ITO 32(1)(5), MUMBAI vs. HIREN C PAREKH, MUMBAI

Various grounds have been raised by the revenue in this appeal wherein common issue is against the deletion of addition to the tune of Rs.62,90,240/- by the ld.CIT(A) as made by the AO under section 69C of the Income Tax Act, 1961 on account of unexplained expenditure in respect of bogus purchases by ignoring the facts that the notices under section 133(6) were returned unserved and investigation carried out by the Sales Tax Department of Government of Maharashtra.

The assessee has also filed cross-objection challenging the order of ld. CIT(A) in sustenance of addition to the tune of 12% of the total bogus purchases which worked out to Rs.8,57,760/- and prayed that in view of the decision in the case of CIT V/s Simit P Seth (356 ITR 451) Gujarat High Court the addition should be restricted to 3,39,530/- on the ground that the assessee has already reflected GP margin of 7.25% and balance needs to be sustained and not at the rate of 12%.

During the course of assessment proceedings, the AO found that the assessee has made total purchases of Rs.2,03,55,145/- and accordingly called upon the assessee to file details of purchases made CO No.17/Mum/2017 during the year along with names and addresses of the suppliers. In the mean time, the AO received information from the Sales Tax Department, Government of Maharashtra which was available on the Website of the Government of Maharashtra that certain parties from whom the assessee has made certain purchases were engaged in providing accommodation entries in respects of bogus purchases and accordingly issued notice u/s 133(6) to the parties but the same were returned unserved with the postal remarks addressee are not known and unclaimed. Therefore, the AO added the same to the total income of the assessee for the reasons that the parties were not genuine and all purchase made by the assessee were in doubt. 5. In the appellate proceedings, the ld.CIT(A) partly allowed the appeal of the assessee by sustaining the 12% of such purchases as GP by observing and holding as under : “3. Decision: I have gone through the facts of the case, finding of the AO and submissions of the appellant in this regard. It is not being disputed by the AO that the purchases have actually been made, what is being disputed is whether the purchase have been made from the said 4 parties. The fact that the payments have been made through the account payee cheques is also not being questioned by the AO in terms of the genuineness of the cheques or the sources, of the payments through the relevant bank account, but it also remains a fact that the said parties were not found at the given address and they also featured in the list of suspected parties of the Sales Tax Department. The appellant, while giving the account payee cheques, statements, confirmations, ledger accounts of the' sellers and also giving quantitative details in terms of sales made etc however, has also been unable to provide with any actual delivery challans of any of the goods transported during the year'. In the light of the above CO No.17/Mum/2017 facts 'where the factor of ,purchases is not being disputed, but the genuineness of the sellers is being disputed, in my considered opinion, disallowance of the profit element embedded in the impugned purchases would serve the purpose of justice. In this regard, I rely on the decision of the Hon.ble Gujarat High Court in the case' of Simit Sheth pronounced on 16.1.2013 wherein the Hon.ble Court have held that "not the entire purchase, but only profit element ernbeded in such purchases can be added to the income of the assessee.". As regards to what is the appropriate profit element percentage, while there can be no uniform yardstick adopted, while looking at the norms in the market and considering the trade of the appellant, 12% GP ,on the impugned component of purchases is directed to be added to the profit of the appellant for the year. Therefore, Rs.8,57,760/- is to be added back to the profit of the appellant for the year. The appellant would get a relief of Rs.62,90,240/-“ 6. We have considered the rival contentions and perused the material placed on record including the orders of the authorities below. We find that the assessee has raised the issue in the cross-objection that the addition sustained towards GP on bogus purchases at the rate of 12% over and above, the GP of 7.5% already declared by the assessee. The ld. AR submitted before the Bench that the CIT(A) has erred in sustaining 12% of GP on such bogus purchases without allowing any credit towards gross profit rate already declared by the assessee in the books of accounts included in the so called bogus purchases and prayed that GP of 4.7% should be sustained which worked out by subtracting 7.25% of the GP declared by the assessee from 12% of GP applied by the ld.CIT(A). Having heard both the parties, we find that it would be reasonable if GP instead of 4.75% as prayed by the assessee, the GP of 8% is applied in place of 12%. We, therefore, direct the AO to apply to GP 8% on the CO No.17/Mum/2017 bogus purchases. The cross-objection filed by the assessee is partly allowed.

In view of the above discussions, the appeal of the revenue is dismissed as infructuous.

In the result, the cross-objection is partly allowed and that of revenue’s appeal stands dismissed.