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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
The only common issue in these six cross appeals is as regards to the order of CIT(A) partly confirmed the addition by applying profit rate at the rate of 15% of the alleged bogus purchase from hawala dealers.
The facts and circumstances in all the three AYs i.e. 2009-10, 2010-11 and 2011-12 are exactly identical except the quantum and hence, we will take the facts from AY 2009-10 and we will decide the issue. The assessee has also raised the issue of re-opening under section 148 of the Act, during the course of hearing before us, the assessee company fairly conceded that it is not pressing the issue of reopening and hence, the same is dismissed as not pressed.
Brief facts are that the assessee is a partnership firm, engaged in export of goods/ includes trade as well as manufacture of goods. During the relevant FY 2008-09 relevant to this AY 2009-10, the assessee declared turnover at Rs. 44,18,25,563/- with a GP ratio of 14.177%. The assessee declared net profit as business income at Rs. 6,71,19,040/-. The AO received information that certain parties are issuing merely accommodation entries/ bogus bills and not supplying any material and assessee as per the website of Maharashtra VAT to 3906 & 3964 to 3966/Mum/2016 King Metal Works AYs.09-10 to 11-12 Department as obtained bogus purchase from this hawala parties to the tune of Rs. 2,88,29,911/- following are the details.: -
Sl Name of the parties Hawala TIN Amount of No. Involved (In Rs.) 1. Dhanera Metal Corporation 27090546348V 72,95,731/- 2. Ahead Mercantile Pvt. Ltd 27420614600V 7,23,548/- 3. Manish Industrial Corporation 27440392265V 34,84,911/- 4. Shreeji Traders 27970618226V 91,02,383/- 5. Bhagwati Trading Co. 27020614820V 15,78,795/- 6. Osian Steel Impex 27940665724V 66,44,543/- Total 2,88,29,911/- 5. The AO require the assessee to explain the purchases made from these parties i.e. the information received from DGIT(Investigation) Mumbai, who in turn received information from Maharashtra Sales Tax Department that the assessee is involved in receipt of bogus purchase/ hawala transactions and the name of assessee M/s King Metal Works appeared as beneficiary on account of taking bogus bills without delivery of goods from the above six parties. The assessee submitted the name and address of these parties, details of payments made by account payee cheques, details of invoices i.e. purchase invoices and sale invoices. The assessee also submitted stock inventory. But the AO issued notice under section 133(6) of the Act and came to know that these parties do not exist on the current address and no business activity has ever been carried out from the said premises. There were instance that even registration certificate issued by Maharashtra Sales Tax Department was cancelled. But the AO considered the entire bogus purchases and made addition. Aggrieved, assessee preferred the appeal before CIT(A), who restricted the disallowance by adopting profit rate of 15% of the bogus purchases by observing in Para 4.15 to 4.17 as under: -
“4.15. Thus, a study of different cases, wherein addition on account of bogus to 3906 & 3964 to 3966/Mum/2016 King Metal Works AYs.09-10 to 11-12 purchases has been dealt with by various Courts and Tribunals shows that such additions have been upheld in their entirety only in a few cases including decisions rendered in the cases of La Medica, Sri Ganesh Rice Mills, Vicky Foods (P.) Ltd. etc. where apart from various other factors there was lack of reliable record with reference to quantitative details etc. and where evidence produced for payment with reference to quantitative details etc. and where evidence produced for payment was found lacking. In other cases, where the full quantitative details are not available or details produced were not fully reliable inasmuch as consumption of material was shown but yield was too low and payments were also doubtful (including the case of Vijay Proteins Ltd., Bholanath Poly Fab Pvt. Ltd., Simit P. Sheth, Sanket Steel Traders, Sathyanarayan P. Rathi etc.) addition was upheld in the range of 25% (as in Vijay Proteins case) to 12.5 % to augment the possible suppression in-GP-applying real income theory depending on the facts of the case. However, perusal of decisions of Tribunals and High Courts on this issue shows that all such cases are decided on the basis of facts and involve no uniform question of law. From the above decisions, the ground-rule that emerges is that where suppliers are not available, the presence of to 3906 & 3964 to 3966/Mum/2016 King Metal Works AYs.09-10 to 11-12 reasonable quantitative details and payments by account payee cheques are primary tests on when the genuineness of purchases is required to be tested. In addition, from cases like NikunjEximp Enterprises (P.) Ltd (High Court as well as ITAT), M. K. Brothers, Nangalia Fabrics Pvt. Ltd., Rajiv G. Kalathil, Permanand, Sagar Bose, Diagnostics etc., it emerges that other aspects such as statements of hawala providers recorded by Sales Tax Authorities; affidavits filed by such suppliers before Sales Tax Authorities; absence of evidence in support of transportation/ delivery of material etc., have been held less relevant as mere Indicators and not decisive factors, to draw a conclusion regarding genuineness of purchases. Thus in essence, the benefit derived by the assessee by showing purchases from such bogus parties is the lowering of GP that would have been earned by the assesse had such purchases and corresponding sates been removed from the accounts. In other words, the effective lowering of the GP is the real additional income of the assessee by showing such purchases and only such component would therefore be taxable.
4.16. In the present appeal, it is seen that the books of account have been rejected by to 3906 & 3964 to 3966/Mum/2016 King Metal Works AYs.09-10 to 11-12 the Assessing Officer. There is compelling evidence to show that this would be a case of purchases made from bogus parties rather than a case of bogus purchases. There is nothing to show that without making the purchases it was possible for the appellant to complete the sales declared in the return of income which have not been disturbed by the AO. On the other hand, the appellant has failed to establish the genuineness of purchases made from the parties claimed. This would indicate that the purchases were made from the open market without insisting for genuine bills and in such cases the suppliers would be willing to sell at a much less rate as compared to the rate that they would have charged otherwise. Resultantly, the gross profit declared by the appellant cannot be relied upon.
4.17. Keeping in mind the totality of circumstances as discussed above, it would be adequate to meet the ends of justice, if the disallowance was to be restricted to 15 percent of the bogus purchases of Rs.2188,29,911/- which amounts to Rs.43,24,487/-The AO is, therefore, directed to restrict the disallowance as above. The appellant, therefore obtains a relief of Rs.2,45,05,4241-. This ensures that only the real income gets subjected to tax to 3906 & 3964 to 3966/Mum/2016 King Metal Works AYs.09-10 to 11-12 and not a notional income or an exaggerated amount determined in an arbitrary manner.
Aggrieved, now both the assessee as well as revenue came in appeal before Tribunal.
We have heard the rival contentions and gone through the facts and circumstances of the case. The matter has been considered. AO has formed his view about the bogus nature of the purchases made by the assessee from the six suppliers on the basis of enquiries conducted by the Sales Tax Authorities as well as his own independent enquiries. During course of assessment proceedings, he also issued verification letters under section 133(6) of the Act and Circle Inspector was deputed to serve these notices to verify the same but it was observed by him that parties do not exist on given addresses and no business activity has ever been carried from the said premises. People living there for the last many years have reported that they have not seen any such business activity on given premises. The assessee was unable to furnish their whereabouts or file confirmation of sales letters or produce the suppliers for supporting its claim to have made purchases from it. It is an admitted fact that the Sales Tax Department has conducted enquiries as a result of which certain dealers have been suspected to have indulged in hawala or accommodation transactions. Some of the relevant enquiries pertaining to the instant case as held by Sales Tax department are discussed by the AO at para no.3.8 of the impugned assessment order and made relevant documents annexure to the assessment order. The AO observed that merely because the funds have moved through banking channel and the paperwork had been arranged, that would be insufficient to hold the transactions are genuine. He also observed that even if such materials had been purchased by the assessee, the purchases have to 3906 & 3964 to 3966/Mum/2016 King Metal Works AYs.09-10 to 11-12 not been made from the alleged parties but made in cash from other undisclosed parties with a view to evade sales tax and other taxes. The Gross Profit Ratio declared during the year under Appeal is shown at 14.12%. At the outset, it is apparent that the AO has made efforts beyond getting information from website information. AO has issued notices u/s 133(6) of the Act to all the six parties and inspector was deputed to make spot enquiries. It is assessee who has failed to produce parties or confirmations from the said parties. Similar items from other parties to establish that the transactions were at arm's length. Accordingly, additional gross profit needs to be estimated on the purchases claimed to be made from the suspected suppliers. There is compelling evidence to show that this would be a case of purchases made from bogus parties rather than a case of bogus purchases. There is nothing to show that without making the purchases it was possible for the assessee to complete the sales declared in the return of income which have not been disturbed by the AO. On the other hand, the assessee has failed to establish the genuineness of purchases made from the parties claimed. This would indicate that the purchases were made from the open market without insisting for genuine bills and in such cases the suppliers would be willing to sell at a much less rate as compared to the rate that they would have charged otherwise. Resultantly, the gross profit declared by the assessee cannot be relied upon.
We have considered the issue and gone through the facts and circumstances of the case, we are of the view that a reasonable profit rate of 12% will meet the end of justice for the reason that the assessee has already declared profit @ 14% on the sales made out of bogus purchases. Accordingly, I direct the AO to re-compute income after applying profit rate @ 12% as against estimated by the CIT(A) at 15% of the bogus purchase. The appeal of the assessee is partly allowed. to 3906 & 3964 to 3966/Mum/2016 King Metal Works AYs.09-10 to 11-12
Similarly, for the AYs 2010-11 and 2011-12 also, we direct the AO to apply profit rate @ 12% and accordingly, assess the income.
In the result, all the three appeals of Revenue are Dismissed and the all three Cross Objections of the assessee are partly allowed.
Order pronounced in the open court on 07-06-2017.