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Income Tax Appellate Tribunal, “H” Bench, Mumbai
Before: Shri B.R. Baskaran (AM) & Shri Amit Shukla (JM)
O R D E R Per Bench :-
The cross appeals filed by the parties and cross objection filed by the assessee are directed against separate orders passed by the learned CIT(A)- 33, Mumbai and they relate to A.Y. 2009-10 to 2011-12. Since the issues urged in these appeals are identical in nature, they were heard together and are being disposed of by this common order, for the sake of convenience.
The Assessing Officer made addition in all the three years by disallowing a portion of purchases treating them as bogus purchases. The learned CIT(A) restricted the addition to 12.5% of the value of alleged bogus purchases. The Revenue has filed these appeals challenging the relief granted by the learned CIT(A). The assessee has filed these appeals and cross objection challenging the addition sustained by the learned CIT(A).
Facts relating to the case are stated in brief. The assessee is engaged in the business of undertaking civil contract works under his proprietary concern named M/s. Kinjal Construction Company. The assessee mainly undertakes contract given by the Government and Semi Government bodies by obtaining them through tenders floated by them. Original assessment for A.Y. 2009-10 and 2010-11 were completed u/s. 143(3) of the Act. Return of income filed by the assessee for A.Y. 2011-12 was processed u/s. 143(1) of the Act. The Assessing Officer subsequently received information from DGIT(Inv) that certain dealers have admitted before the Maharashtra Sales Tax Department that they have issued bogus bills without actual delivery of goods. The list of those dealers was categorized as “Suspicious dealers” and was published by the Sales tax department. It was noticed that the assessee
3 M/s. Heeralal Meghraj Doshi has purchased goods from some of the dealers who have been categorized as “suspicious dealers”. Hence the Assessing Officer reopened the assessment of the assessee for A.Y. 2009-10 and 2010-11. Assessment relating to A.Y. 2011-12 was taken up for scrutiny.
The reasons given by the Assessing Officer for disallowing purchases made from the suspicious dealers are identical in nature in all the three years. The Assessing Officer asked the assessee to furnish copies of bills relating to purchases made from suspicious dealers, proof of payment made to them and evidence for transportation of goods. The Assessing Officer also asked the assessee to produce the dealers before him. The assessee supplied bills, payment details etc. but did not produce the suppliers before the Assessing Officer. Hence, the Assessing Officer issued notices u/s. 133(6) of the Act to the suppliers but all the notices were returned back un-served. The assessee submitted that the work executed by him undergo stringent tests by the Government authorities before approving bills raised by him. He further submitted that the materials used for work are also tested by the Inspector designated by the Contractee. The assessee further submitted that the suppliers usually transport and supply goods at the site itself, i.e., the transportation charges are borne by them. The assessee also submitted that net profit ratio shown by him in A.Y. 2007-08 & 2008-09 was 4% but the same has risen to 9% in A.Y. 2009-10. Accordingly, he submitted that the net profit could not have gone up, had he accounted for bogus bills. Accordingly, the assessee contended that the purchases are all genuine.
The Assessing Officer, however, was not convinced with the explanations given by the assessee. The Assessing Officer noticed that the suppliers have confessed before the sales tax authorities that they have issued only accommodation bills without actually supplying any material. The AO also noticed that the assessee has failed to furnish transportation receipts or octroi receipts. Since the assessee has consumed the materials, the Assessing Officer took the view that the assessee could not prove the 4 M/s. Heeralal Meghraj Doshi purchase of material beyond doubt. The Assessing Officer also placed reliance on the decision rendered by Hon'ble Gujarat High Court in the case of CIT Vs. Chandra Vilas Hotel (164 ITR 102) and also certain other decisions to reiterate that the onus lies on the assessee to prove the claim of deduction for expenditure. The Assessing Officer also observed that the assessee has failed to produce the suppliers before him.
The Department had conducted a survey operation in the hands of the assessee u/s. 133A of the Act. During the course of survey, a statement from the project engineer named Mr. Arvind M. Jain was recorded u/s. 131 of the Act. In the said statement, the project engineer had explained the methodology adopted for purchase of material and for making payment. In the said statement he had stated that certain purchases debited in the books of account of the assessee do not have supporting documents. The Assessing Officer also referred to the statement taken from the assessee on the date of survey as well as post survey. In the statements, the assessee had admitted that supporting documents are missing in respect of certain purchases. He had also stated that he has not been able to justify these purchases and will file a revised return.
In view of the above, the Assessing Officer came to the conclusion that the purchases made from suspicious dealers are bogus in nature and accordingly disallowed the purchases in all the three years as detailed below:- A.Y. Amount in Rs. 2009-10 2.35 crores 2010-11 7.99 crores 2011-12 3.34 crores
In the appellate proceedings, the learned CIT(A) took note of the fact that the assessee has purchased goods from the suppliers who had proper VAT registration. The learned CIT(A) also noticed that the decisions referred by Hon'ble Bombay High Court in the case of CIT Vs. Nikunj Eximp
5 M/s. Heeralal Meghraj Doshi Enterprises Pvt. Ltd.(372 ITR 619), wherein Hon'ble High Court has held that purchases cannot be considered as bogus merely on the basis of suspicion and also for the reason that the suppliers were not produced, when the assessee has furnished letter of confirmation, payment details, invoices, stock reconciliation etc. before the Assessing Officer. The learned CIT(A) also noticed that the contractee, being Government body, has undertaken proper scrutiny and strict verification of the quality of project executed by the assessee. The learned CIT(A) also noticed that the gross contract receipts declared by the assessee has been accepted by the Assessing Officer. The learned CIT(A) also noticed that the assessee was having running account with these parties and payments have been made on several occasions. The learned CIT(A) observed that in the case of bogus purchases, payments would normally be made at one go or it may be shown as outstanding at the end of the year. With regard to the admission made by the dealers before sales tax authorities, the learned CIT(A) took the view that the Assessing Officer cannot place reliance on them without corroborating the same with any other material to prove the authenticity of the statement. The learned CIT(A) also noticed that the Assessing Officer has summarily rejected the evidence furnished by the assessee with regard to the payments, invoice, delivery challan without making further investigation in the matter. The learned CIT(A) also placed reliance on the decision rendered by the coordinate bench of in the case of ITO Vs. Premanand (2007) 107 TTJ (Jd) 395 and also decision rendered in the case of DCIT Vs. Rajeev G. Kalathil (ITA No. 6727/Mum/2012). The learned CIT(A) came to the conclusion that entire purchases cannot be treated as bogus, since gross profit rate and net profit rate declared by the assessee has gone up during the year. Further the Ld CIT(A) observed that the assessee has purchased goods at prevailing market rates. Hence, by placing reliance on the decision rendered by Hon'ble Gujarat High Court in the case of CIT Vs. Simit P. Sheth (ITA No. 553 of 2012 dated 16.1.2013), the Ld CIT(A) came to the conclusion that only a portion of purchases can be disallowed by estimating profit element involved therein.
6 M/s. Heeralal Meghraj Doshi Accordingly, the learned CIT(A) restricted the addition to 12.5% of the alleged bogus purchases. The revenue is aggrieved by the relief granted to the assessee and the assessee is aggrieved by the addition sustained by the Ld CIT(A).
We have heard rival contentions and perused the record. The Ld D.R placed strong reliance on the orders passed by the AO and contended that the Ld CIT(A) should have upheld the addition made by the AO in all the three years. On the contrary, the Ld A.R submitted that the Ld CIT(A) should have deleted the additions in entirety, since the assessing officer has made the additions only on suspicions and further the assessee has proved the genuineness of purchases by furnishing necessary documents.
We notice that the Ld CIT(A) has extracted the following submissions made by the assessee before him. For the sake of convenience, we also extract the same hereunder:-
“(n). The AR of the appellant has further submitted as under:- i) In the course of survey action, no incriminating material or any evidence found to show that either no purchases were made from the 8 parties as listed in assessment order OR that any amount was received back in cash from the said parties; ii) The appellant has submitted copies of bills on which lorry (truck) nos. are mentioned (in most of cases), delivery challans (in few cases, wherever available), payment details (alongwith bank statement showing name of party); ledger account copy proving that payments are made to all these parties within stipulated credit period and which apply to almost all the purchase parties i.e. even other than these 8 parties; GP ratio in prove that the same has in fact increased as compared to other years, which prove that there is no bogus purchase debited to trading account; etc.; iii) No opportunity given by AO to cross-examine the parties whose statements I affidavits relied upon; iv) No transactions with these parties since the year 2011 and appellant cannot be asked to keep track of all the purchase parties;
7 M/s. Heeralal Meghraj Doshi iv) Purchases are made at various sites by Project engineer who has sole responsibility for making purchases as and when, required at Various sites; vi) Purchases are made through brokers also; vii) Precaution taken while making purchase of material at various sites is that the vendors are registered with VAT authorities, proper Tax Invoices is raised by them and most importantly, required quality material is received from them. Beyond these, a prudent businessman cannot be asked to gather any other information for carrying out transaction; viii) All the contracts executed are of Government / Semi- government authorities and their supervisor regularly inspect and keep check upon the construction activity carried out and the material used is also checked and only after thorough investigation and verification, the running bill of the appellant' is passed for payment, else appellant would not receive payment: ix) AO not stated as to what stand department has taken in all the 8 parties income tax proceedings. x) The Appellant submits that from the chart of GP submitted, it would be observed that that there are 15 contracts (other than sub-contracts) executed by the appellant during the year and contract-wise GP position reveals that the appellant has generally earned GP in the range of 16% to 23% in different contracts. The materials purchased from the said alleged bogus parties are mainly used in 2 contracts namely M/East and Narayan Ngr (LW). Out of the total materials of Rs.2,-35,04,632/- purchased from said parties, materials of Rs.88,56,743/- are • used in M/East and materials of Rs.1,41,97,306/- are used in Narayan Ngr (LW). The allegation of the AO of non-genuine purchase is considered, the GP ratio of these 2 contracts give absurd result if these alleged purchases are excluded from the total purchases made for the contract. For e.g., in respect of M/East contract, the alleged non- genuine purchase is stated to be Rs.88,56,743/- and the GP including these purchases comes to -18.21% whereas the GP excluding this alleged non- genuine purchase works out to 33.46%. Similarly, for Narayan Ngr (LW) Works contract, the GP including alleged non-genuine purchase of Rs.1,41,97,3061- works out to 17.61% and excluding this purchase, the GP works out to 34.50%. Thus, the appellant submits that from this chart of GP, it--proves beyond doubt that the purchases are made by the appellant and the same cannot be disallowed.
8 M/s. Heeralal Meghraj Doshi
(xii) The appellant submits that all the details in respect of each of the party was duly furnished to the AO in the course of assessment proceedings and from the details furnished the appellant submits that he has duly purchased goods from all the aforesaid parties and the goods have also been delivered to the sites and all the available details prove this fact beyond doubt. The appellant submits that the AO has not rebutted the aforesaid evidences and merely stated that the appellant has failed to furnish evidences to prove its purchases and since the parties are not produced before AO, the entire purchases made from these parties are disallowed.
The appellant submits that he has purchased material from the (m) said parties, the parties have given valid invoice showing TIN nos. and have also charged VAT as per the applicable rates and the appellant has also received the quality and quantity and after all this precautions, the appellant has carried out its business activities and hence, the genuine purchases made by the appellant cannot be denied merely on the ground of nonproduction-of the aforesaid parties. n) The MVAT department, has categorized certain parties who have failed to pay sales tax as 'suspicious dealer' and hence, the AO could not make disallowance of entire purchases made from these parties without bringing on record any further material or evidence to prove that these parties have not carried out actual purchase and sale business. The appellant submits that merely on the basis of some list and that too of so called 'suspicious dealer' by the sales tax department will not make genuine purchase made by the appellant as non-genuine. In this regard, the appellant relies upon the decision of Mumbai ITAT in the case of DCIT v. Rajeev Kalathi, AY 2009-10, Bench 'D', order dated 20.08.2014 wherein it is held in para 2.4 as under :
"We find that AO had made the addition as one of the supplier was declared a hawala dealer by .the VAT Department. We agree that it was a good starting point for making further investigation and take it to logical end But he left the job at initial point itself. Suspicion of highest degree cannot take place of evidence. He could have called for the details of the bank accounts of the suppliers to find out as whether there was any immediate cash withdrawal from their account. We find that no such exercise was done. Transportation of good to the site is one of the deciding factor to be considered for resolving the issue. The FAA has given a finding of fact that part of the goods received by the assessee was forming part of closing stock. As far as the case of Western Extrusion Industries (supra) is concerned, we find that in that matter cash was immediately withdrawn by the supplier and 9 M/s. Heeralal Meghraj Doshi there was no evidence of movement of goods. But, in the case before us, there is nothing, in the order of the AO, about the cash traial. Secondly, proof of movement of goods is not in doubt. Therefore, considering the peculiar facts and circumstances of the case under appeal, we are of the opinion that the order of the FAA does not suffer from any legal infirmity and there are not sufficient evidence on file to endorse the view taken by the AO. So, confirming the order of the FAA, we decide ground no.1 against the AO."
(o) The -assessee further submits that it is not possible to construct projects without the consumption of the raw-materials and hence, there is no question of appellant not having purchased goods from these parties.
(p) The appellant further submits that its books of account are duly audited and there are no such defects pointed out by the auditor. Further, the AO has also not rejected the books of account of the appellant. Thus, having not rejected the books of account, the purchases made from 8 parties could not be held to be non-genuine.
(q) The appellant submits that suspicion however strong cannot take place of proof and there cannot be any addition merely on the basis of assumptions and presumptions. For the said proposition, the assessee relies on the decision of the Supreme Court in Urnaracharan Shaw & Bros. V. CIT 37 ITR 271 (SC) [page 272 - para (v)]. The appellant therefore submits that purchases could not be held to be non-genuine only for the reason that the parties name appear in the so called list of suspicious dealers of the sales tax authorities. The appellant has furnished all the details proving that the purchases have been duly made and hence, are genuine purchases.
(r) The appellant further submits that the Honble Bombay High Court in the case of CIT v. Nikunj Eximp Enterprises (P.) Ltd. has held that - 'When the assessee have filed letter of confirmations of the suppliers, Bank statements highlighting the payment entries through account payee cheque, copies of invoices, stock reconciliation statements before the AO; and merely because the suppliers did not appear before the AO, one cannot conclude that the purchases were not made by the assessee. The AO cannot disallow the purchases on the basis of suspicion because the suppliers were not produced before them."
(s). The appellant submits that in the present case also, the AO has made disallowance of entire purchases made from 8 parties only on The basis of suspicion and non-production of supplier that too after more than 5 years from last business transaction and hence, the ratio of the aforesaid decision of Bombay High Court squarely applies to the facts of 10 M/s. Heeralal Meghraj Doshi the present case and the disallowance thus made is unjustified and liable to be deleted.
(t) The appellant also relies upon the Bombay High Court decision in Babulal C. Borana v. ITO [2006] 282 1TR 251 (Born) and the finding given on page 258 para 20 are reproduced hereunder-
"Moreover, it is not the case of the Revenue that the investments made by the assessee are outside the books maintained by the assessee. It is not the case of the Revenue that the Syndicate Bank account No.2668 in the name of M/s. Gautam Trading Co belongs to the assessee. It is also not the case of the Revenue that the amounts withdrawn from the Syndicate Bank account No.2668 had been received by the assessee. In the present case, the books maintained by the assessee have not been rejected by the Assessing Officer and in fact the addition is based on the entries made in the books of account maintained by the assessee. The fact that the said Bipinkumar B. Shah has not paid sales tax payable on sale of 50 M.Ts. of HOPE or the fact that the assessee has paid for the goods after the date of search and claimed 10 M. Ts. of HDPE belatedly does not in any way affect the genuineness of the transaction. Having rejected the addition of the value of 40 M.Ts. of HOPE powder, the Tribunal could not have sustained addition of the value of 10 M.Ts. of HOPE powder, when the nature and source of investment has been duly explained by the assessee."
(u) The appellant submits that it has made payments for purchase from its regular bank account and the relevant copies of cross-examine the said person. The appellant relies upon the following decisions for the proposition that no addition could be made on the basis of the statement given by the third party if the appellant is not given opportunity to cross- examine-
361 ITR 206 (Del) CIT Vs. Sunrise Tooling System P. Ltd. 163 ITR 249 (Guj) CIT Vs. M.K. Brothers 252 ITR 476 (Guj) DCIT Vs. Adinath Industries Balaji Textiles Vs. DCIT 49 ITD 177 (Mum) 107 Taxmann 126 (ITAT Ahd) ITO Vs. Ghanshyam Steel Traders 122 Taxmann 32 (ITAT Gauhati) DCIT Vs. Brahmaputra Steels P. Ltd. ITO Vs. Agarwal Steel Traders 77 Taxman 95 (Chd)
The appellant submits that without prejudice to the contention of (v) the appellant that there is no admission made in the statement recorded in the course of survey proceedings, the appellant submits that in any case, the statement recorded it the course of survey proceedings does
11 M/s. Heeralal Meghraj Doshi not have any evidentiary value. In this regard, the appellant relies upon the following decisions-
Paul Mathew & Sons v. CIT [2003[ 263 ITR 101 (Ker) CIT v. S. Khader Khan Sons [2008] 300 ITR 157 (Mad) [SLP filed by the Department dismissed -210 Taxman 248/254 CTR 228 (SC) CIT Vs. Dhingra Metal Works 328 ITR 384 (Del) Unitex Products Ltd. v. ITO [2008] 22 SOT 429 (Mum) DClT v. Premsons (2010) 130 TTJ 159 (Mum)
(w) The appellant further submits in this regard that the CBDT nas issued instruction dated 10/03/2003 wherein it is categorically stated that no confessional statement be recorded and the emphasis in course of search and survey proceedings must be to collect and gather material or evidences and only rely upon such evidences for making additions.
(x) The appellant further submits that the AO has relied upon the statement without affording any opportunity to the appellant to cross examine the said person. The appellant relies upon the following decisions for the proposition that no addition could be made on the basis of the statement given by the third party if the appellant is not given opportunity to cross examine :- a) CIT Vs. SMC Share Brokers Ltd. [2007] 288 ITR 345 (Del) — wherein it was held that rejection of request to cross examine person searched and on whose statement reliance is placed, the same would vitiate assessment/additions being made in violation of principles of natural justice. b) CIT v. Kishenchand Chellaram 125 ITR 713 (SC) — documents relied upon at the back of the assessee cannot be wed as evidence for making addition. c) Laxman S Patel 174 Taxman 206 (Guj) - The legal effect of the statement recorded behind the back of the assessee and without furnishing the copy thereof to the assessee or without giving an opportunity of cross-examination, if the addition is made, the same is required to be deleted on the ground of violation of the principles of natural justice.
(y) The appellant further submits that no addition could be made relying upon the third party statement as held in-
CIT v. Concord Capital Management Co. Ltd. 334 ITR 346 (Del) Dr. R.L. Narang 174 Taxman 96 (Chd)(Mag)
12 M/s. Heeralal Meghraj Doshi
(z) In view of the above, the appellant submits that the disallowance out of purchases of Rs,2,35,04,632/- is without any justification and liable to be deleted.
Without prejudice to above, the appellant submits that similar disallowance of purchases has been in the case of the appellant for the Assessment Year 2011-12 in the assessment u/s.143(3). The appellant preferred appeal before the Honble CIT(A) and the CIT(A) has restricted the addition/ disallowance to 12.5% of the purchases.
The appellant further placed reliance in the following cases wherein it has been held that entire purchases cannot be disallowed and only profit element is to be added: i) CIT v. Bholanath Poly Fab Pvt. Ltd. (2013)355 ITR 290 (Guj)(HC) ii) CIT V. Simit P Sheth (2013) 356 ITR 451 (Guj)(High Court)
We notice that the assessing officer has placed reliance on the report given by the Sales tax department to come to the conclusion that the purchases made by the assessee from the suspicious dealers are not genuine. Even though the assessee has furnished evidences regarding receipt of goods and payments made to the suppliers through banking channels, the AO has taken support of statements recorded from the Project Engineer and the assessee to strengthen his view. A careful perusal of the statement given by both the Engineer and the assessee would show that certain invoices do not contain certain internal documents, i.e., internal procedures followed by the assessee. Both of them have made reference to the internal documents prepared by the assessee only. Both of them did not deny existence of external documents, i.e., third party documents. Further, they have also not stated that the materials were not received or consumed.
We notice that the assessee has made detailed submissions before the Ld CIT(A), a part of which was extracted earlier. The assessee has stated that the entire responsibility for purchasing goods including preparation of documents. Hence the flaw, if any, in the availability of internal documents would not render the external evidences such as, invoices, delivery challans
13 M/s. Heeralal Meghraj Doshi etc. invalid or bogus. We have also noticed that the AO had placed full reliance on the statement given by the suspicious dealers to the Sales tax department. We notice that the assessing officer did not make any independent enquiry with those dealers not did he show that the suspicious dealers have specifically stated that the transactions entered with the assessee were bogus. According to the assessee, those dealers have merely disowned the transactions to serve their own purpose, since they have committed default under VAT Act. Accordingly it was contended that the AO should not have relied upon those statements blindly without making his own investigations. The assessee has also contended that the assessing officer has not given any opportunity to the assessee to cross examine those suspicious dealers and hence the AO should not have placed reliance on those statements. We find merit in the above said submissions made by the assessee for the reasons discussed infra.
The Ld CIT(A) has also pointed out that the assessing officer has rejected the evidences available with the assessee in a summary manner, i.e., the AO did not conduct any type of enquiry or investigation to prove that those documents are not reliable. The assessee has also pointed out that the goods were transported by the suppliers directly to the sites and the lorry numbers have been duly noted down in the relevant invoices. He has also submitted that the delivery challans have been furnished in most of the cases. We notice that the AO did not consider these submissions of the assessee at all. There is no dispute with regard to the fact that the payments to the suspicious dealers have been made by way of account payee cheques. The bank statements also records the names of the dealers by whom the relevant cheques have been encashed. We notice that the AO did not make any comment about the evidences relating to the payments made by the assessee. We have earlier noticed that the Ld CIT(A) has observed that the assessee has given the payments in several installments, which in a way prove the genuineness, i.e., in case of bogus purchases, the payment would normally be made in one go or it would be shown as outstanding. The 14 M/s. Heeralal Meghraj Doshi assessee has also contended that the AO did not bring any material on record to show that the payments so made by the assessee have flown back to him, which might have supported the case of the assessee.
The assessee has contended that AO could not have placed reliance on the statements given by suspicious dealers before the Sales tax department, without allowing the assessee to cross examine them. We have earlier noticed that the AO has not shown that those dealers have specifically admitted that the transactions entered with the assessee were bogus, i.e., they have given general statements only without implicating the assessee’s transactions, in particular. The Hon’ble Bombay High Court, in its decision dated 22-12-2011 rendered in Income tax Appeal No.4299 of 2009 in the case of CIT Vs. M/s Ashish International has expressed the view that the Tribunal was justified in deleting the addition made towards alleged bogus purchases, when the AO did not allow the assessee to cross examine the suspicious dealer.
The co-ordinate bench of ITAT has also considered an identical issue in the case of ACIT Vs. Shri Mahesh K Shah (ITA No.5194/Mum/2014 dated 31.01.2017) and has held that mere reliance by the AO on information obtained from the Sales tax department or on Statement/affidavits of the 12 parties before the Sales tax department or that these parties did not respond to notices issued under section 133(6) of the Act, would not by itself suffice to treat the purchases as bogus and make the addition under section 69C of the Act. It was further observed that, if the AO doubted the genuineness of the said purchases, it was incumbent upon him to cause further inquiries in the matter in order to ascertain the genuineness or otherwise of these transactions. Without causing any further enquiries to be made in respect of the said purchases, the AO cannot make the addition under section 69C of the Act by merely relying on information obtained from the Sales tax Department, the statements/affidavits of third parties, without the assessee being afforded any opportunity of cross examination of those persons for 15 M/s. Heeralal Meghraj Doshi non-response to information called for under section 133(6) of the Act. Accordingly, by following the decision rendered in the case of Ashish International (supra) by Hon’ble Bombay High Court and also upon the decision rendered by the co-ordinate bench in the case of M/s Vaman International P Ltd (ITA No.794/Mum/2015 dated 16.11.2016), the co- ordinate bench has deleted the addition made u/s 69C of the Act towards bogus purchases. The AO has also stated that the assessee did not produce the dealers before him. The assessee has stated that he has stopped business transactions about four years ago and hence he could not have enforced them to appear before the AO, particularly when they have shifted their addresses. The assessee has also submitted that it would have been easy for the AO to locate them through the details available with the income tax department.
Another important point, which has been duly considered by Ld CIT(A) is that the gross profit rate and net profit rate declared by the assessee has increased substantially during the three years under consideration when compared with the Gross profit rate and Net profit rate declared by the assessee in AY 2007-08 and 2008-09. We also find merit in the contentions of the assessee that the above said profit rates would go abnormally high, if the disallowance of part of purchases has been held to be high. We notice that the Ld CIT(A) has rightly appreciated this contention of the assessee.
In view of the foregoing discussions, we are of the view that the Ld CIT(A) was justified in holding that the assessing officer was not justified in disallowing the purchases made from the suspicious dealers treating them as bogus. After having held so, the Ld CIT(A) has proceeded to sustain the addition to the extent of 12.50% of the purchases on the ground that the profit element on the alleged unverifiable purchases should be added. In the instant case, the revenue has conducted survey operations u/s 133A of the Act. During the course of survey, no incriminating materials were seized which show that the purchase of materials from the suspicious dealers were 16 M/s. Heeralal Meghraj Doshi bogus. This fact has been noted down by Ld CIT(A) in paragraph 31 of the order passed for AY 2009-10. The Ld CIT(A) has come to the conclusion to sustain a part of addition only on the reasoning that the purchase price shown in the bills may not be at arms length, while the assessee has contended that the goods were purchased by them at market rates. In paragraph 39 of the order, the Ld CIT(A) accepts the contentions of the assessee that the AO has not made any attempt to prove the bills/invoices produced by the assessee to be bogus. The assessee has stated that he has purchased construction materials from the suspicious dealers at prevailing market rates and it was not established that the purchases were made at a rate higher than the then prevailing market rates. The Ld A.R submitted that the quality of work executed by the assessee is subjected to stringent verification by the Government authorities and hence he could not have compromised on the quality of the materials. Accordingly he submitted that the question of making any profit on purchases would arise only if there is a possibility for the assessee to purchase inferior quality material from the grey market and obtaine accommodation bills from the dealers. He submitted that the work executed by the assessee has not been rejected by the Government authorities and he continues to get work from them on account of quality of work. Accordingly the Ld A.R submitted that the assessee could not compromise on the quality of work. Accordingly the Ld A.R contended that the Ld CIT(A) has sustained the addition to the extent of 12.5% only on surmises and conjectures without bringing any material on record. We are of the view that there is merit in the contentions of the assessee that the Ld CIT(A) has sustained addition to the extent of 12.5% only on the basis of surmises. Accordingly we set aside the order passed by Ld CIT(A) on this issue.
In view of the foregoing discussions, we are of the view that the addition of alleged bogus purchases made in all the three years cannot be sustained. Accordingly we direct the AO to delete the additions relating to purchases made in all the three years under consideration.
17 M/s. Heeralal Meghraj Doshi
In the result, the appeals filed by the revenue are dismissed. The appeals and cross objection filed by the assessee are allowed.
Order has been pronounced in the Court on 15.2.2017