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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
Revenue by .. Shri B.S. Bist, DR .. Shri Shailesh N. Doshi, AR Assessee by Date of hearing .. 30-03-2017 .. Date of pronouncement 30-03-2017 O R D E R PER BENCH:
These two appeals by the Revenue and two Cross Objection by the assessee are arising out of the same order of CIT(A)-25, Mumbai, in appeal No. CIT(A)-33/IT/746/13-14 & CIT(A)-25/IT/746/13-14 dated 24-02-2015. The Assessment were framed by DCIT Circle-22(1) & JCIT Circle 22(1), Mumbai & 2995/Mum/2015 CO No. 219 & 220/Mum/2016 Jayesh Nagardas Bodatra; AY 10-11 & 11-12 for the A Yrs. 2010-11 & 2011-12 vide order dated 07-03-2014, 19-03-2014 u/s 143(3) read with section 147 of the Income Tax Act, 1961 (hereinafter ‘the Act’).
The only common issue in these two appeals of Revenue and the cross objections of the assessee is as regards to the order of CIT(A) restricting the disallowance of bogus purchases at 10% by estimating the gross profit as against the total disallowance made by AO. For this Revenue as well as assessee has raised identical grounds and the grounds raised by Revenue in AY 2010-11 and 2011-12 is as under: - “AY. 2010-11
On the facts and circumstances of the case and iii law, the CIT(A) erred in restricting thy addition at Rs. 11,19,800/- being 10% of total purchases in question as against the disallowance made by the Assessing Officer for Rs.65,33,1 13/- on account of unexplained expenditure u/s 69C of the Act by working of peak credits of purchases in questions.
AY. 2011-12 On the facts and circumstances of the case and in law, the CIT(A) erred in restricting the addition at Rs.45,08.288/- being 10% of total purchases in question as against the disallowance made by the Assessing Officer for Rs. 1,78,66,924/- on account of unexplained expenditure u/s 69C of the Act by working of peak credits of purchases in questions.”
The assessee has also raised identical verdict grounds and for the sake of brevity we are not reproducing the same. & 2995/Mum/2015 CO No. 219 & 220/Mum/2016 Jayesh Nagardas Bodatra; AY 10-11 & 11-12
Brief facts relating to the above issue in both the AYs is that the assessee is an individual having a proprietary firm in the name of M/s Steel and Scrap doing business of trading in Steel and other metals and scrap. During the course of assessment proceedings for AY 2010-11, the AO noticed that the purchase made from the following parties is not genuine for the reason that the parties have not complied with notices under section 133(6) of the Act or notices returned unserved: -
“(i) Mahamantra Metal Alloys P. Ltd. Rs. 35,09,735/- (ii) Dhanlaxmi Metal & Tubes P. Ltd. Rs. 65,43,446/- (iii) Elegant Traders Rs. 2,26,800/- (iv) J.B. Enterprises Rs. 2,25,000/- (v) Jyoti Enterprises Rs. 2,30,375/- (vi) Mahavir Enterprises Rs. 2,39,400/- (vii) Om Enterprises Rs. 2,23,250/- TOTAL Rs.1,11,98,006/-”
Similarly, in AY 2011-12, the following were the parties from whom the assessee had made purchase and could not prove: - AO treated the entire purchase as bogus purchase at Rs. 11,44,825/- and also added peak credit of an amount of Rs. 65,33,113/- in AY 2010-11. In AY 2011- & 2995/Mum/2015 CO No. 219 & 220/Mum/2016 Jayesh Nagardas Bodatra; AY 10-11 & 11-12 12, the AO treated the bogus purchase for disallowance at Rs. 2,44,00037/- but allowed the discount of combined peak of the outstanding parties at Rs. 65,33,113/- thereby making disallowance of bogus purchase at Rs. 1,78,66,924/-. Aggrieved in both the years, assessee preferred appeals before CIT(A) and CIT(A) in both the years passes identical worded orders and restricted the disallowance at 10% of the purchase at Rs. 11,19,800/- in AY 2010-11 and at Rs. 45,8,288/- in AY 2011-12. Aggrieved against both the orders, Revenue came in appeals and assessee came in Cross Objections.
We find that the CIT(A) in AY 2010-11 considered the issue and restricted the disallowance at 10% being profit rate to cover up the possible leakage in the purchase, including element of inflation and avoidance of taxes by observing as in Para 2.19 to 2.21 as under: - “2.19 In the present case also, the A.O has, after examining the evidences, found that the assessee did purchase the goods and he also sold the goods and has offered the income on such sale of goods. Hence, respectfully following the decision of the Hon'ble Gujarat High Court in Bholanath Polyfab P.Ltd. supra, and in view of the reasons given hereinabove in this order, no addition can be made in respect of the undisclosed purchases held to have been made in cash and the entire purchases also cannot be disallowed. However, the profit margin embedded in such amounts of purchases would be disallowed and subjected to tax.
2.20. In the case of Vijay Proteins Ltd. 58 ITD 428, Hon'ble ITAT Ahmedabad 'C' Bench, under similar circumstances, where the A.O had disallowed the entire expenditure on account of purchases made from certain parties treating the same as bogus, has held that "it is an elementary rule of accountancy as well as of taxation law & 2995/Mum/2015 CO No. 219 & 220/Mum/2016 Jayesh Nagardas Bodatra; AY 10-11 & 11-12 that profit from business cannot be ascertained without deducting cost of purchase from sales, otherwise it could amount to levy of income tax on gross receipts or on sales. Such a course is not permissible unless it is specifically authorized to do so under any particular provisions contained in the Act". It has been held by the Hon'ble Tribunal that in such circumstances, a certain percentage of expenditure has to be disallowed on account of inflation of purchase price. Hon'ble Tribunal has held that if purchases are made from open market without insisting for genuine bills, the suppliers may be willing to sell those products at a much lower rate compared to the rate at which they may charge in case the dealer has to give a genuine sale invoice in respect of that sale and supply of goods. 1?1There may be various factors due to which there is bound to be a substantial difference between the party purchase price of unaccounted material and rate of purchase of unaccounted for goods. There may be a saving on account of sales tax and other taxes and duties which may be leviable in respect of manufacture of the goods in question. The suppliers or manufacturers make a substantial saving in the income tax in respect of income from sale of unaccounted goods produced and sold by them. This may also be one of the factors due to which the seller may be willing to charge lower rates for unaccounted goods as compared to accounted for goods. In the appellate proceedings, the assessee has submitted that the purchases have been made from all the parties at almost similar prices and it is not a case where the purchase from the parties who have been found to be non-existent have been made at a higher price. & 2995/Mum/2015 CO No. 219 & 220/Mum/2016 Jayesh Nagardas Bodatra; AY 10-11 & 11-12 2.21 However, considering the nature of the transactions and the totality of circumstances as also the decision in the case of M/s. Vijay Proteins Ltd. (supra) and the judgment in M/s. Gujarat Polyfab Ltd. (supra) and the fact that the assessee is a trading concern and not a manufacturing concern, in my opinion, it would be fair to make estimated addition of Rs. 11, 19,800/- (representing 10% of the purchase in question) to cover up the possible leakages in the purchases, including element of inflation. Therefore, addition of Rs.11,19,800/- is required to be made. Hence, addition to the extent of Rs.11,19,800/- out of the total addition is sustained. The balance addition is directed to be deleted. This ground of appeal is partly allowed.”
In other year i.e. the AY 2011-12 also issue is exactly identical.
We have considered the issue and find that the assessee is engaged in the business of trading in steel and other metals including scrap. The assessee before AO as well as before CIT(A) contended that the assessee had made genuine purchase from the above mentioned parties and delivery of good was also taken and the same was entered in the stock register. It was also claimed that corresponding sale of such purchases were also recorded in the books of account. Further, it was claimed that the payments for this project were made by account payee cheques through banking channels. The assessee filed copies of purchase invoice, delivery challans, abstracts of stock register and ledger account of the parties before the lower authorities. In view of these facts, we agree that the contention of the assessee but the assessee could not file the transport bills for transportation of goods from these parties. It is not in doubt that the assessee might have made purchase from grey market because he has made corresponding sales which is not doubted. In case the assessee had made purchases from undisclosed parties in the open market in cash, we are of the view that the purchase price could be significantly lower if the purchase were made without Page 6 of 7 & 2995/Mum/2015 CO No. 219 & 220/Mum/2016 Jayesh Nagardas Bodatra; AY 10-11 & 11-12 bill and non-payment of sales tax. In view of these reasons, we are of the view that the CIT(A) has rightly applied 10% of profit rate to the bogus purchase, hence, we need not to interfere in the order of CIT(A). Similarly, is the position in AY 2011-12, hence, taking a consistent view we confirm the order of CIT(A) in that year also.
In the result, both, the appeals of Revenue and the Cross Objections of assessee, are dismissed. Order pronounced in the open court on 30-03-2017.