DCIT 13(3)(1), MUMBAI vs. ROYAL PALMS (INDIA )P. LTD, MUMBAI

1. “Whether on the facts and the circumstances of the case and in law, the Ld. CIT (A) erred in deleting the addition of Rs. 2,35,85,824/- out of total addition of Rs.3,27,96,288/-made on account of bogus purchases.

2. Whether on the facts and the circumstances of the case and in law, the Ld.CIT(A) was right in deleting the addition without appreciating the fact that the said purchases could not be proved genuine by the assessee even after giving sufficient opportunity.

3. Whether on the facts and the circumstances of the case and in law, the Ld.CIT(A) was right in deleting the addition without appreciating the fact that the assessee is end user/consumer of the said items and there is no clear mapping of purchases and utilization. In that situation this logic is not correct that since the sales are there purchases can not be denied.”

4. In Appeal for A.Y. 2008-09 in the assessee raised the following grounds of appeal:- “GROUND I 1.On the facts and circumstances of the case, and in Law, the Ld. CIT(A) erred in confirming the addition of Rs.1,21,61,657/- worked out at @ 12.5% on alleged bogus purchase of Rs.9,72,93,258/-.

2. The learned CIT(A) failed to appreciate the fact that: a) The assessee submitted the address as available with him and the appellant is not liable to know the where about of the parties currently. b) The party has replied to the notice sent u/s 133(6) and confirmed that they have supplied the materials to the appellant. c) The AO has neither placed on record any material evidence that the assessee has received any cash in return for the payments made, nor has he found out any unaccounted wealth/ assets. d) The AO has merely relied on the statements collect by the sales tax departments and disregarded the substantial evidence submitted by the assessee, without giving reasons for rebutting 4 Royal Palms (P) Ltd the evidences.

3. Thus the appellant therefore prays that the additions of Rs.1,21,61,657/- worked out at @ 12.5% on alleged bogus purchase of Rs.9,72,93,258/- may please be deleted Without prejudice to the above “On the facts and the circumstances of the case and in law, the CIT(A) erred in making an addition @ 12.5% on alleged hawala purchase of Rs.9,72,93,258/- instead of Rs.5,30,312/- purchase value without giving any opportunity.”

1. “Whether on the facts and the circumstances of the case and in law, the Ld. CIT (A) erred in deleting the addition of Rs.4.08,74,655/- out of total addition of Rs.5,30,36,312/made on account of bogus purchases.

2. Whether on the facts and the circumstances of the case and in law, the Ld.CIT(A) was right in deleting the addition without appreciating the fact that the said purchases could not be proved genuine by the assessee even after giving sufficient opportunity.

3. Whether on the facts and the circumstances of the case and in law, the Ld.CIT(A) was right in deleting the addition without appreciating the fact that the assessee is end user/consumer of the said items and there is no clear mapping of purchases and utilization. In that situation this logic is not correct that since the sales are there purchases cannot be denied.

4. The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the Assessing Officer be restored.”

In Appeal for AY 2009-10 in the Revenue 6. raised the following grounds of appeal:-

5 Royal Palms (P) Ltd 1. “Whether on the facts and the circumstances of the case and in law, the Ld. CIT (A) erred in deleting the addition of Rs. 2,41,08,175/- out of total addition of Rs.2,62,30,547/made on account of bogus purchases.

2. Whether on the facts and the circumstances of the case and in law, the Ld.CIT(A) was right in deleting the addition without appreciating the fact that the said purchases could not be proved genuine by the assessee even after giving sufficient opportunity.

3. Whether on the facts and the circumstances of the case and in law, the Ld.CIT(A) was right in deleting the addition without appreciating the fact that the assessee is end user/consumer of the said items and there is no clear mapping of purchases and utilization. In that situation this logic is not correct that since the sales are there purchases can not be denied.

4. The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the Assessing Officer be restored.”

In Appeal for A.Y. 2009-10 in the assessee 7. raised the following grounds of appeal:- “GROUND I

1. On the facts and circumstances of the case, and in Law, the Ld. CIT(A) erred in confirming the addition of Rs. 21,22,372/- worked out @ 12.5% on alleged bogus purchase of Rs.1,69,78,981/-.

2. The learned CIT(A) failed to appreciate the fact that: a) The assessee submitted the address as available with him and the appellant is not liable to know the where about of the parties currently. b) The party has replied to the notice sent u/s 133(6) and confirmed that they have supplied the materials to the appellant. c) The AO has neither placed on record any material evidence that the assessee has received any cash in return for the payments made, nor has he found out any unaccounted wealth/ assets. d) The AO has merely relied on the statements collect by the sales tax departments and disregarded the substantial evidence submitted by the assessee, without giving reasons for rebutting the evidences.

6 Royal Palms (P) Ltd 3. Thus the appellant therefore prays that the additions of Rs. 21,22,372/- worked out 12.5% on alleged bogus purchase of Rs. 1,69,78,981/- may please be deleted.”

In Appeal for A.Y. 2010-11 in the assessee 8. raised the following grounds of appeal:-

“Ground I 1. On facts and circumstances of the case and in law, the CIT (A) erred in confirming the addition of Rs.21,66,242/- as unexplained cash credit u/s 68 making the working on peak balance method ignoring the submissions made by the Assessee.

The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal.”

7 Royal Palms (P) Ltd In Appeal for A.Y. 2011-12 in the assessee 9. raised the following grounds of appeal:- “GROUND I

1. On the facts and circumstances of the case, and in Law, the Ld. CIT(A) erred in confirming the addition of Rs. 60,87,840/- worked out at 12.5% on alleged bogus purchase of Rs. 4,87,02,723/-.

2. The learned CIT(A) failed to appreciate the fact that: a) The assessee submitted the address as availablewith him and the appellant is not liable to know the where about of the parties currently. b) The party has replied to the notice sent u/s 133(6) and confirmed that they have supplied the materials to the appellant. c) The AO has neither placed on record any material evidence that the assessee has received any cash in return for the payments made, nor has he found out any unaccounted wealth/ assets. d) The AO has merely relied on the statements collect by the sales tax departments and disregarded the substantial evidence submitted by the assessee, without giving reasons for rebutting the evidences.

3. Thus the appellant therefore prays that the additions of Rs. 60,87,840/- worked out at @ 12.5% on alleged bogus purchase of Rs. 4,87,02,723/- may please be deleted.” Without prejudice to the above

1. On the facts and the circumstances of the case and in law CIT(A) erred in making an addition @12.5% on alleged hawala purchase of Rs.4,87,02,723/- instead of Rs.4,36,42,286/- purchases considered by AO. The CIT(A) thus effectively enhanced the purchase value without giving any opportunity.

GROUND II 1. On the facts and circumstances of the case, and in Law, the Ld. CIT(A)erredinconfirmingaddition made by AO of Rs. 4,80,43,104/- as unexplained cash credit u/s 68 of the act. 2. On the facts and circumstances of the case and in law the assessing Officer failed to appreciate the fact that: a) The chart of additions made does not match with the chart given in the show cause notice issued by the Id. AO, thus the addition made by the AO is arbitrary and baseless.

8 Royal Palms (P) Ltd b) The Id. AO has arbitrarily assumed figures, and converted the numbers into Lacs without any basis. c) The Learned AO has assumed and arbitrarily collated the amounts into receipts and payments, without giving any reasoning for such assumption. d) All the entries in the diary were properly explained, thus there is no unaccounted cash entries found based on impounded diary. e) The offer for additional income made during the survey was to cover the omission and discrepancies if any in the impounded material. After explaining each and every entry, there were neither omissions nor discrepancies noticed, and accordingly the offer of additional income is redundant. f) The diary entries of which are treated as basis for making the additions belong to the secretary of the director and the receipt and payments were made for the day to day safekeeping while closing the office, this point was accepted by the AOwhile not considering some of the items for additions. However, the said exclusions are once again arbitrary, baseless and without giving seeing any explanations.

“Whether on the facts and the circumstances of the case and in 1. law, the Id. CIT (A) erred in deleting the addition of Rs.4,26,14,883/- out of total addition of Rs.4,87,02,723/-made on account of bogus purchases.

2. Whether on the facts and the circumstances of the case and in law, the id. CIT (A) erred in deleting the addition of Rs.3,27,544/- out of total addition of Rs.3,68,600/- made on account of disallowance 9 Royal Palms (P) Ltd u/s14A.

3. Whether on the facts and the circumstances of the case and in law, the Ld.CIT(A) was right in deleting the addition without appreciating the fact that the said purchases could not be proved genuine by the assessee even after giving sufficient opportunity.

5. The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the Assessing Officer be restored.”

in assessee’s

11. Royal Palms (P) Ltd appeal and Revenue’s appeal. First and the foremost issue is that assessing officer has disallowed purchases made from the certain parties in full on the ground that these were bogus in nature and could not be substantiated as genuine by the assessee. On the other hand, Ld. CIT(A) found that even if purchases were bogus in nature but complete documentary evidences have been furnished by the assessee to establish delivery of the material purchased and the corresponding sales have also been accepted by the assessing officer as it is, therefore, under these circumstances the purchases could not have been disallowed in full. Thus, relying upon the various judgments of Hon'ble Gujarat High Courts and few other courts, it was found by him that only profit element or the element of potential inflation could at the best be disallowed. Thus, some analyses were made by him and on the basis of same he made the disallowance at the rate of 12.5% of the purchases. Relevant finding of the order of Ld. CIT(A) are reproduced below:- “It is an undisputed fact that the assessing officer identified parties based on information received from Investigation Wing. On his part, the AU has also gone into the issue by sending 133(6) notices on 19.09.2014. The notices were served on Pride Steels Pvt. Ltd. but no reply was received. The assessing officer however did not follow it up by issue of summons u/s 131. However, as far as the evidence submitted by the appellant is also concerned, the appellant has filed his own books, purchase bills/challans, ledger accounts and has its own bank statement to further his argument. The fact that the payments are being made through cheques is not something that is being doubted. In fact, the contentious issue is that these parties which are indicated by the Sales Tax Department through a procedure which appears to be technically correct on paper, are in fact engaged in false billing for a fee/commission. The onus of proving the entire transactions to be genuine is definitely on the tax payer, when it is making the claim of purchase and especially in light of the doubt that has been raised by the enquiries conducted by the Sales Tax Department, the onus is even more on the tax payer to 12 Royal Palms (P) Ltd show that as far as he is concerned, he has discharged his tax related liabilities in an accurate manner. So therefore, while on one hand the AU may not have a clinching proof but the primary responsibility which is ensued on the tax payer has also not been discharged in terms of establishing thegenuineness of the transaction. Merely filing copies of his accounts and bank accounts does in no way establish that the parties actually existed and genuinely supplied material, but then considering that the books of accounts have not been disputed, purchases have not been proved as bogus and neither cheques have been shown to be received back as cash by the appellant, steel is a major ingredient in building projects, I am of the considered view that in the context of the situation , the cause of justice would be served by looking at the gross profit margins being declared by the appellant. Recently Hon'ble Gujarat High Court in the case of CIT vs. Bholanath PolyFab Pvt. Ltd. (2013) 355 ITR 290 and thereafter in the case of CIT vs. Simit P. Sheth2013) 219 Taxman 85 (Guj) has held that in such facts and circumstances, not entire purchase price but only profit element embedded in such purchases can be added. The finding of the Hon'ble Gujarat High Court in the case of CIT vs. Simit P. Seth is as under:- "We are broadly in agreement with the reasoning adopted by the Commissioner (Appeals) with respect to the nature of disputed purchases of steel. It may be that the three suppliers from whom the assessee claimed to have purchased the steel did not own up to such sales. However, the vital question while considering whether the entire amount of purchases should be added back to the income of the assessee or only the profit element embedded therein was to ascertain whether the purchases themselves were completely bogus and non-existent or that the purchases were actually made but not from the parties from whom it was claimed to have been made and instead may have been purchased from grey market without proper billing or documentation. In the present case, the Commissioner of Income-tax (Appeals) believed that when as a trader in steel the assessee sold certain quantity of steel, he would have purchased the same quantity from some source. When the total sale is accepted by the Assessing Officer, he could not have questioned the very basis of the purchases. In essence, therefore, the Commissioner (Appeals) believed the assessees theory that the purchases were not bogus 13 Royal Palms (P) Ltd 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 can be added to the income of the assessee. So much is clear by the decision of this court. In particular, the court has also taken a similar view in the case ofCIT v. Vijay M. MistryConstruction Ltd. [2013] 355 ITR 498 (Guj) and in the case of CIT U. Bholanath Poly Fab (P.) Ltd. [2013] 355 ITR 290 (Guj). The view taken by the Tribunal in the case of Vijay Proteins Ltd. v. Asstt. CIT [1996] 58 lTD 428 [Ahd.] came to be approved. If the entire purchases were wholly bogus and there was a finding of fact on record that no purchases were made at all, counsel for the Revenue would be justified in arguing that the entire amount of such bogus purchases should be added back to the income of the assessee. Such were the facts in the case of Pawanraj B. Bokadia (supra). This being the position, the only question that survives is what should be the fair profit rate out of the bogus purchases which should be added back to the income of the assessee. The Commissioner adopted the ratio of 30 per cent of such total sales. The Tribunal, however, scaled down to 12.5 per cent. We may notice that in the immediately preceding year to the assessment year under consideration the assessee had declared the gross profit at 3.56 per cent of the total turnover. If the yardstick of 30 per cent, as adopted by the Commissioner (Appeals), is accepted the gross profit rate will be much higher. In essence, the Tribunal only estimated the possible profit out of purchases made through non-genuine parties. No question of law in such estimation would arise. The estimation of rate of profit return must necessarily vary with the nature of business and no uniform yardstick can be adopted."

14 Royal Palms (P) Ltd AY 2008-09 AY 2007-08 Income from projects( Rs/lakhs) 2820 2920 Income from Hotel Park Plaza 4293 4192 Income from Hotel Palm Hotel 25 Membership Income 223 224 Other Income 76 50 Total income 7438 7388 968 Net Profit (Rs./lakhs) (%) (13.01%) 1274(17.24%)

The profits shown are reasonable as compared with the industry though the same is lower this year compared with last year. No doubt that steel bars are a major ingredient in construction. In the appellant's case there are several projects going on simultaneously and records maintained do not lead to easy tracking of materials purchased to its ultimate use in a particular project. What part of the impugned purchase has gone for which project could not be verifiably demonstrated by the appellant though a statement was submitted. Further, several projects are under work in progress. The VAT applicable on steel is 4%. Even if materials have been purchased, they are not purchased from this party Pride Steels P. Ltd. and may be in cash from un-disclosed parties. By purchasing from the grey market, the appellant would have benefitted by the savings of taxes. Therefore, in fact and circumstances of the case, in this particular case, it is considered most appropriate to adopt 12.5% profit which can take care of the rotation of capital utilised for such transaction. Hence in the light of finding of the Hon'ble Gujarat High Court in the case of CIT vs. Simit P. Sheth, 12.5% profit is found to be appropriate for ascertainment of taxable income related to such transaction.

The third issue pertains to the addition made as undisclosed income 17. on the basis of entries recorded in the diary impounded during the survey conducted on the premises of the assessee. The assessee has disputed before us the addition only to the extent that benefit of Peak Credit has not been given to the assessee. The lower authorities had denied the benefit of peak credit merely on the ground that all the credit entries represent income and all the entries are different. Therefore, these entries cannot be set off against each other. On the other hand, Ld. Counsel of the assessee has explained in detail before us that in fact proper opportunity was not given to the assessee and therefore, assessee could not explain precise nature of these entries. If an opportunity is given then assessee shall be able to explain with the help of appropriate evidences to explain the nature of these entries. It was submitted that all the entries do not represent income and various entries arise out of the same transaction. Therefore, factually speaking assessee deserves to be granted benefit of peak credit and thus by denying the same injustice has been done to the assessee.