ITO 4(1)(4), MUMBAI vs. MANISH KANJI PATEL, MUMBAI

O R D E R

PER D.T. GARASIA, JUDICIAL MEMBER:

“1. The Id CIT (A) erred in sustaining the disallowance of Rs.43,63,221/- made u/s 40A(3A) of the IT Act.

Manish Kanji Patel 2 2. The Id CIT (A) erred in not appreciating that no separate disallowance u/s 40A(3A) was called for when the books of account were rejected and income was directed to be computed on estimate basis.

3. The Id CIT (A) erred in not appreciating that the amount of Rs.43,63,221/- was out of purchases of A Y 2008-09 remaining unpaid and he had rejected the books of account of AY 2008-09 and had directed the Id AO to adopt gross profit @ 10% of sale. Hence disallowance of expenses u/s 40A(3A) separately was not warranted.

4. The above Grounds of Appeal

are without prejudice to one another.

5. The appellant craves leave to amend or alter any of the above Grounds of Appeal or to add new Grounds of Appeal during the course of appeal proceedings.” Since the grounds taken by the department in all the appeals are common, for the sake of convenience, the same are taken from for the A.Y. 2008-09 and are reproduced as under:

"1(a). On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in directing to delete the addition of bogus purchases of Rs.2,13,99,331/- without appreciating the fact that the AO, made detailed enquiry which had established that purchase bill were bogus and the purchase entries were just to inflate purchases and reduce profit. 1(b). On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in estimating the Gross Profit @10% as against the finding of the A.O. that the assessee had purchased the rejected stock of paper at a lower rate and selling the stock at a higher rate.

2. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary."

The assessee is a proprietor of M/s Paper Land and is in the business of purchase of rejected stock of papers either locally or through imports. The assessee has purchased during the year the rejected stock of papers from M/s Navkar Enterprises and against total purchases from M/s Navkar Enterprises of Rs.3,68,63,236/-, the assessee has made payment to M/s Navkar Enterprises during the year amounting to Rs.1,07,26,432/-. As on Manish Kanji Patel 3 31.03.2009 the sum of Rs.2,61,36,804/- was outstanding payable. During the assessment proceedings, the A.O. issued notice u/s 133(6) inter-alia in the name of M/s Navkar Enterprises to verify genuineness of purchases and this notice was returned as “unserved”. The appellant was shown the notice which returned “unserved” and was asked to furnish the latest address of M/s Navkar Enterprises. The appellant submitted that the above party was not traceable, hence he was not able to get the new address as well account confirmation which details was earlier asked to the assessee by the A.O. In the meantime, to collect more details about M/s Navkar Enterprises, the department wrote letter to the Bank Manager, Bank of Baroda, Takurdwar Branch and out Bank Manager, Canara Bank, Thane Kopri Colony (East) Branch and obtained photocopies of both the sides of the cheques issued to M/s Navkar Enterprises towards purchase consideration. On the basis of the entries found in the assessee’s Bank Book, it was found that the cheques issued to M/s Navkar Enterprises were encashed by various other entities. As per details found on Page 4 of the assessment order and that from the photocopies of the cheques it was evident that most of the cheques issued were “Cross Bearer Cheques” and not “Account Payee Cheques”. Besides giving rise to conclusion of bogus purchases, in the view of the A.O., this also gave rise to contravention of Section 40A(3) of the Income Tax Act. For purchases from M/s Navkar Enterprises, the various other discrepancies were notices by the A.O. with respect to Sales Tax Tin No. quoted on the purchase bill of M/s Navkar Enterprises where Tin No. mentioned as 27280504194V belonged to M/s Manv Impex. The Books of Account produced by the appellant on 06.12.2011 were impounded by the A.O. u/s 131 of the Income Tax Act. The A.O. that there were 15 Purchases Bills and Delivery Challans totally amounting to Rs.1,76,39,908/- of M/s Navkar Enterprises all dated 01.10.2008 which are not entered in the assessee’s Purchase Register as Manish Kanji Patel 4 well as Ledger Account of M/s Navkar Enterprises in the books of the assessee. On being conveyed by the appellant to the A.O. that the original bills required as per its Purchases Register of M/s Navkar Enterprises aggregating to 33 in Nos. could not be produced before the A.O. because it was lying with Sales Tax Department who had conducted raid on M/s Navkar Enterprises, a letter was written by the A.O. to the Asst. Commissioner of Sales Tax, Inv-7 Shri Sanjay Pawar as well the A.O. contacted him on the phone and it was replied by Shri Sanjay Pawar that only sample bill of the assessee is with him and all other bills were with the assessee. After narrating the damaging evidence collected by the A.O. which is briefly narrated in Para 15, Page 7 & 8 of the assessment order, the A.O. concluded that the purchases of Rs.3,68,63,236/- were bogus purchases made by the appellant from M/s Navkar Enterprises. Similarly, purchase from Shreeji Impex of Rs.38,24,031/- treated as bogus in A.Y. 2009-10.

Manish Kanji Patel 5 Therefore, the natural question arises that if purchases were not made from these parties then how was the sale made. But it is undisputedly proved by the investigations and findings of the AO that books of account are full of bogus entries on account of purchases and payments for purchases and, therefore, they cannot be the basis for computing correct income of the assessee. Therefore, the books of account cannot be relied but the profit has to be estimated on the basis of turnover or any other suitable basis. The A.O. has not disputed the stock and sales and assessee has also claimed that after impounding of books quantity wise stock and purchase/sales were tallied to the last Kg. The A.O. has not made any further comments in the remand report on the submissions of the assessee that stock and quantity of purchase and sales have been tallied by the assessee. Therefore, if entire purchases are treated as bogus then the correct income cannot be computed because it gives rise to almost 80%margin on sales. Hence, it will be appropriate if by rejecting books of account, the income is estimated. The assessee has claimed that its average rate of profit in earlier years is 3.28% from AY 2006-07 to 2009-10 and average rate is 5.97%. The A.O. has not commented on the average rate of profit of the assessee. Therefore, after looking into all the facts and circumstances of the case and the fact that assessee has been using bogus bills of purchases, the A.O. is directed to take 10% of sales as gross profit and accordingly, re-compute the income of the assessee. Since the books of account have been rejected as basis for computing income and the income is estimated, therefore, there will be no separate disallowance u/s. 40A(3) on account of payments against purchases claimed to have been made to Navkar Enterprises and Shreeji Impex. In the result, the grounds of appeal are partly allowed.”

5. The DR submitted that the assessee has made purchase from Enterprises and Shreeji Impex. Therefore, the assessee was asked to produce the cheques and books of account before the Assessing officer to verify whether the assessee has made purchase from Enterprises or not.

Manish Kanji Patel 6 The assessee has not purchase form Enterprises and all the payments made by cheques to Enterprises are crossed bearer cheques and not account payee cheques. Moreover, all the payments made to Enterprises where bearer cheques and all the cheques were encashed from Bank of Baroda by the third person and AO has also made enquiry from the Bank of Baroda. Moreover the AO has also verified from the Sales Tax Department and it was proved by the AO that the assessee has made bogus purchases and the assessee has not made any payment made Enterprises. Therefore, this is the case which is entirely a bogus purchase. Therefore, when the assessee is unable to produce the party. Therefore, as per the decision of Hon’ble Delhi High Court in the case of Law Midica the entire purchases to be disallowed.

Sr. No. Copy of Judgments Balaji Textile Industries P Ltd v Third Income Tax Officer [1994] 49 1 ITD 177 2 CIT v Simit P Sheth [2013] 356 ITR 451 (Gujarat) 3 CIT v Bholanath Poly Fab P Ltd [2013] 355 ITR 290 (Gujarat) 4 CIT v Sathynarayan P Rathi [2013]351 ITR150 (Gujarat) ITO v Maharashtra State Co-operative, Consumers' Federation 5 Ltd[2011]13taxmann.com 163 (Mumbai) 6 CIT v Hotline Electronics Ltd [2012] 18 taxmann.com 363 (Delhi) 8. We have heard the rival contention of both the parties looking to the facts and circumstances of the case we find that assessee had made purchase of paper from Navkar EnterprisesRs.3,68,63,236/- and from Shreeji Impex of Rs.38,20,041/-. During the Assessment proceedings the A.O. issued notice u/s 133(6) to Navkar Enterprises to verify the genuineness of purchase and notice was returned unserved. The assessee submitted that party is not traceable, therefore, the A.O. has treated this purchase as bogus purchase. The Assessee also admitted that assessee is not able to produce these parties the total purchase from Navkar Enterprises and Shreeji Impex comes 4,06,83,277/-. On the above submission the CIT(A) has held that assessee has imported the rejected stock at cheaper rate and sold it at higher rate. Therefore, require bogus purchase bills and secondly, possible modus operandi is that he has purchased locally the damage stock from local supplier in cash therefore, required bogus bills. The A.O. has not disputed the sells of the assessee and quantity for closing stock the assessee has though disputed the addition but no evidence is produced to show that purchase were made from Navkar Enterprises and Shreeji Impex. Therefore, assessee has not made purchase from this part but the sells have been made. The Books of the account cannot be relied but the profit has to be estimated on the basis of the turn over or any other suitable basis. The similar issue had come up Manish Kanji Patel 8 before Hon’ble Gujarat High Court in the case of Commissioner of Income Tax vs. Simit P. Sheth 356 ITR 451 (Guj.) wherein the Hon’ble Gujarat High Court held that entire purchase price cannot be added only profit element embedded in the such purchase can be added to the total income of the assessee. The Hon’ble High Court has held that: - “The assessee was engaged in the business of trading in steel on wholesale basis. During the course of reassessment proceedings for the year 2006-07, the Assessing Officer noticed that some of the suppliers of steel to the assessee and made their statements on oath to the effect that they had not supplied the steel to the assessee but had only provided sale bills. In turn, they were receiving small commission. The Assessing officer concluded that the total purchase of Rs.41,04,903/- cumulatively made from the three parties were bogus. He thus treated such purchases as bogus purchases and added the entire amount of Rs.41,04,903/- to the gross profit of the assessee. He also rejected the books of account and estimated the assessee’s business profit at Rs. 5 lakh. The Commissioner (Appeals) held that the assessee had made purchases from other parties in the open market. Therefore, he retained 30 per cent of the purchases cost as the probable profit of the assessee. He reduced the additions from Rs.41,04,903/- to Rs.12,31,471/- and deleted the balance of Rs.28,73,432/-. While doing so, he deleted the addition of Rs. 5 lakhs as made by the Assessing Officer on the ground that the addition on account of bogus purchases had already been made. The Tribunal was of the opinion that twelve and half per cent of the disputed purchases should be retained in the hands of the assessee as business profits. On appeal to the High Court: Held, dismissing the appeal, that the Commissioner (Appeals) believed that the purchases were not bogus but were made from the parties other than those mentioned in the books of account. That being the position, not the entire purchase price but only the profit element embedded in such purchases could be added to the income of the assessee. In essence, the Tribunal only estimated the possible profit out of purchases made through non-genuine parties. The estimation of rate of profit return must necessarily vary with the nature of business and no uniform yardstick could be adopted.”

Manish Kanji Patel 9 9. We find that in the instant case the facts are similar to the judgment by Hon'ble Gujarat High Court, we find that entire bogus purchases and entire amount of bogus purchase cannot be the gross profit of the assessee. We find that the purchases were not bogus but were made from the parties other than those mentioned in the books of account. The Assessing Officer has not disputed the sales of the assessee and quantity of sales of closing stock. The assessee has though disputed the addition but no evidence is produced and no document is produced to show that purchases were made from Navkar Enterprises and Shreeji Impex. That being the position, not entire purchase price but only the profit element embedded in such purchases could be added to the income of the assessee. We therefore estimated the possible profit out of purchase made through non-genuine parties. The estimation rate of profit return must be necessary vary with the nature of business and no uniform yardstick could be added. We found that in the instant case stock and sales and the quantity-wise stock and purchases / sales were tallied to the last KG therefore, we directed to take the A.O. 12% of the sales as gross profit accordingly re-compute the business of the assessee. We find that CIT(A) has directed to take the G.P. @ 10% of the sales but to cover up all the decisions of the books of accounts. We modify the order of the CIT(A). We direct him to take the 12.5% sales gross profit accordingly the Departmental appeal is partly allowed.

Manish Kanji Patel 10 11. In the result, departmental appeal filed in ITA No. 7300 and ITA No. 7154 are partly allowed.

“4.2. I have considered the facts of the case and submissions of the assessee. Section 41(1) states that where allowance or deduction has been claimed in respect of any loss/expenditure or trading liability incurred by the assessee and subsequently during Manish Kanji Patel 11 previous year, if the assessee has obtained any benefit in cash or in any kind then such amount will be treated as income of the assessee and, therefore, the A.O. has to show that some benefit against the creditors taxed u/s. 41(1) has been taken whether in cash or in kind. But A.O. has not brought on record any material to show that any benefit has been taken by the assessee against these creditors in the previous year. No material has been brought on record even to show that the liability does not exist. The assessee has relied on the decision of Hon’ble ITAT in the case of Maharashtra State Consumer Federation Ltd., (supra) and on the decision of Hon’ble Delhi High Court in the case of Hotline Electronics Ltd. (supra). In these cases, it has been held that the A.O. should show that no liability existed and assessee has taken any benefit in any manner merely because in these cases liability was outstanding for more than few years it cannot be brought to tax u/s. 41(1). In the remand report, A.O. has stated that the assessee does not know the whereabout of a party and, therefore, liability cease to exist. But this logic does not work in business. If the assessee does not know the address of the creditor, it does not mean that the creditor will not come and ask for its money In any case he A.O. has not disputed the creditor and merely recovery is disputed but A.O. cannot unilaterally decide without the consent of the creditor and the assessee that the liability has ceased. Therefore, the addition made by the A.O. is deleted and the ground of appeal is allowed.”

14. We have heard the rival contention of both the parties. We find that the A.O. observed that the assessee ask to fail the confirmation in respect of outstanding Sundry Creditors but the assessee failed to file the confirmation letter the non-filing confirmation as the supplier were from abroad and the Assessing Officer was of a view non-filing of confirmation attracts provision of Section 41(1). We find that in the case of ITAT Mumbai in case of Maharashtra State Co-operative Consumer Federation 13 Taxman 163 Mumbai wherein it is held that in absence of contrary material placed by the Revenue for no such liability exist in the books of Manish Kanji Patel 12 account or the assessee has obtain any benefit by case or any other manner merely because said liability was more than 5 years old it cannot be said that there was cessation of liability. Therefore, we are of the view that CIT(A) is justified in deleting the same. In the result Departmental appeal ground No. 2 dismissed.