.59,31,849/-).

8. The order passed by learned CIT(A) was challenged by the revenue before the Income Tax Appellate Tribunal. Cross objection was also filed by the assessee in the said proceedings. By virtue of order dated 28th February, 2017, the Tribunal dismissed the appeal as also the cross objection fled by the assessee and upheld the order of learned CIT(A).

9. Learned Counsel for the appellant urged that the view expressed by the Tribunal in upholding the order of learned CIT(A), dated 09th March, 2015 was untenable in law, inasmuch as the assessee had clearly failed to prove the genuineness of purchases made during the course of execution of the works, despite having been granted A.Ys. 2013-14 to 2015-16 Konark Infrastructure., opportunity to produce the twelve parties before the A.O. for purposes of verification.

10. The Tribunal upheld the findings recorded by the learned CIT(A) on two grounds. Firstly, that the consumption report with regard to material purchases had never been controverted by the A.O and secondly that the completion certificate in regard to the contract works submitted by the assessee had been accepted by the A.O., in the light of which, it could not be said that the purchases were totally bogus and consequently ought not to be fully disallowed. The Tribunal also upheld the addition estimated at Rs.59,31,849/- based upon estimated proft at the rate of 12.5% on the total purchases in question.

12. We are of the opinion that the view expressed by the Tribunal in upholding the order passed by the learned CIT(A), cannot be said to be in any manner perverse or legally untenable, inasmuch as, if the entire amount of Rs.4,74,54,793/- were to be held as non-genuine purchases, then it would not be possible to justify as to how the works allotted to the assessee for execution by the semi Government Agencies could be completed. Therefore the argument that the entire amount of Rs.4,74,54,793/- ought to have been added to the income of the assessee is untenable, especially when the learned CIT(A) in its order as upheld by the Tribunal in the order impugned held that the purchases per se were not in dispute but the parties from whom the purchases are shown to have been made are disputed. A.Ys. 2013-14 to 2015-16 Konark Infrastructure., 13. In our opinion, the order passed by the Tribunal is legally valid warranting no interference.”

87.8 The jurisdictional High Court in a recent decision dated 10th June, 2022 has followed the similar principle in the case of PCIT vs Batliboi Environmental Engineering Ltd [2022] 141 taxmann.com 245 (Bombay) and held as under:

4. As regards first question, the Tribunal has upheld the finding and conclusion of the Commissioner of Income-tax (Appeals) whereby the Commissioner (Appeals) directed the Assessing Officer to disallow 12.5% bogus purchases and to add 12.5% of the amount of purchases as income of the Appellant. The argument advanced is that the bogus purchases ought to have been disallowed in totality. The learned counsel for the parties have placed before us the decisions of the Division Bench in the cases of Pr. CIT v. Mohommad Haji Adam & Co. [2019] 103 taxmann.com 459 (Bom.) and Pr.CIT v. Paramshakti Distributors (P.) Ltd. [IT Appeal No. 413 of 2017, dated 15-7-2010] wherein the Division Bench has observed that if the factum of sales has been accepted by the Department then even if it is established that there were bogus purchases, it is not necessary that entire amount should be added to the income of the Assessee as there cannot be a sale without purchase. The facts of the present case are identical wherein the sales have been accepted. Therefore, in light of the aforesaid decisions first question of law does not survive for consideration.

87.9 In the latest judgement of Hon’ble Bombay High Court in the case of PCIT Vs. Vishwashakti Construction A.Ys. 2013-14 to 2015-16 Konark Infrastructure., (ITA No. 1016 & 1026 of 2018) dated 4th May 2023, the jurisdictional High Court has followed the decision in the case of Ram Builders (supra) and held as under:

6. An appeal was preferred before the ITAT both by the assessee as also the revenue, which was finally decided by virtue of the order impugned dated 20th January, 2017, which is impugned in the present appeal. The Tribunal upheld the view of the CIT(A) to treat the purchases from ten parties as bogus and also upheld the view expressed by the CIT(A) to sustain the addition to the extent of 12.5% of the amount of the disputed purchases relying upon the decision of Gujarat High Court in the case of CIT V/s. Bholanath Poly Fab Pvt. Ltd. In a case involving a similar issue, even this Court in Income Tax Appeal No. 398 of 2018 decided on 18th July, 2022, had dismissed the appeal filed by the revenue on the ground that if the entire amount of purchases were to be held as non-genuine purchases, then it would not be possible to justify as to how the works allotted to the assessee for execution by the semi-Government Agencies, could be completed.

7. Even in the present case the Appellant is a contractor, who had been allotted a subcontract for carrying out civil works of road and buildings repairs for which various types of building materials are stated to have been purchased from several suppliers including the ten suppliers, who are alleged to have been providing accommodation entries. It is not denied that the works allotted had been completed for the concerned agency, which would have been otherwise A.Ys. 2013-14 to 2015-16 Konark Infrastructure., impossible, if the entire purchases made by the Appellant were to be held as non-genuine.

In our opinion the order passed by the Tribunal warrants no interference. No substantial questions of law arise in the present appeal.

i) In none of the papers mentioned above, there is any evidence or mention of receiving the amount back in cash by the appellant. It is a well settled legal principle that the seized documents should be interpreted in the manner they are written and in the absence of any further evidence, neither the assessee nor the assessing officer is permitted to add or take-out anything from the seized documents. In his analysis of these seized documents, the Assessing officer has not pinpointed any noting/entry substantiating that the amount of Rs.29,99,72,505/- paid to IDCC through cheque has been received back in cash by the appellant. Neither, the AO has brought any other evidence on record (other than his interpretation of seized papers) to substantiate his interpretation that the amount was actually received back by the appellant in cash. ії) The Assessing Officer has interpreted that the amount mentioned in page no. 4 is 2% less than the amount mentioned in page no. 3 and this page no. 4 corresponds to amount paid back by ECC to the appellant. This page has been duly explained by the appellant as mentioned in para 55 of this order. The appellant has stated that the entries mentioned in seized page no. 4 are corresponding to cheques issued by the appellant to IDCC. The appellant has also informed that the difference of 2% between expenditure mentioned on page 3 and payment on page 4 is on account of TDS u/s 194C. The appellant has also given an entry-wise reconciliation of various entries on page 3 and page 4 vis-a-vis the ledger accounts of IDCC in its books of accounts. This table has already been reproduced in para 55 of this order and is not being repeated here. It has also been stated that ECC might be maintaining this ledger in order to track the payments because it was A.Ys. 2013-14 to 2015-16 Konark Infrastructure., supervising the work of IDCC and was negotiating extra remuneration on this. This submission of the appellant appears to be correct firstly because the title of page 4 is IDCC CHQ" and secondly, because the payments details to IDCC after deducting TDS (as per ledger accounts of IDCC in the books of the appellant) matches with the details mentioned on seized page no. 4. iii) The Assessing Officer has interpreted that after keeping 5% commission, ECC has deposited the amount back in IDCC cheque account. There is inconsistency in the interpretation by the Assessing Officer because at one side the Assessing Officer is saying that the commission @ 5% was paid to ECC but on the other hand Assessing Officer is saying that the amount deposited back in IDCC cheque account' is 2% lower of the payments made to IDCC. In any case, the contents of seized page no. 4 stand explained by appellant as discussed above. iv) There is no noting or evidence on these seized pages regarding the cash received from IDCC similar to the case of 30 parties mentioned at seized page no. 18 and 19. In the case of these 30 parties, notings on page no. 19 indicate that amount in cash after reducing the commission was received back by the appellant for further utilisation. However, on the seized papers relied upon by the AO, there is no such noting regarding the payments made to IDCC.

V) The Assessing Officer has further relied on seized pages no. 20 & 21 interpreting these pages as 'actual state of affairs of accounts of both JV members with the appellant'. The Assessing officer has noted that on these pages, there is an entry of Rs. 5,00,00,000/- for cash investment by ECC indicating that the money paid by the appellant to IDCC has come back through ECC in IDCC CHQ account. I have perused the said seized pages no. 20 & 21. A perusal of these two A.Ys. 2013-14 to 2015-16 Konark Infrastructure., pages (page 20 &21) suggests that the pages do not have any entry for cash deposit corresponding to amount of Rs. 29,99,72,505/- less Rs. 1,49,95,000/-, as alleged by the AO. Neither, there is any entry corresponding to Rs. 25,47,02,040/- (as mentioned on seized page no. 4). Had the interpretation of the AO been correct, these pages (20 & 21) should have contained either of these two entries. Thus, even if, it is presumed that the interpretation of AO regarding page 20 & 21 that these are actual accounts of members of appellant JV, is correct, in that case also, there is no conclusive evidence that the amount paid to IDCC has come back to the appellant JV in cash through ECC.”

“79.9 In the remand report, the Assessing Officer has raised issues that IDCC did not file the copy of agreement with the appellant for undertaking sub-contracting work. In this regard, the appellant has submitted that there was no written agreement with IDCC for undertaking the sub-contract work. It has been argued that the expenses paid to IDCC for sub-contracting work cannot be held as bogus merely because there was no written agreement especially when M/s IDCC is an established sub-contractor and has included the amount paid by the appellant in its receipts. The appellant has also harped upon the fact that M/s IDCC has turnover ranging between Rs. 15 Crores to 38 Crores and has disclosed A.Ys. 2013-14 to 2015-16 Konark Infrastructure., substantial amount of taxable income for A.Y. 2012-13 to 2016-17. The appellant has further submitted that written agreements are no guarantee of making the transactions genuine because there may be cases where written agreements may be made to create evidence for showing a bogus transaction as genuine transaction. As per the appellant, while deciding the genuineness of a transaction, one has to see whole nature of documents and evidences submitted by the parties. I tend to agree with the appellant because IDCC and the appellant filed various documents in this regard and the AO has not find any fault in these documents. In my opinion, merely because there was no written agreement between the appellant and IDCC, the sub-contract expenses paid to IDCC cannot be termed as bogus especially when there is no conclusive evidence proving the bogus nature of these subcontract expenses.

79.10 Another argument mentioned by the Assessing Officer in the remand report is that M/s IDCC did not file the details of expenses incurred for the work carried for the appellant along with supporting evidences. In the rejoinder, the appellant has submitted that IDCC vide letter dated 18/12/2019 sent to the Assessing Officer in response to notice u/s 133(6) of the Act had clarified that the expenses incurred for execution of work for the appellant was debited to P/L Account along with expenses incurred for execution of other contracts. The appellant has contended that the Assessing Officer has not appreciated that no contractor maintains contract-wise books of accounts and the books of accounts give overall picture of expenses incurred on all the contracts being executed in that particular year and it is practically not A.Ys. 2013-14 to 2015-16 Konark Infrastructure., possible to segregate the expenses for each contract. I find merits in the said submission of the appellant because there is no requirement to maintain separate books of accounts for each contract being executed by a contractor and therefore it may not be practically possible for a contractor to segregate expenses incurred for a particular contract, as desired by the AO in the present case. Here it is important to note that the assessment u/s 143(3) of the Act has been completed in the case of IDCC for AY 2012-13, 2013-14 and 2014-15 wherein the books of accounts of IDCC were accepted by its Assessing Officer. Therefore, in my opinion, there is no reason to doubt the books of accounts of IDCC.”

51. Ground No. 3 of the Revenue’s appeal relates to the Ld. CIT(A)'s action of deleting the disallowance made by the AO on account of sub-contract charges paid to IDCC. After considering the rival submissions, it is observed that the issue involved in this ground is similar to the Ground No. 3 of Revenue's appeal in A.Y. 2014-15. Following our conclusion drawn in A.Y. 2014-15, we dismiss this ground of the Revenue.

52. We now take up the appeals of the assessee and the Revenue in & 3059/Mum/2023 for AY 2017-18. The common issue involved in both these appeals relate to the protective addition of Rs.8,00,00,000/- made by the AO on account A.Ys. 2013-14 to 2015-16 Konark Infrastructure., of unexplained cash credit in the hands of the assessee JV. The facts relating to this protective addition are that, the AO had found that there were two noting’s on Page Nos. 20 & 21 under the nomenclature ‘INVT in Cash’ in the names of the JV partners, KIL and Shri U.M. Rupchandani of Rs.3,00,00,000/- and Rs.5,00,00,000/- each. According to the AO, these pages contained the noting’s regarding the actual state of affairs relating to the assessee JV. The AO inferred that these cash investments denoted the cash infused by the JV partners into the assessee JV to undertake the water pipeline project. Since the date on these pages was 25.08.2016, the AO presumed that the cash investments were made on this date and accordingly added these sums in the hands of the JV partners in AY 2017-18 by way of unexplained investment and correspondingly made protective addition in the hands of the assessee JV also by way of unexplained cash credit in AY 2017-18.

53. Aggrieved by this action of the AO, the assessee preferred an appeal before the Ld. CIT(A). Having regard to the cumulative facts of the case, the Ld. CIT(A) noted that, the assessee JV had already declared additional income of Rs.9.50 crores viz., Rs. 5 crores in relation to ECC and Rs.4.50 crores in relation to KIL in AYs 2011- 12 to 2013-14. The Ld. CIT(A) further noted that additional sum of Rs.3,36,55,357/- had also been offered by way of additional income across AYs 2014-15 to 2016-17. Applying the principle of telescoping, the Ld. CIT(A) held that such additional income assessed in earlier years could be telescoped against the cash investment of Rs.8 crores unearthed in Page Nos. 20 & 21 relating to A.Ys. 2013-14 to 2015-16 Konark Infrastructure., AY 2017-18. The Ld. CIT(A) accordingly held that, no separate addition on account of cash investment was warranted since it was fully covered by additional income offered in earlier years. Being aggrieved by the above appellate order of the Ld. CIT(A), both the parties are in appeal before us.

54. Heard both the parties. Before adverting to the facts of the case, we first take note of the principle of telescoping which has since been judicially approved by the Hon’ble Supreme Court in the case of Anantharam Veerasinghaiah & Co. Vs CIT (123 ITR 457). In the decided case, it was held that where the assessee offers any income on ad hoc basis, then such income is commonly described as intangible addition; but it is very much a part of assessee’s real income as disclosed in his account books and has the same concrete existence. The Hon’ble Court held that the secret profits or undisclosed income of an assessee earned in the same or an earlier assessment year may constitute a secret fund, even though concealed, from which the assessee may draw subsequently for meeting expenditure or introducing amounts in his account books. The intangible additions were held to be available to the assessee as the regular book profits could be. The Apex Court thus held when the unexplained cash deficits and the cash credits can be reasonably attributed to a pre-existing fund of concealed profits or by reference to concealed income earned in that very year then no addition is warranted on account of such cash deficits or cash credits. A.Ys. 2013-14 to 2015-16 Konark Infrastructure., 55. Similar view was expressed by Hon’ble Madras High Court in the case of CIT v. K. S. M Guruswamy Nadar and Sons, [1984] 149 ITR 127. In the decided case, it was held that when there are two separate additions viz., one on account of suppression of profit and another on account of cash credit, then it is open to the assessee to explain that, the suppressed profits had been brought in as cash credits and has to be telescoped into the other.

56. Gainful reference may also be made to the decision of the Hon’ble jurisdictional Bombay High Court in the case of CIT vs J.J. Gandhi (39 CTR 127). In this judgment also, the Hon’ble High Court had approved the theory of telescoping and held that it could be applied in cases where additions in relation of unexplained money/investment are sought to be made in the hands of the assessee. The Hon’ble Court explained that if an addition towards undisclosed income was made and the AO also seeks to make certain addition in relation to unexplained investment then, it can be treated by the assessee that the unexplained investment is sourced out of the undisclosed income already taxed.

57. The principle which emerges from the above is that, the same income should not be taxed twice i.e. once at the time of generation and thereafter at the time of application for routing back into the business. The said principle would equally apply where the cash generated by business concerns are routed through partners/directors. Having regard to this settled legal position, we now come back to the facts of the case. It is not in dispute that the assessee had declared A.Ys. 2013-14 to 2015-16 Konark Infrastructure., additional income of Rs.9,50,56,072/- before the ITSC, Mumbai in AY 2013-14. It is noted that the assessee had also filed a letter dated 28.10.2014 before the ITSC wherein it was specifically clarified that this income was utilized by way of investment in the on-going work of water pipeline project at Ulhasnagar. The details of utilization inter alia comprised of sum of Rs.4,50,56,072/- and Rs.5,00,00,000/- by KIL and Eagle Infra Limited, represented by Shri U.M. Rupchandani, respectively. It is therefore evident that the JV partners had disclosed income in the hands of the assessee JV before the ITSC, Mumbai and such additional income of Rs.9,50,56,072/- represented the intangible addition / secret profit, which applying the judicially approved principle of telescoping, could be set off against any unexplained money/investment found by the Revenue.