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Income Tax Appellate Tribunal, MUMBAI BENCHES “C”, MUMBAI
Before: Shri G S Pannu, AM, & Shri Saktijit Dey, JM
O R D E R Per Saktijit Dey, Judicial Member:
These cross appeals by the assessee and the department are against a common order dated 14.08.2014 of learned CIT(A) -29, Mumbai for A.Y. 2010-11.
The common issue arising for consideration in these appeals is in relation to the decision of the CIT(A) in quantifying the gross profit @10% of the alleged bogus purchases and restricting addition to that amount.
Briefly, the facts are, the assessee, an individual is carrying on business in manufacturing and sale of kitchenware products through its proprietary concern M/s. Unique Industrial Corporation. For the purpose of its manufacturing activity the assessee has set up a factory at Village Asangaon in Thane District. In the course of assessment proceedings, for verifying the genuineness of the purchases claimed to have been made from certain parties, the AO issued notices u/s. 133(6) to four parties viz. Shree Ganesh Trading Co., M/s. Balaji Box Industries, Jay Traders & Colour Corner. As observed by the AO, the notices issued u/s. 133(6) were returned un-served by the postal authorities. On the basis of information received from the Sales-tax authorities through DGIT (Inv) Mumbai, he found that one of the party viz. Shree Ganesh Trading from whom assessee had claimed to have made purchases of Rs.1,88,27,754/- is a hawala dealer providing accommodation entries. He also found that a survey u/s. 133A of the Act was conducted in the business premises of the assessee in February 2013, and in the course of survey when the assessee was confronted the fact of bogus purchases, he stated that the purchases were made through one agent and he was not able to recollect the address of the said agent. However, he promised to produce the said agent and the concerned parties within seven days. The AO observed, inspite of such promise, the assessee was unable to produce either the concerned parties or the agent. He also observed that the assessee was unable to produce supporting evidence to prove the genuineness of the purchases. The AO observed that the assessee was not able to provide quantitative tally vis-a-vis material consumed in production and sale. Thus, on the basis of the aforesaid facts, the AO ultimately concluded that the purchases amounting to Rs.1,88,27,754/- made from Shree Ganesh Trading Company are not genuine hence, added back to the income of the assessee. As far as purchases made from other three parties as referred to herein before, the AO also added the entire purchases amounting to Rs.2,08,53,497/- by treating them as bogus. Being aggrieved of such additions made by the AO, the assessee preferred appeal before the CIT(A).
The learned CIT(A) after considering the submissions made by the assessee and examining the material available before him found that the AO has not recorded any finding in the assessment order to indicate that any incriminating documents revealing bogus purchases were found in the premises of the assessee or any unaccounted stocks were found during the course of survey conducted by the department. He observed that the AO has not carried out any independent inquiry to establish that the purchases are bogus except relying upon the conclusion of the Sales tax authorities. He also noted that the AO has not doubted the sales effected by the assessee.
From the details submitted he found that generally sales made by the assessee are either to the government agencies or big corporate entities.
Therefore, the AO could have easily verified from the concerned parties regarding the sales made by the assessee; whereas, the AO merely relying on the fact that notices issued u/s. 133(6) has been returned un-served, treated the purchases as bogus. The CIT(A) also noticed that the assessee has given quantitative tally of purchases, consumption and sales, which were not found to be defective. He found that the purchases made of the disputed amount are available with the assessee and entered into its books of account as well as part of its inventory. He also noted that the payment for such purchases were made by crossed-cheques and have been debited in the name of concerned parties. The learned CIT(A) observed that the report of the Investigation Wing contained name of the bogus parties but it does not contain sales made to the assessee. He, therefore, observed that merely because concerned parties have not confirmed the sales or they are not available in the given address, will not make the entire purchases bogus. He observed when the sales/consumption of material are not doubted, the purchases cannot be disallowed entirely. He further observed that though, there cannot be any doubt that the assessee has purchased the goods/material, the doubt remains regarding the purchase price shown in the invoices. He observed, since the bills raised by those parties are not verifiable, the purchase price shown in the invoices raised by the concerned parties cannot be accepted, as, there is every possibility that purchases are over invoiced to reduce the profits, which may have impact on the gross profit rate declared by the assessee. The learned CIT(A) relying upon certain judicial precedents, observed that in such circumstances what can be added is the profit element embedded in such purchases treated as bogus. He noted that for the year under consideration, the assessee has shown gross profit rate @ 6.3%. He, therefore, was of the view that in the facts and circumstances of the case estimation of gross profit @10% of the total bogus purchases would be fair and reasonable. Accordingly, he worked out the addition to be made by applying such gross profit at Rs.39,68,125/-. Thus, while the assessee is challenging the estimation of gross profit @10%, the department is seeking restoration of the addition made by the AO.
The learned AR reiterating the stand taken before the departmental authorities, submitted that the assessee not only before the AO but also before the CIT(A) had produced all relevant and necessary documents to prove the genuineness of the purchases. He submitted, the assessee has produced quantitative tally of purchases, consumption and sales and no discrepancy or defect is found in such quantitative tally, which is matching with the purchases and sales invoices. He submitted that the assessee generally purchases goods from in and around Bombay and he had his own truck for transporting goods to his factory premises. The learned AR submitted that when the CIT(A) was satisfied that the purchases made by the assessee are genuine, there is no need for even estimating the gross profit on account of bogus purchases. He submitted that out of the four parties, the name of only one party appeared in the list of bogus dealers maintained by the Sales Tax Authorities; therefore, the purchases made from the other parties could not have been disallowed. The learned AR submitted that in any case of the matter the gross profit rate of 10% applied by the CIT(A) is high and excessive compared to the gross profit rate shown by the assessee in the preceding assessment years.
The learned DR, on the other hand, submitted that the assessee before the departmental authorities had not produced individual documentary evidence to prove the genuineness of the purchases. He submitted that neither any delivery challans were produced nor confirmations from different parties were furnished by the assessee to prove the purchases. Therefore, the assessee having failed to prove the purchases the addition made by the AO should be restored. He submitted since the assessee is a manufacturing concern, the sales figures are not relevant therefore, the observation of the CIT(A), since no doubt have been raised regarding sales figure, purchases cannot be held to be bogus is a correct conclusion drawn on fact.
We have considered the rival contentions and perused the material on record. As could be seen from the material on record, in the course of assessment proceedings, the AO had enquired into the purchases on random basis by issuing notice u/s. 133(6) to four parties as mentioned herein before.
It is relevant to observe the notices issues u/s. 133(6) were returned un- served by the postal authorities. As it appears, thereafter the AO has not made any further enquiry by deputing his inspector or through any other mode. It is also relevant to observe, out of four parties, purchases from whom were treated as bogus, only one party viz. Shree Ganesh Trading appears in the list of bogus dealers maintained by the Sales Tax Authorities.
As far as rest of the parties are concerned, there is no allegation against them by the Sales Tax Authorities. That being the case, it was incumbent on the part of the AO to conduct necessary inquiry for establishing the fact that the purchases from the concerned parties are bogus. Merely by issuance of notice u/s. 133(6), it cannot be established that the purchases made from the concerned parties are bogus. Even, as far as the purchases made from Shree Ganesh Trading, whose name allegedly appears in the list of bogus dealers of Sales Tax Authorities, no independent inquiry has been conducted by the AO.
It is a fact on record, before the AO as well as the first appellate authority, assessee has produced not only its books of account but purchase and sale invoices, ledger accounts, bank statements to prove the genuineness of purchases. The assessee has also produced statement showing quantitative tally of purchases made, consumption made in manufacturing process as well as sale of finished products with reference to the purchase and sales invoices.
On a careful reading of the assessment order, we have not found any defect or discrepancy pointed out by the AO in such quantitative tally. It is also a fact that the AO has not disputed the consumption of material or sales turnover declared by the assessee. In these circumstances, we are in agreement with the CIT(A) that the addition of the entire purchases by treating them as bogus cannot be made. At the same time, we are of the opinion that the assessee has failed to prove conclusively that the purchases were actually made from the concerned parties. Therefore, in the facts and circumstances, the CIT(A) was justified in holding that the profit element embedded in the purchases treated as bogus can be considered for addition.
Having held so, it is necessary to decide what should be the gross profit rate in such circumstances. As could be seen, the CIT(A) has applied gross profit rate of 10% on the alleged purchases. However, from the chart placed before us, we find that the gross profit rate shown by the assessee in the preceding assessment years are as under:
Comparative GP Chart Table
Year ending G/P Ratio Accepted by the Average G/P % 6 years Assessing Office u/s. 31.03.2006 6.79 143(3) 31.03.2007 6.51 143(3) 31.03.2008 5.97 143(3) 31.03.2009 5.60 143(1) 31.03.2010 6.65 143(3) 31.03.2011 6.34 143(3) 37.86/6 6.31% From the aforesaid chart, it is noticed that the gross profit rate shown by the assessee generally varies between 5.5% to about 7%. It is also noticed that the gross profit shown by the assessee in the preceding assessment years have been accepted by the AO in assessment completed u/s. 143(3) of the Act. Keeping in view the gross profit shown by the assessee in the preceding assessment years, we are of the considered opinion that addition made on account of bogus purchases should be restricted to an amount to be worked out by applying the gross profit rate of 7% (seven) of the alleged bogus purchases. The AO is directed to compute the addition accordingly and grant consequential relief to the assessee.
In the result, the grounds raised by the assessee are partly allowed and those by the department are dismissed.
Order pronounced in the open court on 5th day of April 2017.