HARISH RADESHYAM KHANDELWAL,MUMBAI vs. ITO 30(1)(4), MUMBAI

ITA 5515/Mum/2016 3

The return of income was filed by assessee with Revenue for the impugned assessment year on 04-09-2009 which was processed u/s 143(1) of 1961 Act. No detailed scrutiny was conducted by Revenue in case of the assessee for the impugned assessment year u/s 143(3) r.w.s. 143(2) of 1961 Act.

Information was received by AO from Director General of Income-tax (Inv.), Mumbai that some businessmen had indulged in the acceptance of bogus purchase bills from bogus hawala dealers who were engaged in providing accommodation entries. It was informed to the A.O. that Sales Tax Department, Mumbai, Govt. of Maharashtra carried on detailed enquires in respect of above parties and recorded statements, deposition, affidavits etc. of main persons of above concerns which established that these concerns are engaged in providing bogus bills. It was also informed to the AO that these parties admitted that they were not doing any business. It was informed to AO that it is also established that no actual goods or services are delivered by these parties to their customers and they issued only bogus bills after charging commission. It was informed to A.O. that assessee is beneficiary of such bogus purchase bills and during previous year relevant to the assessment year under consideration, the assessee had accepted bogus bills from following four parties:-

Name TIN Amount (Rs) Dhruv Sales Corporation 27760622173V 665,163 Accure Impex Private Ltd. 27530626228V 599,612 Riddhi Dyechem 27910403695V 2,541,448 Corporation International Chemicals ITA 5515/Mum/2016 4 Chemi-Age Enterprise 27400387728V 9,794,547 Total 1,36,00,770 Thus, with above background, A.O. opined that he had reasons to believe that income had escaped assessment within meaning of section 147 of 1961 Act . Hence, notice dated 18th March, 2014 u/s 148 of 1961 Act was issued to assessee after recording of reasons for re-opening of the assessment and the said notice was duly served upon the assessee. Thus, the assessment was reopened by AO within four years from the end of relevant assessment year. The reasons for reopening of the assessment was communicated to the assessee by AO vide letter dated 9th June, 2014 . The assessee did not file any objection against the reopening of the assessment, hence, reassessment proceedings were completed by AO on merits as detailed hereunder. During course of reassessment proceedings, the assessee furnished copies of purchase invoices, ledger and explanation of transports charges on purchase of goods, bank statements and contended that the purchase transactions entered into with these parties are genuine.

The A.O. considered submissions of assessee and observed that the parties with whom assessee entered into these alleged business transactions of purchase of material, in their statement recorded on oath before Sales Tax authorities have categorically accepted that they have not done any business as well as there was no actual delivery of goods to the purchasing parties. The A.O. issued notices u/s. 133(6) of the Act to these afore-stated four parties to verify genuineness of purchases but the notices were returned un-served by postal authorities with remarks "left". The assessee was asked by AO to produce these parties, but the assessee failed to produce said parties before AO nor submitted any documentary evidences to prove genuineness of these purchases. The assessee , however, submitted certain details such as copy of purchase bills, purchase register, ledger accounts, copy of bank statement ITA 5515/Mum/2016 5 only in support of his claim, but the assessee could not produce the afore- stated parties before AO nor in the opinion of AO , the assessee could produce cogent evidences which could prove genuineness of purchase transactions. The assessee was show caused by AO as to why this amount of Rs. 1,36,00,770/- towards purchases from these four concerns should not be treated as bogus purchases and added back to the total income of the assessee for the year under consideration. In reply, the assessee submitted that when they had purchased the goods, the parties were available at the address given in the invoice. The said addresses were correct at the time when the assessee had purchased the goods. It was submitted that the sales tax department grants registration to a dealer wherein all details are called for verifications, including bank account, PAN , Address etc. and before grant of RC, even visit to the premises of the dealers were done by Sales tax authorities to confirm place of business of the dealers. The signatory to the application was required to attend before registration authority and sign in his presence which establishes that dealer is in existence when RC is obtained. The assessee submitted that he had purchased material from them and sold material to his customers . It was submitted by assessee that during assessment year 2009-10, the sales(net of sales tax) was of Rs. 1,76,85,320/- and purchases(net of sales tax) was of Rs. 1,58,17,462/-. Thence , it was submitted by assessee before AO that there was no question of selling the material if there was no purchases and hence the assessee submitted that purchases were genuine as the material was duly sold and corresponding purchases as recorded in books of accounts should be accepted .

The A.O., however, rejected submissions of the assessee whereby he observed that the assessee has given a mere general submission without any corroborative evidences. It was observed by AO that no statement showing movement of goods was ever furnished. The AO observed that these four parties from whom purchases were allegedly made by assessee themselves ITA 5515/Mum/2016 6 admitted in front of the Sales Tax Department that they have not made any sale or purchase transaction and they were not engaged in any business. Thus, AO observed that it is proved that purchases shown to have been made from these parties are bogus. The AO observed that as per statement given by these hawala dealers, the modus operandi of these transactions are that first they issued only bogus bills without delivery of goods, received cheque payments from purchasing parties and subsequently after deducting their commission they have repaid the balance sum to the purchase parties in cash. It was observed by AO that mere filing of purchase bills and payment by account payee cheques was not sacrosanct and was not sufficient to establish genuineness of these purchases. The A.O. relied on decision of Hon’ble Supreme Court in the case of Kachwal Gems v. Jt. CIT (2007) 288 ITR 10(SC) and decision of Hon’ble Supreme Court in the case of Mcdowell and Co. Limited v. CIT 154 ITR 148(SC). Thus, the A.O. held that assessee was a beneficiary of accommodation entries through bogus bills issued by these four parties whereby there were no actual delivery of the goods. The AO observed that onus is on the assessee to prove genuineness of transactions as these transactions are appearing in assessee’s books of accounts and in the instant case , the assessee had failed to discharge onus cast upon him. The AO held that assessee was beneficiary of the accommodation bills issued by these four parties wherein there was no actual delivery/supply of material/goods to the assessee by these parties. The AO also observed that there cannot be sales without purchases and hence it was observed by the AO that purchase rates cannot be accepted because assessee has purchased actual material/goods from grey market by making payment in cash, while from these four parties only bogus bills were obtained. Hence , the A.O. was not satisfied about the correctness and completeness of books of accounts of the assessee which was rejected by the AO by invoking provisions of Section 145(3) of 1961 Act . The AO observed that assessee had shown GP rate @ 10.56% of the turnover, however, after considering the submissions of the assessee, nature and ITA 5515/Mum/2016 7 volume of the business etc. , the AO estimated GP ratio to be 20.17% of the turnover , vide assessment order dated 30-01-2015 passed by the AO u/s 143(3) r.w.s. 147 of 1961 Act.

Name TIN Amount (Rs) Dhruv Sales Corporation 27760622173V 665,163 Accure Impex Private Ltd. 27530626228V 599,612 Riddhi Dyechem 27910403695V 2,541,448 Corporation International Chemicals Chemi-Age Enterprise 27400387728V 9,794,547 Total 1,36,00,770 Ld. Counsel for assessee submitted that above purchases to the tune of Rs. 1,36,00,770/- were treated as bogus purchases by authorities below. It was submitted that originally return of income was processed u/s 143(1) of 1961 Act and no scrutiny assessment was framed by Revenue u/s 143(3) r.w.s. 143(2) of 1961 Act. The assessments were reopened within four years from ITA 5515/Mum/2016 8 the end of assessment year. He submitted that A.O. had received information from Director General of Income-tax (Inv.), Mumbai that some businessmen had indulged in the acceptance of bogus purchase bills from the bogus hawala bills providers who were merely providing accommodation entries without supplying/delivering actual material in consideration of commissions. It was informed to the A.O. by Sales Tax Department, Mumbai, Govt. of Maharashtra that they carried on detailed enquires in respect of above hawala parties and recorded statements, deposition, affidavits etc. of concern persons of these accommodation entry providers wherein they admitted that the said concerns are providing bogus bills and were not engaged in any business. The assessee’s name also figured in the list of beneficiaries who has alleged to have received bogus bills from above stated four entry providers. It was submitted that based upon the same, A.O. reopened the assessment and treated purchases made from these four parties to the tune of Rs. 1,36,00,770/- as bogus purchases and gross profits were estimated @20.17% as against gross profits @10.56% of turnover declared by the assessee in return of income filed with Revenue. It was submitted that A.O. was not satisfied about correctness and completeness of books of accounts of the assessee which were rejected by the AO by invoking provisions of Section 145(3) of 1961 Act wherein AO estimated gross profits on the turnover @20.17% instead of GP @10.56% on turnover declared by assessee in return of income filed with Revenue. The ld. Counsel for assessee submitted that assessee is regularly buying material from one of the party listed as alleged bogus hawala dealer namely Chemi-Age Enterprises and during the year under consideration the assessee had purchased material worth Rs. 9,794,547/- from the said party. It is submitted that dealings for purchase of material with this party namely Chemi-Age Enterprises was entered in by assessee in earlier years as well in subsequent years also. Our attention was drawn to paper book page No. 24 to 28 filed with the tribunal whereby complete details of sale and purchase were produced. It is submitted that ITA 5515/Mum/2016 9 these materials were sold to Lupin Limited and the total sales of the material was Rs. 1,76,85,230.00 against the total purchases of Rs. 1,58,17,461/- and complete reconciliation was produced before the A.O. also. Our attention was drawn to pages 29-36 of paper book filed with tribunal wherein complete reconciliation of purchase and sales are placed w.r.t. purchases from these four parties. The ledger accounts of these four parties along with invoices raised by these parties are also placed at paper book/pages 37-83 filed with the tribunal. The asssessee has also placed its bank statement in paper book / pages 84-137 filed with the tribunal to contend that payments were made by cheques. It was submitted that stock records were maintained and produced. The sale and purchases were reconciled quantitavily and no discrepancy was found. It was submitted that the accounts of the assessee were audited by a qualified chartered accountant as provided u/s 44AB of 1961 Act and tax-auditors have not made any adverse remarks against assesse. The learned counsel for the assessee submitted that GP ratio for the last three years was as under:-

F.Y. 2006-07 8.69% F.Y. 2007-08 8.79% F.Y. 2008-09 10.56% Thus, it was submitted that the GP ratio in the previous year relevant to the impugned assessment year 2009-10 is better than earlier years and authorities below erred in applying GP ratio of 20.17% on total turnover.

Name TIN Amount (Rs) Dhruv Sales Corporation 27760622173V 665,163 Accure Impex Private Ltd. 27530626228V 599,612 Riddhi Dyechem 27910403695V 2,541,448 Corporation International Chemicals Chemi-Age Enterprise 27400387728V 9,794,547 Total 1,36,00,770 Thus, with above background, assessment was reopened by AO after recording reasons for re-opening by issuing notice dated 18th March, 2014 u/s 148 of 1961 Act to assessee, which was duly served on the assessee. The assessee has furnished copies of purchase invoices, ledger extracts of these parties, bank statements to evidence payments by cheque, statement of purchase and sale , as well quantitative details of purchase and sale duly reconciled before the authorities below and assessee had contended that the purchase transactions entered into with these parties are all genuine purchases. It was submitted by assessee before authorities below that when assessee purchased material from these parties , these parties existed and the sales tax department grant registration only after detailed verifications and enquiries , hence these purchases are genuine. The A.O. issued notices u/s. 133(6) of the Act to these afore-stated four parties to verify genuineness of purchases but notices were returned un-served by postal authorities with remarks "left". The assessee was asked by AO to produce these parties, but the assessee failed to produce said parties before AO. The assessee has averred that it asked AO to issue summons to these parties u/s 131 of 1961 Act , which request was not acceded to by the AO as averred by assessee. We have observed that no request for cross examination was made by the ITA 5515/Mum/2016 12 assessee before the authorities below to cross-examine these parties. It was submitted by assessee that during assessment year 2009-10, the sales(net of sales tax) was of Rs. 1,76,85,320/- and purchases(net of sales tax) was of Rs. 1,58,17,462/-. Thence , it is submitted by assessee that there was no question of selling the material if there was no purchases and hence assessee submitted that purchases were genuine as the material was duly sold and corresponding purchases as recorded in books of accounts should be accepted . However, the assessee could not produce any evidence to substantiate actual movement of goods from these parties to the assessee . The purchases were made by assessee from these parties and amounts are appearing in books of accounts of the assessee and since incriminating information has been received by Revenue, the onus has now again shifted back to assessee to prove genuineness of purchase transactions with cogent material . It is the averment of revenue that the assessee did not purchased material from these parties and only bogus bills are obtained from these parties, and since sales are not doubted, the material was in-fact purchased but from some other dealers in grey market without bill by making payment in cash . These facts are especially in the knowledge of the assessee as purchases were made by the assessee and onus is on assessee to prove genuineness of purchase transactions as these transactions are appearing in assessee’s books of accounts and in the instant case , the assessee had failed to discharge onus cast upon him. The assessee could not establish with cogent material substantiating actual movement of goods from these parties to the assessee nor assessee could produce these parties before the authorities below. The assessee did not seek cross examination of these parties. The assessee was ,however, able to reconcile purchases quantitatively with sales . The AO has applied gross profit ratio of 20.17% on total turnover as against gross profit ratio of 10.56% on turnover declared by assessee, after rejecting books of accounts. The learned CIT(A) has also upheld re- assessment order of the AO. The assessee has however contended that it had ITA 5515/Mum/2016 13 dealing with M/s Chemi-Age Enterprises in the preceding years as well in subsequent years which is continuing as of date. Under the factual matrix of the case , we are of the opinion that profit embedded in these purchases are to be estimated to cover loss of revenue by way of VAT, taxes and commission etc . The assessee has declared gross profit ratio of 10.56% on turnover in the impugned assessment year as against gross profit ratio of 8.79% in immediately preceding year, while Revenue has estimated gross profit of 20.17% on total turnover. In our considered view, end of justice will be met in the instant case, if the additions are sustained to the tune of addition by way of 5% of the alleged bogus purchases from three parties namely M/s Dhruv Sales Corporation, M/s Accure Impex Private Limited and Riddhi Dyechem Corporation International Chemicals , which were to the tune of Rs.38,06,223/- , which will lead to enhancement of GP ratio to the extent of 5% of Rs.38,06,223/- which comes to sustaining addition to the tune of Rs.1,90,311/- to cover profit embedded in these bogus purchases and loss of revenue by way of VAT, taxes, commission etc. , in addition to profits as reported by the assessee. With Respect to Chemi-Age Enterprises from where the assessee made purchases to the tune of Rs.97,95,547/- during relevant previous year and with whom it is stated that dealings are continuing as of now, the assessee needed to be granted one more opportunity to produce the said party before the AO and satisfy the AO about its contentions that purchases were genuine, to the satisfaction of AO. The AO shall grant reasonable and adequate opportunity to the assessee to produce the said party before the AO and also to produce any other evidences and explanation which the assessee may deem fit in his defense before the AO. In absence of satisfaction being achieved by the AO as to genuineness of purchases made by the assessee from Chemi-Age Enterprises, the AO shall enhance GP ratio by 5% and bring the same to tax as profits embedded in said purchases in addition to profits as reported by the assessee in return of income filed with ITA 5515/Mum/2016 14 Revenue, as was ordered to be done by us with respect to other three parties as per our orders. We order accordingly.