ITO 31(2)(3), MUMBAI vs. MANJULA S. SHAH, MUMBAI

आदेश / O R D E R

Per Joginder Singh(Judicial Member) The Revenue is aggrieved by the impugned order dated 29/09/2014 of the Ld. First Appellate Authority, Mumbai. The only ground raised by the Revenue pertains to deleting the addition of Rs.58,17,619/- made on account of unexplained purchases from M/s Manav Impex (Rs.12,17,105/-), M/s Kodiyar Industries (Rs.30,74,842/), M/s K.C. Enterprises (Rs.3,61,400/-) and M/s V. S. Impex (Rs.11,04,272/-), ignoring the fact that in response to notices issued u/s 133(6) of the Income Tax Act, 1961 (hereinafter the Act), these parties neither responded nor were produced by the assessee.

2.1. On the other hand, the ld. counsel for the assessee, Shri Vipul J. Shah, defended the conclusion arrived at in the impugned order by contending that necessary details/explanation were furnished by the

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assessee. Reliance was placed upon the decision from Hon'ble jurisdictional High Court in the case of Nikunj Exmip Enterprises Pvt. Ltd. (ITA No.5604 of 2010) order dated 17/12/2012.

2.2. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee, an individual and proprietor of M/s Eastern Chemical Manufacturing Products declared income of Rs.84,900/- in her return on 24/08/2009. The assessee filed the audited profit & loss account, balance sheet, tax audit report in form No.3CA along with details in Form No.3CD and other requisite documents. The assessee purchased material amounting to Rs.58,17,619/- from following four parties.

Sl. Name of the Party Amount in Rs. No. 1 M/s Manav Impex 12,77,105 2 M/s Khodiyar Industries 30,74,842 3 M/s K.C. Enterprices 3,61,400 4 M/s V.S. Impoex 11,04,272 Total 58,17,619/-

During assessment proceedings, the assessee filed the necessary details, however, the ld. Assessing Officer was not satisfied with the claim of the assessee, therefore, he issued notice u/s 133(6) of the Act to M/s Manav Impex, which was returned by the postal authorities and the remaining three parties, as per the Revenue, denied of having any transaction with the assessee. The Ld. Assessing Officer

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relied upon the declared list of suspicious dealer from the sales tax department and made the addition u/s 69C of the Act, amounting to Rs.58,17,619/-.

2.3. On appeal before the Ld. Commissioner of Income Tax (Appeal), the factual matrix was considered and following the decision from Hon'ble jurisdictional High Court in the case of Nikunj Eximp Enterprises Pvt. Ltd. (supra), the addition was deleted. The Revenue is aggrieved and is in appeal before this Tribunal.

2.4. If the observation made in the assessment order, leading to addition made to the total income, conclusion drawn in the impugned order, material available on record, assertions made by the ld. respective counsel, if kept in juxtaposition and analyzed, broadly, we find that DGI(Investigation) vide letter dated 26/12/2013 informed the list of beneficiaries of hawala dealers. The sales Tax Department also issued a list of such dealers, who are transacting in bogus purchases. On the basis of this list the ld. Assessing Officer suspected that the assessee has also indulged in bogus purchases from these parties and thus he made addition u/s 69C of the Act. We find that the Mumbai Bench of the Tribunal in the case of ACIT vs M/s Chirag Construction Company in ITA No.3604/Mum/2013 for Assessment Year 2009-10, vide order dated 13/01/2017, made an elaborate discussion in a case, where, there were allegedly bogus purchases. The factual matrix was

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considered in the light of various judicial pronouncements and thereafter upheld the order of the Ld. Commissioner of Income Tax (Appeal). The ratio laid down in the aforesaid case squarely covers the case of the assessee. The relevant portion from the order is reproduced hereunder for ready reference and analysis:- “The Revenue is aggrieved by the impugned order dated 14/02/2013 of the Ld. First Appellate Authority, Mumbai. The Revenue has challenged the addition, which was deleted by the Ld. Commissioner of Income Tax (Appeal) as the same was on account of bogus purchases of Rs.4,48,88,866/- as the assessee could not produce the parties before the Assessing Officer for verification. 2. During hearing, the ld. DR, Shri A. Ramachandran, defended the addition by adducing arguments, which is identical to the ground raised by contending that the assessee made bogus purchases from certain parties and did not produce them for examination before the Assessing Officer, thus, the addition was rightly made. It was fairly agreed by the ld. DR, that the payments were made through cheque. He relied upon the decision in the case of Shri Ganesh Rice Mills vs CIT (2007) 294 ITR 316 (All.) and CIT vs La Medica (2001) 117 taxman 628 (Del.); 250 ITR 575 (Del.). 2.1. On the other hand, the ld. counsel for the assessee, Shri Shashi Tulsyan, explained that the assessee is a civil contractor, made total purchases of 5.66 crores and the assessee disclosed 1.51 crores, which were suspected, paid taxes by including them in the return. It was explained that the net profit increased from year after year. It was asserted that the assessee is doing job work for the government departments, the work was verified and then the payments were made through cheque. The quality and quantity details were also claimed to be provided by the assessee. It was explained that the payments were made after certification and verification by the authority and consumption of material. The ld. counsel explained that during survey, on incriminating material was found except for three parties for which due disclosure was made. It was also contended that the assessee co- related the material with job work and payments in which no

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discrepancy was found. It was also explained that remand report was sought from the Assessing Officer, wherein, the MCGM authorities were asked to verify the genuineness of the claim. It was empathetically argued that the government authorities duly confirmed that the job work was done by the assessee as per order. It was further claimed that the invoice bill from the purchase parties like Sale Tax, etc, were duly provided by the assessee. The cases relied upon by the Revenue to be argued on different facts. Reliance was placed upon the decision from Hon'ble jurisdictional High Court in the case of CIT vs M/s Nikunj Exim Enterprises Pvt. Ltd. 372 ITR 619 (Bom.), Dhakeshwari Cotton Mills Ltd. vs CIT 26 ITR 775 (SC), Hital Chunilal Jain & Ors. (2016) 46 CCH 0020(Mum.) and DCIT vs Rajeev G. Kalathil (2014) 41 CCH 552 (Mum.). 2.2. We have considered the rival submissions and perused the material available on record. Before coming to any conclusion, we are reproducing hereunder the finding of the Ld. Commissioner of Income Tax (Appeal) for perusal and analysis:- “20. I have considered the stand of the A.O. as well as the submissions of the appellant including judicial- pronouncements as well as the above referred Appeal Orders placed on record by the Ld.A.R. The issues regarding Disallowance of Rs.4.48 crores in respect of purchase are discussed and decided hereinafter. 20.1. The assessment was preceded by a survey by the Investigation Wing and in the said survey the books of accounts, vouchers and documentation were thoroughly examined. The Investigation Wing had reservations about the genuineness of certain purchases and the same were surrendered by the appellant. As per the para 3 of the of the relevant Assessment Order , "A survey u1s.1334 of I.T. Act, 1961 was conducted at the office premises of the assessee at Goregaon, Mumbai-63 on 25.08.2009 by the investigation wing of the Income Tax Department, P4umbai. During the course of survey, assessee offered a sum of Rs.1,51,45,603/- (68,49,274 + 21,55,128 + 61,41,201) in respect of purchases made from following three parties - (i) Kavita Sales - Rs.68,49,2741; (ii) Manav Impex - Rs.21,55,128/- & (iii) Mahavir Impex - Rs.61,41,201/- for taxation on the basis of bogus bills for A.Y.2009-10. It was also noticed, during the course of survey, that signed blank cheques belonging to these three parties were found and the partner of the firm submitted in statement recorded on oath that the signed blank cheque books were taken from these three parties to safeguard its interest since these purchases from three parties were not genuine. Assessee has also offered this amount of Rs.1,51,45,603/- as its additional income in computation of total income for A. Y.2009-10 and paid taxes

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accordingly. Therefore, the additional Income of Rs.1,51,45,603/- offered by the assessee as additional income is taxed as such." Thus, as on the date of survey the business affairs of the appellant in general and the purchases made by the appellant in particular were deemed to have been verified by the Investigation Wing and they did not discover anything amiss in the purchase claims other than the purchases from 3 parties which were surrendered by the appellant." However, the A.O. has made further disallowance of Rs.4,48,88,866/- under the heading 'Purchases' reasons for which has been given by the A.O. in para 5 of the Assessment Order which has already been reproduced earlier. 20.2. The appellant is a contractor who had undertaken amongst other projects "Premier Nalla Project" where its job included widening, remodeling and training of 'Premier Nalla Project'. It is seen that in the year under consideration the appellant had carried out contract work exclusively for Government Departments. It was involved in 16 contract jobs of various specification. The addition of Rs.4.48 crores made towards unproved purchases relates to one such project named as “widening/improving/remodeling/training of premier nalla system in catchment No.501 (Nehru Nagar Nalla System)” in short “Premier Nalla” for which the appellant had shown a total receipts of Rs.12,69,19,180/- (Page No.14 of Paper book).

20.3.1. The disallowance of purchases of Rs. 4.48 cores relates to the contract "Premier Nalla". The appellant received a sum of Rs. 12,69,19,180/- for the work done on this contract during the year as per the payment certificate issued by the MCGM (Page No 15 to 57 of Paper Book), As per the Terms of Contracts by the Municipal Corporation of Greater Mumbai (MCGM), [which is in public domain and'. available on the website of Municipal Corporation of Greater Mumbai, and which will be referred at the appropriate placers in the Order, the jobs executed by the contractor (here the appellant), also require quantity and quality specification of the material to be supplied / consumed and the contract receipts in the hands of the appellant invariably precede such verification and certification by the departmental authorities. The receipt sanctioned by the MCGM reflects execution of work and supply/ utilization of the following material as per the Work Certificate (Page No 11 of Paper Book) .which has already been explained at length by the appellant in its submissions and which has been reflected in earlier paragraphs and for the sake of brevity, the same is not repeated here. 20.3.2. It may be pointed out that the execution of the contract, the quality and the quantity of the material supplied is directly under the supervision of the representative engineer of the MCGM. The appellant has to in the beginning furnish samples of the material to be supplied and the materials are later on supplied on approval of samples. This is on account of the clause 59 of General Conditions of Contract for Civil Works issued by the MCGM

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which is applicable to all the contracts awarded by the MCGM (Page No 06 to 08,1 of Paper Book). For sake of further clarification, the relevant extracts of bye laws related to conditions of contract reproduced below:- "59(a) Material to be provided by the Contractor: The Contractor shall, at this own expense, provide all materials required for the works other than those which are to be supplied by the Municipal Corporation. All materials to be provided by the Contractor shall be in conformity with the specifications laid down in the contract and the Contractor shall, furnish proof to the satisfaction of the Engineer that the materials so comply. Contractor shall produce proof viz. challans, bills, vouchers, etc. so as to ensure that the material was brought on site and quantities used as per the norms, specifications, etc. The Contractor shall, at his own expense and without delay, supply to the Engineer samples of materials proposed to be used in the works. The Engineer shall, within seven days of supply of samples or within such further period as he may require and intimated to the contractor in writing, inform the contractor whether the samples are approved by him or not. If the samples are not approved the contractor shall forthwith arrange to supply to the Engineer for approval fresh samples complying with the specifications laid down in the contract. The Engineer shall have full powers to require removal of any or all of the materials brought to site by the Contractor which are not in accordance with the contract specifications or which do not conform In character or quality to the samples approved by him. In case of default on the part of the Contractor in removing the rejected materials, the Engineer shall be at liberty to have them removed by other means. The Engineer shall have full powers to procure other proper materials to be substituted for rejected materials and in the event of the Contractor refusing to comply, he may cause the same to be supplied by other means. All costs, which may attend upon such removal and / or substitution shall be borne by the Contractor," 20.3.3. These particulars have also been incorporated in the tender document as mentioned in para.6.7.13 at page no 04 of the Paper Book. The appellant further produced a copy of the relevant pages of the tender document(Page No 01 to 05 of Paper Book) . The Works Contract for the year certifies that the requisite material for which deduction towards purchases has been made, has been actually received / consumed. The appellant maintains a register which incorporates details of various items which have been received on the site and which have been consumed or supplied under the supervision of the representative engineer (Page No 70 to 105 of Paper Book). Thus there is complete quantity check of various purchase items in terms of their delivery on the contract site and consumption In the execution of contract job. The appellant has also prepared

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summary of the Job work executed and the material consumed which matches with the specification as regards contract work done and material utilized in works contract as certified by the MCGM authority (Page No.58 to 59 of Paper Book). The appellant prepared a break up and summary of the total items purchased / consumed partywise and the said details were enclosed in the submission (Page No 60 to 69 of Paper Book). This demonstrates that the appellant had made the requisite purchases towards completion of work contract and the same are supposed to have been supplied to the contractee parties in the job work leading to contract receipts of Rs. 12.69 crores.

20.3.4. It has been explained by the appellant that it does not make use of items other than steel which are sold in big and reputed stores. The items like sand and concrete are explained to have been purchased from the parties who approach the agent of the appellant for the supplies on the site at competitive rates. Most of the items purchased are of approved standard and they are delivered by the supplier. Therefore, it may not be possible for the appellant to know as to whether the supplier is the real seller or he is only a front for the real supplier. In fact, once the payments are made to such parties/suppliers and transactions are over, the appellant may not have any control over them. Thus, it cannot be denied that the purchase of material were made by the appellant, which were consumed/ utilized in the execution of contract and utilization of these supplies has resulted in the contract receipts from MCGM. 20.3.5. In the present case, the total supply of material costing Rs. 5,66,34,559/- is stated to have been obtained from 41 parties of which 20 parties who supplied material worth Rs. 4,48,88,866/- have been held to be non-genuine. In the impugned contract the cost of material constitutes 44% of the receipts. The rejection of purchases from 20 parties which is 80% of the total purchases of the material made for the execution of the contract would lead to the preposterous'. conclusion of having executed contract involving materials without there being any corresponding genuine purchase and receipt of material. If such disallowances are take in to consideration, the Gross Profit Ratio as well as Net Profit Ratio will shoot up in a very high ratio in double digits and for which onus was cast on the A.O. to bring on record any such comparable figures/datas which could show that in the Government Civil Contracts there could be a possibility of such abnormal Gross Profit or Net Profit. In fact, the appellant has been engaged in such activity for the last several years. The book results of the appellant for the current year and the preceding three years have already been reflected in appellant's reply in tabular form in earlier paragraphs and where Net Profit Ratio of the appellant for A.Y.2009-10 is shown at 5.96% as against 6.12%, 3.81% and 3.23% respectively for receding Assessment Years, 2008-09, 2007- 08 8(2006-07. The Gross Profit Ratio of the appellant for

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A.Y.2009-10 is shown at 11.52% as against 8.05%, 9.75% and 10.48% respectively for preceding Assessment Years, 2008-09., 2007-08 & 2006-07. A glance at the above comparative figures will show that the current year's results are much better and improved not only in terms of turnover but also profitability. It has been pointed out by the Ld.A.R. that the assessment of 3 preceding years have been completed under 143(3) and in these assessment mostly additions and disallowances has been made out of labour charges and site expenses to raise the net profit rate to 8%. The books of accounts of the appellant are audited and the returns filed in each of these years were supported by tax audit report in the form .3CB & 3CD. From the Assessment Order, it is also seen that the A.O. has not rejected the Tax Audit Report in case of the appellant. Since, the appellant has done job work exclusively for Government Department, its receipts are 100% verifiable. As per the Terms of Contracts by the Municipal Corporation of Greater Mumbai (MCGM), which is in public domain and available on the website of Municipal Corporation of Greater Mumbai, and which will be referred at the appropriate placers in the Order, the jobs executed by the contractor (here the appellant) also require quantity and quality specification of the material to be supplied / consumed and the contract receipts in the hands of the appellant invariably precede such verification and certification by the departmental authorities. On the Other hand, the only ground for rejecting the purchase is mention of the names of purchase parties on the website of sales tax department under the category of suspicious dealers. The A.O. has not found any infirmity with respect to receipt of payment for execution of contracts for which appellant has obtained, supplied and consumed materials under the quantity and quality supervison of the representative engineer. The A.O. has also not been able to bring on record the evidences that the amount of the payment for purchases which were made by the appellant to the respective parties via banking channels, were received back by the appellant and ultimately there was no purchase of any material. But that is not possible because without supply of material, the contract awarded by MCGM cannot be fulfilled by the appellant and consequently, the MCGM will not make any payment for the same. In fact the entire process is inter connected and the statement of suppliers of raw materials cannot be taken and read independently rather it has to be examined in totality. In view of the above it is apparent that the mere appearance of the name of the parties on the website of sales tax department, cannot justify the conclusion that the purchases made by the appellant were not genuine. 20.3.6. Thus, the contracts executed by various contractors are subjected to check as regards their specification, workmanship, quality and quantity of material utilized by the Audit/Vigilance team of

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the MCGM. The A.O. has not brought out any material on record to suggest that there were any defect or deficiency in the quantity and quality of material supplied and the workmanship of the job performed. 20.4,1. Further, a look at the AO's Remand Report show that he has accepted that the concerned projects for which payments have been shown have been executed by the appellant. He has carried out verification from the MCGM which confirms the claim of the appellant as regards the project details pertaining to the execution and consumption of material.

20.4.2. The Dy. Chief Engineer (SWD), MCGM, Ghatkopar however confirmed quantitative usages of RMC and Steel Only. As regards consumption of Reubbe, Metal Powder and sand is concerned, it was stated by them that quantity of these items is not separately recorded by them. The MCGM authorities did not certify the price at which the raw - material purchased / consumed was acquired. The A.O. observed that he had called for details of all the raw material acquired for all the projects executed during the year. The appellant however, gave such details with regard to 'Premier Nalla Project' On the ground that the addition under contest in appeal . related to this project alone. The A.O. suggested that there is a possibility of raw material purchased having been used in the remaining 15 projects. It has been concluded by the A.O. that since the appellant has not proved the genuineness of purchases having been made from the parties mentioned in the books of accounts and, therefore, he expressed his doubts that it is possible that the purchases may have been made in cash and shown in the name of bogus entry providers-Presuming that possibility, the A.O. suggested that the disallowances should be confirmed by application of section 40A(3) of the I.T. Act, 1961 The apprehension of the A,O. has been strongly contested by the A,R.

It has been pointed out by the appellant that if the MCGM has not certified quantity of items like Rubble, Metal Powder, Sand etc. utilized in the execution of the contract and the MCGM has also not certified the purchase rate of Raw Materials, this could be in their administrative wisdom that the MCGM records do not incorporate details about the items which vary depending upon the project and which do not command lot of value. The MCGM authorities also do not maintain the rates of material which keep on fluctuating by day. This however, does not in any manner raise any question mark about them about the claim of the appellant in regards to genuineness of the purchase of material for the completion of "Premier Nalla Project".

The appellant has made claim for purchases for which payments have been made by cross- cheque. Where payments are made by

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account payee cheques no body can deny the existence of the parties. The A.O. has not brought any material on record to suggest that the payments made to purchase parties were received back in cash by the appellant and no further payments were made by the appellant towards purchase of any material so as to fulfill the conditions of contract imposed by t h e MC G M wh i c h h a s m a d e p a ym e n t s t o wa r d s c o n t r a c t a wa r d e d t o t h e a p pellant. Once the appellant establishes consumption of items purchased as well nothing more remains to be proved by the appellant. As far as the prayer for application of provision of section 40A(3) of the I.T. Act, 1961 is concerned, it cannot be invoked on the basis of surmises and conjectures. The A.O. has not brought any material on record to suggest that any payment towards purchase was made by the appellant in cash exceeding Rs.20,000/- each for purchase. The suggestion of the A.O. cannot be accepted at this stage in view of judicial pronouncements. In this regard, I would like to refer and rely on the judgments below since the facts and circumstances of these judgments of these cases are applicable to the present case of the appellant. There are as under:- (i) The Hon'ble Gujarat High Court in the case of CIT v M.K.Brothers reported at 163 ITR 249 has held that "It was clear from the Tribunal's order • that whether the said transactions were bogus or not was a question of fact. The assessee was given credit facilities for a short duration and the payments were given by cheques. When that was so, it could not be said that the entries for the - purchases of the goods made, in the books of the account were bogus entries. Thus, the conclusion arrived at by the Tribunal was not against the weight of evidence. The Tribunal was, therefore, justified in deleting the addition to the income of the assessee."

In this case, "during the assessment proceedings it came to the notice of the ITO that in the relevant assessment year the assessee had made certain purchases from some parties, who were not available to cross-examine for the genuineness of the above purchases. It was found by the ITO that though the purchases were claimed to have been made on credit basis, the payments were shown to have been Made after substantial lapse of time after the date of purchase. The ITO held that the transactions relating to those purchases were bogus and, therefore, treated the amount allegedly paid for those purchases as income of the assessee. On second appeal, the Tribunal found that there was no evidence anywhere that those concerns gave bogus vouchers to the assessee and further there was nothing to indicate that any part of the fund given by the assessee to those parties came back to the assessee in any form. He, thus, held that the evidence was not adequate to conclude that the purchases made were bogus and, therefore, deleted the aforesaid addition to the income of the assessee."

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(ii) The Hon'ble ITAT, Jodhpur Bench in the case of ITO v Permanand reported at 107 TT3 395 has held that "In the instant case, the addition rested mainly only on the observation of the Sales-tax Department. The assessee was never associated with the enquiries made by the Sales- tax Department to that extent The satisfaction of the Assessing Officer himself is of prime importance while making assessment of an income and these duties cannot be performed by substituting satisfaction of someone else. The assessee did pay for the purchases he made from the above two parties through cheque as was evident from the record. The statements or even the affidavits of the sellers could not be utilized against the assessee, unless an opportunity was given to him to confront the said statement by way of cross-examination, etc. Admittedly, no such opportunity was given to the assessee to confront the above sellers in the instant case. Further, the assessee had also discharged the primary onus cast on him by section 69 by showing the purchases their entries in the books of account, payments by way of account payee cheque and producing the vouchers of sales of the goods. The Assessing Officer did not make requisite investigation against the two sellers. Therefore, the Commissioner(Appeals) had rightly held that the addition made by the Assessing Officer merely on the basis of observations of sales-tax department, without conducting independent enquiries was not justified. Since the purchase in question had been held as genuine purchase, addition of Rs. 55,632 could not be made to the income of tile assessee. Hence, the revenue's appeal was liable to be dismissed" In this case, "the assessee was trading in narma, kapas, foodgrains and also derived income from commission. The Assessing Officer on the basis of information received from the Sales-tax Department held that the assessee had made bogus purchases from two parties and, therefore, he made certain addition to the income of the assessee under section 69. He also made an addition of Rs, 55,632 to the income of the assessee holding that the assessee did not pay any sales-tax or mandi tax on the purchases made from the above two parties and, thus, made extra profit. On appeal, the Commissioner (Appeals), held that the Assessing Officer had made addition merely on the basis of observation made by Sales-tax Department, without conducting independent enquiries. He, therefore, deleted the addition."

(iii) The Hon'ble ITAT, Jaipur Bench in the case of Shanti Kumar Chordia v ACIT reported at 128 TTJ 708 has held that "Where assessee had declared doubtful purchases and purchases of diamond from unregistered dealers for which no verification was got done by assessee, in absence of any verification of purchases from unregistered dealers and verification of purchases from certain other parties, application

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of section 145(3) was justified [Partly in favour of assessee]" In this case, "where the assessee had declared doubtful purchases and the purchases of diamond from unregistered dealers for which no verification was got done by the assessee, in the absence of any verification of purchases from the unregistered dealers and verification of the purchases from certain other parties, application of section 145(3) was justified; however, there was no justification for ,application of 25 per cent GP rate as done by the Assessing Officer as profits' margin in such cases was low."

(iv) The Hon'ble Calcutta High Court in the case of Diagnostics v CIT 4ported at 334 ITR 111 has held that - "However, as regards the payments made to M/s. Selvas Photographics are concerned amounting to Rs. 3,12,302, we find that those have been made by account payee cheques and those have been encashed through the bankers of M/s. Selvas Photographics. It appears that according to the appellant, at the time of assessment, the appellant had no business transaction with M/s Selvas Photographics and consequently, the said party did not co-operate with the Assessing Officer. However, the transaction having taken place through account payee cheques, we are unable to accept the contention of Mr. Agarwal, the learned Advocate appearing for the Revenue that the transaction was a non-existent one. If an assessee took care to purchase materials f or his business by way of account payee cheques from a third party and subsequently, three years after the purchase, the said third party does not appear before the Assessing Officer pursuant to the notice or even has stopped the business, the claim of the assessee on that account cannot be discarded as nonexistent. In the case before us, the Revenue has not put forward any other ground, such as, it was not a genuine transaction for other reasons but has simply rejected the claim on the ground as if there was no such transaction.

(v) The Hon'ble ITAT, Delhi Bench in the case of YFC Project Pvt. Ltd vs Deputy Commissioner of Income Tax reported in 46 DTR 496 / 134 TT) 167 (Delhi) has held that - "The assessee has achieved a turnover of Rs. 884.81 lakhs. It has shown net profit of Rs.79.11 lakhs. Its net profit in terms of percentage is almost double than the previous year. Assessing Officer was unable to point out a single defect in its books of account, Merely non-filing of confirmation from two suppliers, it cannot be held that assessee has not received the goods from these persons and the credit balance in the shape of

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sundry credit appearing in the books of account is unaccounted money of the assessee. The assessee has filed certificate from the bank indicating the facts that cheque issued by it were cleared, Assessing Officer is harping upon only one aspect that notice issued to Shri Subhash Chand returned back with a remark "not known", thereafter he did not take any steps to procure the presence of this person. According to the assessee, notice did not contain the father's name of Shri Subhash Chand, that may be the reason for' return of the notice otherwise on the bills raised by Shri Subhash Chand, his Mobile number is available. He could have been contacted on his mobile number." In view of the above discussion, in our opinion, Assessing Officer is not justified in making the disallowance of purchases made by the assessee. We allow this ground of appeal also and delete the addition of Rs. 6,64,521 and Rs.4,04,012.

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(vi) The Hon'ble ITAT, Mumbai Bench in the case of Free .2 DTR India Assurance Services Ltd v DCIT reported at 349/(2011) 12 Taxman.com 424 (Mum) has held that -"13. Ground No. 4 is ag ain st the suste nan ce of disallowance of 20 per cent of Rs. 6,16,346 out of cash purchases of Rs. 30,80,730 under section 40A(3) and ground No. 1(u) in . revenue's appeal in ITA No. 3661/Mum/07 for assessment year 2002-03 is against the relief allowed by the Id. CIT(A) of Rs. 24,65,384 out of total disallowance of bogus purchases Rs.30,80,730. 14. The facts of the above issue are that the Assessing Officer found from page No. 140 of the seized documents of Annexure A-6 seized from Prime Plaza that the assessee had made purchases amounting to Rs. 30,80,730 from Shri Deepak for which the assessee had issued a cheque of Rs. 30,80,730 and in lieu thereof he received cash from Shri Deepak. Therefore, the Assessing Officer issued show cause notice as to why the purchases of Rs. 30,80,730 should not be disallowed. The assessee replied vide letter dated 8-3-2000 as under (Para 8 at page 12 of the assessment order):- In para 10, reference is made for page No. 140 of Annexure A-6 seized from Prime Plaza. The amount mentioned is Rs, 30,80,730. In the show-cause notice, your honour have mentioned that these entries pertains to Deepak but these entries pertain to M/s Mira Cloth Agency and M/s Shreeram Sales & Synthetics which is already explained in the explanation to seized materials. Purchase bills were taken from these parties to cover up the purchase actually made in the grey markets. The cheques were issued to them against which cash was received and this very cash was in turn utilised for the payment of purchases made of fabrics from grey market. This fabric was purchased in the year 2001-02 (assessment year 2002-03) and w - lying in stock as on 31-3-2002, the closing stock as on 31-3-2002 includes this fabric purchased and the amount of closing stock was shown in the trading account on the credit side and against which the expenses under the head purchases were shown on the debit side of the trading account. By showing the closing stock on the credit side and the expense i.e. purchases on the debit side of the trading there remains no effect on the profit of the year under consideration. It goes without saying that there cannot be a closing stock without its corresponding purchases. The effect of both these items considered collectively results into no effect on the taxable income. As such no disallowance is warranted on this count."

However, the Assessing Officer did not accept the assessee's explanation. According to the Assessing Officer Shri Ashish Mehta himself accepted in the statement, recorded under section 132(4) on 26-6-2003 that the assessee made certain cheque payments and received the cash back and since assessee had clarified that the purchases were not made from

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Deepak Enterprises but from the Grey market it was established that the assessee did not purchase material from M/s Hira Cloth Agencies and M/s Shreeram Sales & Synthetics. Hence the Assessing Officer concluded that assessee admitted bogus purchases amounting to Rs, 30,80,730 from M/s Hira Cloth Agencies and M/s Shreeram Sales & Synthetics and accordingly added the same to the income of the assessee.

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He, therefore, submits that the addition made by the Assessing Officer and sustained by the Id. CIT(A) be deleted.

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'The provision of section 40A(3) is to be invoked when the department has evidence with itself that the assessee has made payments in cash exceeding the prescribed limits. Disallowance cannot be made merely on a presumption that the assessee must have made payments in cash and that too exceeding the prescribed limits. Hence, the impugned addition made by the Assessing Officer and sustained by the Commissioner (Appeals) was to be deleted." (p.86).

In the absence of any distinguishing feature 22. brought on record by the revenue, we respectfully following the aforesaid decisions and for the reasons as discussed above hold that the Id. CIT(A) was not justified in sustaining the addition of Rs. 6,16,346 being 20 per cent of total purchase of Rs. 30,80,730 and accordingly we delete the entire addition of Rs. 30,80,730. The ground taken by the assessee is therefore allowed and the ground taken by the Revenue is dismissed" (vii) The Hon'ble ITAT, Pune Bench in the case of Rajmal Lakhichand v ACIT reported at 79 ITD 84 has held that - "It was on record that against the purchase of silver, the assessee had shown in the books payments in the form of cash and sale of gold, apart from a few payments later by demand drafts. The revenue had not made any investigation to show that the payments by demand drafts were withdrawn by the assessee or his own men. In view of this fact, the assessee had discharged the onus of proving the, fact that it had paid for the purchases of silver and the department had not controverted the assessee's claim t h a t a l l t h e p a y m e n t s w e r e t o the payments were made to the parties

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concerned. In fact, as the Assessing Officer had made an addition under section 69/69C, it was incumbent upon him to show that the assessee had made payments before the date of search or alternatively to prove that the alleged payments shown by the assessee were bogus. As none of the above burdens was discharged by the Assessing Officer it could be accepted that the assessee had made payments for the purchase of silver as shown in its books of account and, therefore, no addition was possible under section 69/69C. The department had based its entire case on the facts found by the cu sto ms a ut hor iti es . I t i s a wel l- s ett le d pri nci pl e of l a w t ha t if t he statement/deposition/ evidence /judgment is to be relied upon by any authority, reliance must be placed on such documents entirely. The Assessing Officer was not justified in picking a convenient portion of such judgment which was only in his favour and ignoring the portion which was in favour of the assessee. In this case, there was no doubt that the department on its own had not made any enquiries to prove that the assessee had purchased the contraband silver and it was also not proved that the assessee had made payments for the same in cash at the time of delivery. The department had based the entire addition on the findings of the customs authorities, but it had not given due weightage to the finding of the CEGAT that no payment was made by the assessee for the acquisition of the subject silver till the date of search. The provision of section 40A(3) is to be invoked when the - department has evidence with itself that the assessee has made payments in cash exceeding the prescribed limits. Disallowance cannot be made merely on a presumption that the assessee must have made payments in cash and that too exceeding the prescribed limits. Hence, the impugned addition made by the Assessing Officer and sustained by the Commissioner (Appeals) was to be deleted."

20.4.3. A.O. in his Remand Report submitted that co-relation of the stock register with the Tender document and Certificate issued by MCGM is not possible because stock register consisted mainly of details like purchase party names, material purchased, bill no etc. The contents of stock register were doubtful since the purchases itself are doubtful. Further the quantity analysis does not provide the rate at which material was purchased as the same is not certified by MC GM. However, the apprehension and the views of the A.O. are not justified and rather misplaced because of the fact that , firstly, a normal stock register is supposed to incorporate movement of the material purchased and its consumption and the stock register of the appellant has also been explained as one

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which incorporates the name of purchase party and bill number etc which give a comprehensive view of the stock acquired and its utilization/supply. The Assessing Officer was required to verify whether the stock acquired by incurring purchase expenses was reflected in the consumption and closing stock. This has not been done by the Assessing Officer. The stock register is not necessarily meant for verification of the rates at which the material was acquired. There is nothing wrong in the stock register if purchase rate is not included in the details recorded in it. The observations of Assessing Officer thus are devoid of any merit. Moreover the disallowances were by A.O. by doubting the purchases made and not the basis of the rate of the purchase. 20.4.4. The A.O. had required the appellant for furnishing of extensive detail in respect of all the purchase parties for the materials utilized in all the contracts executed. He had also asked for production of the suspicious parties. The appellant however, did not furnish all the necessary details on the plea that the subject matter of appeal does not relate to all the projects and further, the projects details were not readily available, Here, the A.O. has actually travelled on some other route rather than what was directed to him in the Remand Order. The A.O. made unfruitful exercise on the issue which was not a subject matter of appeal.

20.4.5. The A.O. has mentioned that the appellant failed to provide the correct address of two parties namely Mahadeshpura Enterprises & Om Corporation. The addition of unproved purchases has been made in regard to items acquired from 20 parties appearing on Maharashtra Government Website. The A.O. had issued 133(6) notices to 18 parties as current addresses of the two parties namely Mahadeshpura Enterprises & Om Corporation, were not provided by the appellant . Out of the notices issued to 18 parties however, there was service on 6 parties and the remaining notices were returned unserved. As per Inspectors report service could not be affected on other parties as either they were not available or they had shifted to other place address of which was not available. Here, it may be mentioned that the Assessing Officer had made addition as unproved purchases in respect of 20 parties. The addition was made on the basis of test check carried out by the Assessing Officer of the genuineness of purchase parties which figured on the website of Maharashtra State Sales Tax Department. The adverse view was taken as the notices issued for verification were either unserved or unresponded. Many of these notices were not served because the suppliers keep on changing their place of business and the notice sent at the old address come back unserved. In the course of remand proceedings the appellant had provided changed addresses of the parties which were available with it. The AO issued notices to them and there was service on 6 parties. The other

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notices could not be served for want of availability of current addresses. It has been explained that these suppliers keep on changing site of their business depending on the business prospects. The appellant has already effected purchases and made payment to them by account payee cheques. Thus, it may not be feasible nor possible for the appellant to keep track of all the purchase parties with whom business was done and completed in past. 2.4.6. The A,O. has issued a letter to MCGM for obtaining information about the raw material used in the other 15 projects. There has been however, progress in the matter. In this regard it may be mentioned that if the MCGM is slow is responding to the request of the Assessing Officer it cannot be held against the appellant at this stage. 2 0 .4 .7 . Ac co rd ing t o t he A.O ., t he enq u ir ie s m ad e b y t h e Sa les T a x Department revealed that the 20 parties appearing on their website were only issuing bills without actually supplying the material. The AO has enclosed with the report statements of the parties and other documents lifted from the website of the Sales Tax Department to support the claim that these parties were not genuine traders. In this regard, it may be stated that the sales tax department has made certain enquiries and has reached certain conclusions as regard certain dealers. These conclusions are based on the statements recorded of the parties concerned and the reports of the Departmental Officers. Their conclusion is valid for affairs of sales tax department. As far as AO is concerned that information is not adequate and conclusive. Any view as regards genuineness of purchases, has to be formed taking into account the totality of the facts and circumstances of the case. If the Assessing Officer really wanted to apply the tentative inferences of the sales tax department to the assessment proceedings of the assessee he was duty bound to call the deponents and make them confirm the nature of dealings with the appellant. If they depose that the dealings with the appellant are not genuine, the appellant would have right to cross examine them to bring the truth of the deposition on the surface. This has not been done by the Assessing Officer. The date of statements clearly state that these statements were taken before the date of assessment order and they were available for test check, validation and grant of opportunity to the appellant for cross examination. Their submissions at the Remand stage, when the assessing officer is only required to verify the consumption of raw material purchased in the execution of contract and cross verification with the MCGM Authorities, is totally out of place, In this regard I would like to refer and rely on the decision of Supreme Court in the case Kishinchand Chellaram vs CIT reported in 125 ITR 713 where it was held

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"1. The letters, dated 14-2-1955 and 9-3-1959, did not constitute any material evidence which the Tribunal could legitimately take into account for the purpose of arriving at the finding that the amount of Rs. 1,07,350 was remitted by the assessee from its Madras Office, and if these two letters were eliminated from consideration, there was no material evidence at all before the Tribunal which could support its finding. What the manager of the bank wrote in his letters could not possibly be based on his personal knowledge but was based on here say. The revenue authorities ought to have called upon the manager to produce the documents and papers on the basis of which he made the statement and confronted the assessee with those documents and papers. No explanation has been furnished by the revenue as to what happened when the manager appeared in obedience to the summons and what statement he made.

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has not revealed any deficiency on this score..

20.6. The AO was directed to carry out the verification of the stock register and its correlation with the tender document and certification by the Municipal Corporation of Greater Mumbai Authorities. For not carrying out this part of verification the Assessing Officer has cited the following reasons: i) Stock register mainly consists of purchases party names, Material purchased, Bill No. If the purchase itself is doubtful then the stock register is also doubtful, The stock register is prepared by the assessee, so it cannot be said that the assessee has given any evidences to prove that the bogus parties (held by the assessing officer in the assessment order) are genuine. ii) Quantitative analysis does not provide with the rate of purchase of raw-material and the same is not certified by the NICGM. iii) This only proves that the work was executed and this office is not denying th fact that the work was not executed. But this does not prove that the raw material was purchased from the suspicious parties. The reasons given by the AO are mere pretence. The appellant has received payment from Municipal Authorities and this fact has been accepted by the AO. The MCGM authorities have certified consumption of material in executing these contracts. Then it becomes self obvious that the material consumed was definitely acquired by the appellant by making purchases. In the circumstances even if AO's observation relating to absence of evidence to prove the purchase parties is taken into account, still there can be no denial of purchase of material, its consumption, execution of job work by utilization of these materials and the award of payments to the appellant.

It may be stated that once the appellant has established that the items shown to have been purchased, have been fully consumed/supplied to the parties, the only area which requires consideration is whether the appellant has been able to establish the correctness of the rate at which material has been acquired. Undisputedly, the appellant is in the same business for preceding several years and its assessment for 3 preceding assessment years have been completed u/s 143(3) wherein additions and disallowances have been made out of labour and site expenses to raise the net rate to 8% ( as per Page no.88 to 98 of the Paper Book). In the assessment year under consideration the net profit rate computed on the basis of return income comes to 7.511/6 and if all the disallowances excluding the addition towards purchases is taken into account the net rate would come to 8.5% which is a shade better than the rate of 80/c which has been accepted as reasonable in appellant's own case in preceding 3 assessment years.

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Further, if the addition of 4.48 crores is taken into consideration such rate would come to 13.24% which is unrealistic and arbitrary. The additions towards unproved purchases have been made in the "Premier Nalla Project". In this project the total receipts during the year are stated to be 12.69 crores and the expenses claim are 9.37 crores inclusive of purchase of material at 5.66 crores. If the purchases to the extent of 4.48 crores are rejected the Gross Profit will come to 61% which is impossible in the nature of business which the appellant is carrying on. Thus, in the context of past records of the appellant, the nature of business carried on and on the basis of the submissions, addition to the tune of Rs. 4.48 crores towards purchases by the A.O., appears to be totally unrealistic.

20.8. As regards A.O.'s letter dated 01.02.2013 as well as comments of the A.R. thereupon which has already been discussed in earlier paragraphs, it may be stated that the information sent by the A.O. is in continuation to his earlier stand and no fresh issue arises out of the same. Sales tax Officer's Order concerning cancellation of VAT registration is dated 19.11.2011 and does not pertain to the Financial Year relevant to the present assessment year under appeal The basic issue has already been discussed in earlier paragraphs. The scribbling written by Jain Trading Corporation is without cross verification as well as cross examination from the appellant. As regards M/s.Sam Enterprises also, the appellant was never allowed cross examination by the A.O.. The information arising from them does not prove that after receiving the money by cheque, these two parties returned back the money in cash to the appellant and the appellant made any net profit out of the,. same. In this regard, reference is made and reliance is placed on the following judgements:. i) The Hon'ble ITAT, Jaipur Bench in case of ITO V. Kanchanwala Gems reported in 122 TTJ 854 has held under — The assessee had furnished all necessary information including name, address, PAN, RST/CST numbers and telephone numbers of the suppliers, supported with documents which was expected from a prudent purchaser to establish the genuineness of claimed transaction;, besides the payments had been made throug14-1,- account-payee cheques and goods purchased from the four parties had been exported by the assessee in the same shape, size and weight, duly verified by the customs authorities. The Assessing Officer was not justified in doubting the genuineness of the claimed purchases made by the assessee from the four suppliers and making addition merely on basis that on subsequent occasion the parties were not found on the given addresses or in some other cases some .connected person to the supplier had stated that they were only issuing bills without supplying goods or that the money paid by the assessee against the purchases was withdrawn by those parties. Undisputedly,

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after completion of transaction a purchaser cannot have any control over the suppliers and suppliers are always at liberty to Use the money paid to them against the goods sold by them. Thus, in the absence of any positive evidence that the goods were not purchased from the above parties but from some named person or that the money paid by the assessee against the goods was ultimately returned to the assessee by the suppliers, there was no occasion before the Assessing Officer to deny the claimed purchases, especially when the genuineness of the export of those goods by the assessee had been accepted by the Assessing Officer. The Commissioner (Appeals) had, thus, rightly deleted the addition" ii) In the case of ITO vs. Permanand, the Hon'ble ITAT, Jodhpur Bench reported in 107 TTJ 395 has held:

"In the instant case, the addition rested mainly only on the observation of the Sales-tax Department. The assessee was never associated with the enquiries made by the 5ale5-tax Department to that extent. The satisfaction of the Assessing Officer himself is of prime importance while making assessment of an income and these duties cannot be performed by substituting satisfaction of someone else. The assesee did pay for the purchases he made from the above two parties through cheque as was evident from the record, The statements or even the affidavits of the sellers could not be utilized against the asse5see, unless an opportunity was given to him to confront the said statement by way of cross- examination, etc. Admittedly, no such opportunity was given to the assessee to confront the above sellers in the instant case. Further, the assessee had also discharged the primary onus cast on him by section 69 by showing the purchases, their entries in the books of account, payments by way of account payee cheque and producing the vouchers of sales of the goods. The Assessing Officer had miserably failed to bring on record any clinching evidence to prove that these alleged purchases were bogus and not genuine. Further, the Assessing Officer did not make requisite investigation against the two sellers. Therefore, the Commissioner (Appeals) had rightly held that the addition made by the Assessing Officer merely on the basis of observations of sales-tax department, without conducting independent enquiries was not justified. Since the purchase in question had been held as genuine purchase, addition of Rs.55,632 could not be made to the income of the assessee. Hence, the revenue's appeal was liable to be dismissed." iii) In the case of R.K.Synthetics vs. ITO reported at 81 TTJ 909, the Hon'ble ITAT, Jodhpur Bench has held; "It was an undeniable fact that the addition in question under section 69 had been made on the sole basis of the statement of the partner of the assessee-firm recorded by the Central Excise authorities. That was also an undeniable

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fact that the Assessing Officer never recorded any further statement of the said partner or anybody else. A copy of the statement recorded by the Central Excise authorities was never provided to the assessee. No independent investigation was carried out by the Assessing Officer even though he proposed to make an addition under section 69 in the hands of the assessee. There was no evidence of suppressed sales as the sales declared by the assessee had been accepted fully by the 'Assessing Officer and no action had been taken by the Sales Tax Department despite there being information regarding the fact that the statement made by the said partner had been retracted in the very next opportunity immediately after .making of the statement. The assessee had been maintaining complete financial and quantitative records at all stages of production and no specific defects had been .pointed out by the authorities below. The Commissioner (Appeals) had categorically mentioned that the Assessing Officer had not pointed out any defects in the books of account nor brought any on record and that the Assessing Officer was not justified in rejecting the books of account against which the department had not come in second appeal. In the circumstances, the totality of the facts and circumstances did not justify additions under section 69 merely on the basis of the statement of the said partner without any further supporting evidence being on record. [Para 10] In the result, the appeal was allowed. [Para 12]" 20.9.1. Thus it is seen that the appellant has performed hundreds of small jobs in the relevant accounting year over the period and even the department agrees that the receipts are fully verifiable and that the payment certificates by MCGM elaborately deal with the quality and quantity of raw material that has been consumed. In the course of Remand Proceedings the A.O. made the necessary verification of the raw material consumed. He corresponded with the MCGM authorities who have confirmed the vital facts of the appellant's business affairs as regards consumption of materials and payment receipts of the "Premier Nalla Project", The appellant had gone to the extent of submitting that the execution of this project was subject to Vigilance by the MCGM authorities and even they have confirmed the execution and use of materials as is evident from the certificates filed before me. Therefore, this inspection does not bring to surface any flaw in the execution of the project. 20.9.2. The whole case of the A.O. is built up on appearance of certain purchase parties on the Website of Maharashtra Sales Tax Department and the appellant's failure to produce these parties before the A.O. Department's effort to verify the genuineness of purchases in respect of these parties did not make any progress as very few of the notices issued could be served and even where they were

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served there was no response from the parties. In my opinion the mere appearance of a purchase party on the website of State Government does not turn a genuine purchase into a non genuine purchase. This fact only raises a question mark and allowance of purchase expenses of appellant has to be necessarily decided taking into view the totality of the circumstances of the claim. It is also to be kept in view that once a name of the party appears on the Website of the State Government even if the party has made genuine sales to the assessee he would take himself unavailable and would be most reluctant to co-operate with the Department for the verification of purchases. The appellant has already filed a number of Court/ ITAT decisions which are on the point. In the case of M.K Brothers supra the Hon'ble Gujarat High Court held that in that case the tribunal had found that there was no evidence to show that bogus vouchers had been issued to the assessee and that nothing had been shown to indicate that any part of funds given by the assessee to these parties came back to the assessee in any form and the assessee had made payments by cheques. The Hon'ble Court therefore, held that the Tribunal was justified in deleting the addition. In the case of the appellant as well the Department does not assert that the suspicious dealers have specifically claimed that the supplies to the appellant are bogus. The purchase payments have been made by the appellant by cheque and there is no evidence not even a suggestion that the funds given by assessee as purchase price were received back by the assessee. This judgment of the Hon'ble Gujarat High Court would therefore be squarely applicable to the appellant's case. Similarly Hon'ble Calcutta High Court in case of Diagnostics supra has held that where payments have been made by account payee cheques adverse view cannot be taken if subsequently the dealers do not co-operate with the A.O. for verification of the purchases. In this regard, I have already referred to various decision of the Hon'ble Courts and placed reliance on the same.

20.9.3. As mentioned earlier; it was brought to my notice that the assessment of the appellant in the preceding 3 years have been completed u/s 143(3) and a net rate of 8% was considered reasonable. In the assessment under consideration, the net rate on the basis of returned income comes to 7.5%. The appellant during the-. year has received total contract receipts of Rs.12.69 crores from 'Premier Nalla Project'. It has claimed to have incurred material and other expenses of Rs.9.37 crores on this project. If the purchases of value of Rs.4,48 crores relating to this project are rejected and disallowed that would mean enhancement of profit by whopping 35% to 61% for the 'Premier Nalla Project' which is unimaginable and unrealistic. It is also seen that the appellant was subjected to survey by the investigation Wing. The Investigation Wing is believed to have scrutinized the

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business affairs of the appellant and wherever its claims about purchases or expenses were not found to be acceptable, the appellant was asked to surrender the claim relating to purchases and expenses. By implication one could infer that the Investigation W ing was satisfied about the remaining claims and the genuineness of remaining claims cannot be tarnished merely because some of the suppliers figure on the State Government Website as suspicious dealers. 20.9.4. The A.O. has made a suggestion that since purchase parties are not available for verification and there is evidence of purchase material having being utilized the appellant might have used these parties as name lenders and may have made purchases in cash in which situation the provisions of section 40A(3) may be invoked for confirming the addition. The contention of the A.O. is not based on any material fact. There is nothing on record to suggest that appellant had shown purchases from parties whereas the actual purchases have been made from market in cash. Since such suggestion is only based on suspicion and there is no documentary evidence to establish purchase of material in cash in excess of prescribed limit, the provisions of section 40A(3) cannot be applied following the decision of the Jurisdictional bench in case of Free India Assurance Services Ltd. as reported in (2011) 12 Taxman.com 424 (Mum). 20.9.5. In the remand report the A.O. has raised the issue that the appellant did not co-operate when he wanted to gather information more particularly purchases in respect of other 15 projects executed by the appellant during the year. The A.O. also mentioned the fact that he had sought for information about those projects from MCGM authorities. But these authorities were not very enthusiastic in responding to him. I feel that the A.O. completely misunderstood the mandate of the Remand order and misdirected himself in launching fresh enquiries which were beyond the subject matter of appeal. The appellant is before me in the present appeal contesting the disallowance of purchases of the value of Rs. 4.48 crores which relate to 'Premier Nalla Project'. The assessment order does not make any reference about purchase claims of the appellant about other projects completed by it. In the Remand order specific direction was given to the A.O. to verify the purchase claims relating to this project which were for adjudication by this office. It is therefore, absolutely clear that the A.O. completely misdirected himself in trying to launch a verification into purchase and other expenses claimed by the appellant for other projects. 20.9.6. Thus it is to be seen that the appellant maintains Tax Audited books of accounts which includes stock register incorporating

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quantity of items purchased, consumed and lying-in-stock. The A.O. was directed to make verification of stock register which he avoided without indicating any acceptable reasons. The sales/contract receipts of the appellant are completely verifiable as they are through account payee cheques and subject to TDS and A.O. also do not deny it. There is complete verification of materials purchased with reference to stock register and payment certificates issued by MCGM authorities. Of course the MCGM authorities have not certified the rate at which the material has been acquired by the appellant. This would however not mean any adverse inference because the net profit rate after taking into account the other disallowance made in the assessment order and which have been confirmed in the earlier part of my order, give a net profit rate of 8.5% which is better than the rates which the Department accepted as reasonable and adequate in the preceding 3 assessment years when the assessment were framed in scrutiny u/s 143(3) of the Income-tax Act. Mere appearance of the purchase parties on the Website of Sales tax Department does not falsify the purchase claims made by the appellant. The purchase parties have no where specifically stated that the deals with the appellant were bogus. All the purchases of materials have been done by account payee cheques and there is nothing to indicate that the payments made by cheque were paid back to the appellant and the purchase were not genuine. In the light of the foregoing, I have no hesitation in my mind to hold that the A.O. erred in disallowing the purchase of Rs.4.48 crores and the addition made is therefore deleted.”

2.3. If the observation made in the assessment order, leading to addition made to the total income, conclusion drawn in the impugned order, material available on record, assertions made by the ld. respective counsel, if kept in juxtaposition and analyzed, the facts, in brief, are that the assessee is engaged in the business of civil construction as a civil contractor mostly doing job work for the government departments. A survey was conducted on 25/08/2009 at the office premises of the assessee, wherein, the assessee offered a sum of Rs.1,51,45,603/- in respect of purchases made from three parties namely Kavita Sales (68,49,274/-), Manav Impex (Rs.21,55,128/-) and Mahavir Impex (Rs.61,41,201/-) and this amount was declared as additional income and included returned income, paid taxes thereupon, in Assessment Year 2009-10.

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2.4. During assessment proceedings, the ld. Assessing Officer issued notices u/s 133(6) of the Act to few parties from whom the assessee claimed to have made purchases. The notices sent to these three aforementioned parties were returned unserved. The ld. Assessing Officer required the assessee to produce the details/documents to establish the genuineness of the purchases. The assessee was also asked to produce the parties. The ld. Assessing Officer has made a discussion with respect to website of the Maharashtra Government, Sales Tax Department, displaying a list of suspicious party. The assessee was asked to prove the genuineness of the purchases from twenty parties, mentioned hereunder, and discussed in the assessment order. Sr. Name of Party Purchase amount No. (In Rupees) 1 Carbon Enterprise 688,460/- 2 Deepali Enterprise 23,58,009/- 3 Entech Enterprise 45,04,054/- 4 Foram Traders 7,33,514/- 5 Ganesh Traders 32,99,686/- 6 G.M. International 80,09,274/- 7 Jain Trading Corporation 7,13,594/- 8 Mahadeshpura Enterprise 1,26,464/- 9 National Trading Co. 10,32,028/- 10 Neelam Enterprise 8,44,158/- 11 Om Corporation 47,51,701/- 12 Raj Traders 21,02,813/- 13 Real Traders 18,04,606 14 Sam Enterprise 7,22,866/- 15 Shiv Sagar Enterprise 7,57,848/- 16 Shraddha Trading Co. 51,00,805/- 17 Shree Enterprise 7,42,854/- 18 Siddhivinayak Corporation 32,03,602/- 19 S.S. Enterprises 25,59,565/- 20 VSK Enterprises 8,32,165/- Total 4,48,88,866/-

It is noted that during assessment proceedings, the assessee took the plea that normally the purchases are made by the site supervisors and that to through agents. The invoices are then verified with the material, so received, and sent to the office of the assessee for payment. All the expenses were claimed to be

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accounted for in the books of accounts and most of the payments are made through cheque. Plea was also raised that less time was provided to the assessee to produce the parties to attend the assessment proceedings. The Assessing Officer was not satisfied with the reply of the assessee, doubted the genuineness of the purchases and made addition of Rs.4,48,88,866/-. 2.5. The assessee felt aggrieved and carried the matter in appeal before the First Appellate Authority, made submissions, as mentioned in the impugned order, by claiming that the assessee carried out the contract work exclusively for the government department involving sixteen contract jobs of various specifications. The major project, which was of widening, improving, remodeling of premium Nalla system in catchment number 501 (Nehru Nagar Nalla System) for which the assessee showed total receipt of Rs.12,69,19,180/- (page-14 of the paper book). The Ld. Commissioner of Income Tax (Appeal) after considering the factual matrix, examined the claim of the assessee, remand report from the Assessing Officer deleted the addition. The Revenue is aggrieved and is in appeal before this Tribunal. 2.6. Under the facts available on record, before adverting further, we are analyzing the book results of different Assessment Years, which are as under:- Assessment Turnover Gross G.P. Ratio Net Profit Net Profit Year (in Crores) profit (in (%) (in crores) ratio(%) crores) 2009-10 96.46 11.11 11.52 5.75 5.96 2008-09 79.06 6.36 8.05 4.84 6.12 2007-08 42.71 4.16 9.75 1.63 3.81 2006-07 14.92 1.56 10.48 0.48 3.23

From the above, it is noteworthy that comparative figures show that the current year’s results are much better not only in term of turnover but profitability also. It is undisputed fact that earlier three Assessment Years were completed u/s 143(3) of the Act, wherein, mostly addition and disallowances were made and out of labour charges and site expenses to raise the net profit rate to 8%. There was no adverse finding with respect to purchases more specifically when the assessee was doing identical job work for the government departments, meaning thereby, the book results with respect to

33 ITA No.7220/Mum/2014 Mrs. Manjula S. Shah

purchases were accepted by the Department. The books of the assessee are audited and the returns were supported by tax audit report in form 3CB and 3CD. It is also noted that the job work was exclusively made for the government departments, wherein, receipts are 100% verifiable. The payments are made to the assessee after verifying the quality/quantity of material used by the assessee, as per specification, and there is no dispute with respect to consumption of material. It is also noteworthy that the payments are made to the assessee after due verification/certification of the work and material by various departmental authorities. It is not in dispute that material was consumed by the assessee. The only dispute is with respect to material made from particular parties. The investigation wing was suspicious of genuineness of certain purchases. However, during survey, nothing incriminating was found suggesting that the assessee made purchases from other parties and wherever some incriminating material was found with respect to three parties, the assessee made the surrender, paid taxes thereupon, by disclosing the same in its return. 2.7. It is also noteworthy that execution of the contract, quality and quantity of material was directly under the supervision of representative engineer from MCGM. The samples of the material are verified/certified by the site engineer as per condition mentioned in clause-59 (general conditions) of the contract civil works issued by MCGM, which is applicable to all contracts awarded by MCGM (Page No.6 to 08.1 of the paper book). The relevant extracts are reproduced hereunder:- "59(a) Material to be provided by the Contractor: The Contractor shall, at this own expense, provide all materials required for the works other than those which are to be supplied by the Municipal Corporation.

All materials to be provided by the Contractor shall be in conformity with the specifications laid down in the contract and the Contractor shall, furnish proof to the satisfaction of the Engineer that the materials so comply. Contractor shall produce proof viz. challans, bills, vouchers, etc. so as to ensure that the material was brought on site and quantities used as per the norms, specifications, etc.

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The Contractor shall, at his own expense and without delay, supply to the Engineer samples of materials proposed to be used in the Works. The Engineer shall within seven days of supply of samples or within such further period as he may require and intimated to the contractor in writing, inform the contractor whether the samples are approved by him or not. If the samples are not approved the contractor shall forthwith arrange to supply to the Engineer for approval fresh samples complying with the specifications laid down in the contract.

The Engineer shall have full powers to require removal of any or all of the materials brought to site by the Contractor which are not in accordance with the contract specifications or which do not conform in character or quality to the samples approved by him. In case of default on the part of the Contractor in removing the rejected materials, the Engineer shall be at liberty to have them removed by other means. The Engineer shall have full powers to procure other proper materials to be substituted for rejected materials and in the event of the Contractor refusing to comply, he may cause the same to be supplied by other means. All costs, which may attend upon such removal and / or substitution shall be borne by the Contractor.”

2.8. These particulars are also incorporated in the tender document as mentioned in para 6.7.13 at page no 04 of the Paper Book (Copy of the relevant pages of the tender document is available at Page No 01 to 05 of Paper Book). The Works Contract for the year certifies that the requisite material for which deduction towards purchases has been made has been actually received/consumed by the assessee in the project/job work. The assessee maintains a register which incorporates details of various items which have been received on the site and the material have been consumed or supplied under the supervision of the representative engineer (Page No 70 to 105 of Paper Book). Thus there is complete quantity check of various purchase items in terms of their delivery on the contract site and consumption in the execution of contract job work. The assessee had also prepared summary of the Job work executed and the material consumed which matches with the specification as regards contract work done and material utilized in works contract as certified by the MCGM authority (Page No 58 to 59 of Paper Book). The assessee also prepared a break up and summary of the total items purchased / consumed party-wise and the said details are

35 ITA No.7220/Mum/2014 Mrs. Manjula S. Shah

available at Pages 60 to 69 of Paper Book. The assessee drew our attention to the sample bills of representative parties (Page No 106 to 150 of Paper Book). All these documentation establishes that the assessee had made the requisite purchases and the same were supplied to the contractee parties in the job work leading to contract receipts of Rs. 12.69 crores. 2.9. The ld. counsel for the assessee, further claimed/explained that it does not make use of items other than steel which are sold in big and reputed stores. The items like sand and concrete are purchased from the parties who approach the agent of the assessee for the supplies on the site at competitive rates. Most of the items purchased are of approved quality standard and they are delivered by the supplier. It is therefore not possible to know as to whether the supplier is the real seller or he is only a front for the real supplier. The fact however, remains that the purchase of material has been made. It has been consumed/ utilized in the execution of contract and utilization of these supplies has resulted in the contract receipts which are offered for assessment purposes. The items supplied, their quantity and quality are completely certified by the representative engineers of MCGM. It therefore leaves no doubt about the genuineness of the purchases. Since many of the documents were to be obtained from the Government Departments and the time allowed by the Assessing Officer was explained to be short these documents could not be furnished before the Assessing Officer and therefore these documents were submitted by the assessee at the first appellate stage. These documents were duly examined by the Ld. CIT(A) and thereafter the conclusion was arrived at. No contrary material/facts were brought to our notice by the Revenue, thus, we find merit in the arguments of the ld. counsel for the assessee. 2.10. The ld. counsel for the assessee explained that the total supply of material costing Rs. 5,66,34,559/- has been obtained from 41 parties of which 20 parties who supplied material worth Rs. 4,48,88,866/- have been held to be non-genuine. In the impugned contract the cost of material constitutes 44% of the receipts. The rejection of purchases from 20 parties which is 80% of the total purchases of the material made for the execution of the contract would lead to the preposterous conclusion of having executed contract involving materials without there being any corresponding genuine

36 ITA No.7220/Mum/2014 Mrs. Manjula S. Shah

purchase and receipt of material. This is not possible because the job contract was completed by the assessee as per specification, after verifying the consumption of material. The payments were made to the assessee by the concerned authority/MCGM only after being satisfied that the job work has been completed in a required manner. The ld. Assessing Officer’s main reason for rejecting the purchase is because certain names of purchase parties on the website of sales tax department under the category of suspicious dealers. The assessee explained that it has received payment for execution of contracts for which it has obtained, supplied and consumed materials under the quantity and quality supervision of the representative engineer. The payments for purchases have been done by banking channels. In the face of such material even if the purchase parties are alleged to be suspicious by the Sales Tax Department of Maharashtra State Government the purchases cannot be disbelieved because without such purchases there cannot be any supply/consumption and execution of contracts by utilizing these material and consequential receipt from the contractee department. In view of the above it is apparent that the mere appearance of the name of the parties on the website of sales tax department cannot justify the conclusion that the purchases made by the assessee were not genuine. 2.11. Even otherwise, the contracts executed by various contractors are subjected to check as regards their specification, workmanship, quality and quantity of material utilized by the Audit/Vigilance team of the MCGM. The assessee, before us as well as before the Ld. Commissioner of Income Tax (Appeal) claimed that the job was also subjected to such check and the check did not lead to discovery of any defect or deficiency in the quantity and quality of material supplied and the workmanship of the job performed (Page No 151 to 165 of Paper Book). 2.12. It is noteworthy that the Ld. CIT(A), during first appellate stage, remanded the said documents to the Assessing Officer to verify the claim of the assessee in respect of the purchases of material made by correlating the stock register of the appellant with the tender document and the certificate by MCGM Authorities. The A.0 was also asked verify the genuineness of the tender documents and certificate produced by the assessee. In turn, the AO submitted a remand report on

37 ITA No.7220/Mum/2014 Mrs. Manjula S. Shah

07.12.2012 to the Ld. Commissioner of Income Tax (Appeal), out of which, following main points emerges:- i. The A.O. accepted that the concerned projects for which payments have been shown have been executed by the assessee. ii. The verification done from the MCGM confirmed the claim of the assessee as regards the project details pertaining to the execution and consumption of material. iii. The Dy. Chief Engineer (SWD), MCGM, Ghatkopar however confirmed quantitative usage of RMC and Steel only and consumption of Rubble, Metal Powder and sand is not separately recorded by them. The MCGM authorities did not certify the price at which the raw - material purchased / consumed was acquired. iv. The A.O. observed that he had called for details of all the raw material acquired for all the projects executed during the year. The assessee however, gave such details with regard to 'Premier Nalla Project' on the ground that the addition under contest in appeal related to this project alone. The A.O. suggested that there is a possibility of raw material purchased having been used in the remaining 15 projects. v. Since the assessee has not proved the genuineness of purchases having been made from the parties mentioned in the books of accounts it is possible that the purchases may have been made in cash and reflected in the name of bogus entry providers. In that situation the A.O. had recommended that the Ld. C1T(A) should confirm the addition by application of section 40A(3) for making the disallowance. vi. Co-relation of the stock register with the Tender document and Certificate issued by MCGM is not possible because stock register consists mainly of details like purchase party names, material purchased, bill no etc. The contents of stock register are doubtful since the purchases itself are doubtful. Further the quantity analysis does not provide the rate at which material is purchased as the same is not certified by MCGM. vii. The A.O. had required the assessee for furnishing of extensive details in respect of all the purchase parties for the materials utilized in all the contracts executed. He had also asked for

38 ITA No.7220/Mum/2014 Mrs. Manjula S. Shah

production of the suspicious parties. The assessee however, did not furnish all the necessary details on the plea that the subject matter of appeal does not relate to all the projects and further, the projects details were not readily available. viii. The assessee failed to provide the correct address of two parties namely Mahadeshpura Enterprises & Urn Corporation. The addition of unproved purchases has been made in regard to items acquired from 20 parties appearing on Maharashtra Government Website. The A.O. had issued 133(6) notices to 18 parties as current addresses of the two parties namely Mahadeshpura Enterprises & Om Corporation were not provided by the assessee. Out of the notices issued to 18 parties however, there was service on 6 parties and the remaining notices were returned unserved. As per Inspectors report service could not be affected on other parties as either they were not available or they had shifted to other place address of which was not available. ix. The A.O. has issued a letter to MCGM for obtaining information about the raw material used in the other 15 projects. There had been however, no progress in the matter. x. The enquiries made by the Sales Tax Department revealed that the 20 parties appearing on their website were only issuing bills without actually supplying the material. The AO has enclosed with the report statements of the parties and other documents lifted from the website of the Sales Tax Department to support the claim that these parties were not genuine traders. 2.13. The Ld. Commissioner of Income Tax (Appeal) confronted the assessee with the aforementioned points to which the assessee responded to the report of the Assessing Officer by submitting as under:- i In points (a) and (b) the A.O. has accepted the appellant's claim relating to the execution of the project and the same stands endorsed by the MCGM authorities.

ii. As regards point (c) wherein the AO has mentioned that the MCGM authorities have not certified the quantity of items like Rubble, Metal Powder, Sand etc. utilized in the execution of the contract and also that they have also not certified the purchase rates of raw materials the assessee had submitted

39 ITA No.7220/Mum/2014 Mrs. Manjula S. Shah

that the MCGM records do not incorporate details about the items which vary depending upon the project and which do not command lot of value. The MCGM authorities also do not maintain the rates of material which keep on fluctuating by day. This however, does not in any manner raise any question mark about the claim of the assessee in regards to genuineness of the purchase of material for the completion of "Premier Nalla Project".

iii. As regards point (d) the assessee submitted that the exercise undertaken by the A.O. for verification of other projects in the course of Remand Proceedings was beyond the mandate of remand order. His view that the purchase items may have been used in other contracts would contradict the certificate of the MCGM Authorities relating to consumption of material relating to "Premier Nalla Project". The Remand proceedings are intended for doing fact verification and not for making wild guesses which have no factual basis. Moreover this substantiate the fact that the materials were indeed purchased

iv. As regards point (e) the assessee has made claim for purchases for which payments have been made by cross- cheque. It is nobody's case that payments made to purchase parties were received back in cash by the assessee. Where payments are made by account payee cheques nobody can deny the existence of the parties. Once the assessee establishes consumption of items purchased as well nothing more remains to be proved by the assessee. As far as the prayer for application of provision of section 40A(3) is concerned it cannot be invoked on the basis of surmises and conjectures. The assessee had claimed payment for purchases by account payee cheques. The A.O. had not shown anywhere that the payment for expenditure was made in cash in excess of the prescribed limit. The disallowance of expenses is therefore, totally unwarranted. In support of its contention the assessee relied on the following judgments:

2.14. Now, we shall deal with the case laws relied upon by the assessee and also considered by the Ld. Commissioner of Income Tax (Appeal). The Hon'ble Gujarat High Court in the case of CIT v M.K.Brothers reported at 163 ITR 249 has held as under

"During the accounting year relating to assessment year 1971-72, the assessee had made purchases of the total value of Rs. 52,254/- from certain parties. The Income- tax Officer required the assessee to produce evidence

40 ITA No.7220/Mum/2014 Mrs. Manjula S. Shah

regarding the purchases. In the meantime, the said parties had admitted to the sales tax authorities that they had issued bogus vouchers. The Income-tax Officer held that the purchases were not genuine and assessed the amount of Rs. 52,254/- as income of the assessee from undisclosed sources. The Tribunal .found that there was no evidence to show that bogus vouchers had been issued to the assessee, that nothing had been shown to indicate that any part of the funds given by the assessee to these parties came back to the assessee in any form, and that the assessee had made its payments by cheque. The Tribunal deleted the addition. On a reference:

Held, that the conclusion arrived at by the Tribunal was supported by the evidence on record. The amount of Rs. 52,254/- was not assessable as income from undisclosed sources and the Tribunal was justified in deleting the addition".

The Co-ordinate Bench of the Tribunal in the case of ITO v Permanand reported at 107 TTJ 395 has held as under:-

"No addition can be made in the hands of the assessee on the basis of observations made by a third party. The addition rests mainly only on the observations of the Sales- tax Department. The assessee was never associated with the enquiries made by the Sales-tax Department to that extent. The satisfaction of the AO himself is of the prime importance while making assessment of an income and these duties cannot he performed by substituting the satisfaction of someone else. The assessee did pay for the purchases, he made from the two parties, through cheque. The statements or even the affidavits of the sellers cannot be utilized against the assessee. Admittedly, no opportunity was given to the assessee to confront the sellers. The assessee has discharged the primary onus cast on him by s. 69 by showing the purchases, their entries in the books of accounts, payments by way of account payee cheques: producing the vouchers of sales of the goods. The AO has miserably failed to bring on record any clinching evidence to prove that these alleged purchases were verily bogus and not genuine. The AO has not arrived at a judicious conclusion ufter applying his own mind. Strangely enough, the AO has halfheartedly accepted certain quantum of

41 ITA No.7220/Mum/2014 Mrs. Manjula S. Shah

purchases because out of total purchases aggregating Rs. 9,93,442, he has disallowed only a peak of Rs. 3,36,852. This .finding of the AO is paradoxical. The AO did not make requisite investigation against the two sellers. The impugned deletion is confirmed".

Likewise, the Mumbai Bench of the Tribunal in the case of Free India Assurance Services Ltd v DCIT reported at 62 DTR 349 has held as :-

"There is no dispute that the assessee has made payments of Rs. 30,80,730 by cheques to HC and SS. During the course of search, the statement was also recorded of AM on 20th June, 2003 wherein he has stated that against the cheque transactions, cash has been received. During the course of assessment proceeding, it was stated by the assessee that the said cash, against cheque payments was utilised to purchase cloth from the grey market and in support, the assessee has also .filed details of closing stock as on 31st March, 2003 wherein fabric cloth totalling to Rs. 30,80,730 is appearing as closing stock. In the absence of any material to show that no such cheque payments were made by the assessee or cash amount received by the assessee against the cheque payments was utilised by the assessee other than purchases or the entry recorded in the closing stock amounting to R.c. 30,20,730 is .found to he fictitious or .false or no such closing stock was found during the course of search, the assessee has made cash purchases of Rs. 30,80,730 which undisputedly was found recorded in the inventory of closing stock, therefore, the AO was not justified in treating the said purchases of Rs. 30,80,730 as bogus purchases.

In the absence of any material to show that the assessee has made cash payments in violation of provisions of s. 40A(3), disallowance could not be made merely on presumption that the assessee has made purchases by way of cash payments from the grey market; disallowance deleted".

2.15. During hearing, the ld. counsel for the assessee also placed reliance upon the following judicial pronouncements:-

42 ITA No.7220/Mum/2014 Mrs. Manjula S. Shah

i. Jaipur Bench of the Tribunal in the case of Shanti Kumar Chordia v ACIT reported at 128 TTJ 708 (Page nos. 08 to 15 of Paperbook)

ii. Hon'ble Calcutta High Court in the case of Diagnostics v CIT reported at 334 ITR 111 (Page nos. 16 to 20 of Paper book)

iii. Delhi Bench of the Tribunal in the case of YFC Project Pvt Ltd vs Deputy Commissioner of Income Tax reported in 46 DTR 496(Page nos. 56 to 64 of Paper book)

iv. Pune Bench of the Tribunal in the case of Rajmal Lakhichand v ACIT reported at 79 1TD 84 (Page nos. 41 to 55 of Paper- book)

2.16. The ld. counsel for the assessee was asked to clarify various points, which were clarified as under:-

(a) So far as point (vi) regarding the futility and feasibility of verification of stock register, is concerned, the ld. counsel for the assessee explained that a stock register incorporates the movement of goods and its consumption. In addition to these details the stock register submitted by the appellant also incorporates the name of the party and bill no. The Assessing Officer was, in the remand proceedings, asked to verify whether the stock acquired by incurring purchase expense was reflected in the consumption and closing stock. There is nothing wrong in the stock register does not incorporate purchase rates. Moreover the disallowance has been made by doubting the purchase and not the purchase rate. Therefore the entries recorded in the stock register comprehensively establish beyond any doubt that the items purchased were wholly utilized in the contract undertaken and there was no mismatch between the materials acquired and materials utilized. The observations of the AO are thus devoid of merit.

(b) So far as, the observation of the Assessing Officer narrated for point number (vii) (supra), it was submitted that the issue contested in appeal is disallowance of purchase expenses in respect of "Premier Nalla Project". The scope of remand proceedings was therefore limited to the expenses incurred in this project and the

43 ITA No.7220/Mum/2014 Mrs. Manjula S. Shah

Assessing Officer was neither required nor justified in attempting to review that part of assessment order which was not subject matter of the appellate proceedings.

(c) As regards point (viii) the Assessing Officer had made addition as unproved purchases in respect of 20 parties. The addition was made on the basis of test check carried out by the AD of the genuineness of purchase parties which figured on the website of Maharashtra State Sales Tax Department. The adverse view was taken as the notices issued for verification were either unserved or unresponded. Many of these notices were not served because the suppliers keep on changing their place of business and the notice sent at the old address came hack unserved. In the course of remand proceedings the assessee had provided the changed addresses of the parties which were available with it. The Assessing Officer issued notices to them and there was service on 6 parties. The other notices could not be served for want of availability of current addresses. The assessee submitted that these suppliers keep on changing site of their business depending on the business prospects. The assessee has already effected purchases and made payment to them by account payee cheques. It is neither feasible nor possible for the appellant to keep track of all the purchase parties with whom business was done in past.

(d) As regards point (ix) regarding the information which was pending from MCGM it was submitted that if the MCGM is slow in responding to the request of the Assessing Officer it cannot be held against the assessee.

(e) As far as point (x) is concerned the ld. counsel for the assessee claimed that the conclusions reached by the sales tax officers are valid for the affairs of the Sales Tax Department. As regards the assessment under Income Tax the Assessing Officer should have done its own enquiry and should have confronted the assessee with the material thus gathered. If the Assessing Officer really wanted to apply the tentative inferences of the sales tax department to the assessment proceedings of the assessee he was duty bound to call the deponents and make them confirm the nature of dealings with the assessee. If they depose that the dealings with the assessee are not genuine the

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assessee would have right to cross examine them to bring the truth of the deposition on the surface. This has not been done by the Assessing Officer. Thus the conclusion reached by the Assessing Officer is devoid of merit. The assessee had placed reliance on the Judgment of the Hon'ble Supreme Court in the ease Kishinchand Chellararn vs CIT reported in 125 ITR 713 (Page no. 77 to 87 of the Paper Book).

2.17. Considering the explanation of the assessee by keeping it in juxtaposition with the observation made in the assessment order and conclusion drawn in the impugned order, we find that the Ld. Commissioner of Income Tax (Appeal) justifiably reached to a conclusion in deleting the addition, because, there is no dispute to the fact that the job work of the contractee party was completed by the assessee, which was only possible with the consumption of material. No addition can be sustained merely on the basis of doubt because suspicion cannot be the basis of doubt, however, strong it may be, unless and until it is corroborated with material/evidence. Even otherwise, the Department has not proved that the conclusion drawn by the Ld. Commissioner of Income Tax (Appeal) is erroneous or factually incorrect. Even otherwise, non service of supplier parties cannot be said to be a valid reason to the department to disbelieve the purchases. The assessee is a civil contractor and hence its supplies are received on site. Many of the items purchased are supplied by entities of unorganized sector. They keep on changing their place of business and therefore non service of notice at the addresses given by the suppliers after a lapse of many years does not justify adverse view as to the genuineness of purchases. It would be seen that the addition was made on the basis of test check carried out by the Assessing Officer of the genuineness of purchase parties which figured on the website of Maharashtra State Sales Tax Department. The adverse view was taken as the notices issued for verification were either unserved or unresponded. Many of these notices were not served because the suppliers keep on changing their place of business and the notices sent at the old address came back unserved. In the course of remand proceedings the assessee had provided changed addresses of the parties which were available with it. The Assessing Officer issued notices to them and there was service on 6 parties. The other notices could not be served for want of availability of current addresses. It is a

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general position in such type of business that the suppliers keep on changing their site of business depending on the business prospects. The assessee has already effected purchases and made payment to them by account payee cheques. It is neither feasible nor possible for the appellant to keep track of all the purchase parties with whom business was done in past. But fact remains that the assessee had consumed the materials purchased from the said parties and the consumption of the purchases have been confirmed by the MCGM authorities. Just because the parties did not appear before the AO it cannot be held against the assessee. Our view find supports from the ratio laid down by Hon'ble Jurisdictional High Court in case of CIT-1 v/s M/s Nikunj Eximp Enterprises Pvt. Ltd (372 ITR 619)(Bom.), wherein it was held that merely because the suppliers could not be produced before the authorities but other relevant details have been filed to show that the transaction was genuine the purchases cannot be disallowed. The relevant extract of the judgment is as under:

"Whether on the facts and in the circumstances of the case and in law the Tribunal was right in deleting the addition made by the Assessing Officer of Rs. I,33,41,917/- towards bogus purchases even though the suppliers were non- existent and one of the parties had categorically denied having any business dealings with the Appellant Company".

.............

We have considered the submissions on behalf of the revenue. However, from the order of the Tribunal dated 30.04.2010, we, find that the Tribunal has deleted the additions on account of bogus purchases not only on the basis of stock statement i.e. reconciliation statement, but also in view of the other facts. The Tribunal records that the Books of Accounts of the assessee appellant have not been rejected. Similarly, the sales have not been doubted and it is an admitted position that substantial amount of sales have been made to the Government Department i.e. Defence Research and Development Laboratory, Hyderabad. Further, there were confirmation letters filed by the suppliers, copies of invoices for purchases as well as copies of bank statement all of which would indicate that the purchases were inflict made. In our view, merely because the suppliers have not appeared before the Assessing Officer or the CIT(A), one cannot conclude that the purchases were not made by the assessee- appellant. The

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Assessing Officer as well as CIT(A) have disallowed the deduction of Rs. 1.33 crores on account of purchases merely on the basis of suspicion because the sellers and the canvassing agents have not been produced before them. We find that the order of the Tribunal is well a reasoned order taking into account all the facts before concluding that the purchases of Rs. 1.33 erores was not bogus. No fault can he .found with the order dated 30.04.2010 of the Tribunal".

2.18. So far as, the contention of the ld. DR, the Ld. Commissioner of Income Tax (Appeals) was not justified in accepting genuineness of purchases when the name of supplier parties appeared on the list of suspicious dealers on the website of the Sales tax Department, in concerned, we are of the view that the assessment under Income Tax Act by the Assessing Officer, should have been done on its own enquiry and should have confronted the assessee with the material thus gathered. If the Assessing Officer really wanted to apply the tentative inferences of the Sales Tax Department to the assessment proceedings of the assessee, he was duty bound to call the deponents and make them confirm the nature of dealings with the assessee. If they depose that the dealings with the assessee are not genuine the assessee would have right to cross examine them to bring the truth of the deposition on the surface. This has not been done by the Assessing Officer. Thus the conclusion reached by the Assessing Officer is devoid of merit.

2.19. Even otherwise, fact remains that the assessee made purchases, for which payments have been made by cross-cheque. It is nobody's case that payments made to purchase parties were received back in cash by the assessee or the cheques issued to them were not in cashed, meaning thereby, the purchases from the concerned parties cannot be disputed. Where payments are made by account payee cheques, nobody can deny the existence of the parties. Once the assessee establishes consumption of items purchased nothing more remains to be proved by the assessee. The fact that the assessee has made the purchases by payment through account payee cheques and its consumption has been broadly explained which clearly establishes the assessee's case that the purchases as recorded by the assessee in the books of accounts are genuine. The ratio laid down by Hon'ble Apex court in the case of Dhakeswari Cotton Mills Ltd. Vs Commissioner of

47 ITA No.7220/Mum/2014 Mrs. Manjula S. Shah

Income Tax, West Bengal reported at 26 ITR 775 (SC) The relevant para of the order is reproduced hereunder:-

"we are in entire agreenei1 with the learned Solicitor- General when he says that the income-tax Officer is not fettered by technical rules of evidence and pleadings, and that he is entitled to act on material which may not be accepted as evidence in a coon of law, hut there the agreement ends , because it is equally clear that in making the assessment tinder sith-section ('3) of Sectioii 23 of the Act, the Income-tax Officer is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must he something more than hare suspicion to support the assessment under Section 23(3)."

Likewise, the Mumbai Bench of the Tribunal in the case of Hiralal Chunilal Jain & Others vs. ITO & Others (2016) 46 CCH 0020 (Mum) wherein the Tribunal held as under:

"2. Assessee,an individual is proprietor of M/s.Divya Alloys and is engaged in business of resellers of ferrous and non ferrous metals. Effective ground of appeal is about an addition of Rs. 1,44,348/- During the assessment proceedings, the A0 found that the assessee had purchased goods worth Rs. 7.21 laksh Shiv Sagar Steel(India),that the name of Shiv Sagar was appearing in the list of bogus parties forwarded by the sales tax authorities, that the name of the assessee was appearing as a beneficiaries in the list. The AO directed the assessee to produce the party from whom he had claimed to have purchased goods. However, the supplier was not produced by the assessee. Summons issued to Shiv Sagar could not he served on the given address. The AO held the purchase transaction bogus and treated the entire purchase (Rs. 7.21 lakhs)as unexplained expenditure u/s.69C of the Act.

48 ITA No.7220/Mum/2014 Mrs. Manjula S. Shah

Maharashtra that the assessee was one of the beneficiaries of accommodation entries, that Shiv Sagar the supplier of the goods was one of the entities who had admitted to have bogus bills, that the assessee had asked for cross examination of the supplier but same was not given, that the AO had not supplied the copy of the statements of Shiv Sagar to the assessee,that in the books of accounts of the assessee all the purchases and sales were recorded, that payments were made through banking channels, that the AO had made addition of entire purchases u/s.69 of the Act, that the FAA had reduced it to 20%. It is a fact that the AO had not rejected the sales of the assessee and the assessee was maintaining the quantative derails and stock register. In our opinion, once the sales are accepted as j'enuiize or not doubted the AO cannot reject the entire purchase. In the case of Nikunj Eximp(supra)the Hon'ble Bombay High Court has held if sales were not doubted by the AO and copies of bank statement showing entries of payment through account payee cheques to the suppliers, copies of invoices for purchases and a stock statement, i.e. stock reconciliation statement are filed purchased could not be rejected. In the case of Rajeev Kalathil('supra)the Tribunal has held as under:

"2.4. We find that AG 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."

In the present case also the AG had made the addition on the basis of information received from the Sales tax department, but, he did not make any independent inquiry. He did not follow the principles Of natural justice before making the addition. The FAA had reduced the addition to 20%, but he has not given any justification except stating

49 ITA No.7220/Mum/2014 Mrs. Manjula S. Shah

that same was done to plug the probable leakage revenue. Considering the peculiar facts and circumstances of the case, we are reversing the order Of the FAA Effective ground of appeal is decided in favour of the assessee."

In another case, the Mumbai Bench of the Tribunal in the case of DGIT vs. Rajeev G. Kalathil reported at (2014) 41 CCH 0552 (Mum), wherein it was held as under:

"2.3 Before us, Departmental Representative argued that both the suppliers were not produced before the AO by the assessee, that one of them was declared hawala dealer by VAT department, that because of cheque payment made to the supplier transaction cannot be taken as genuine. He relied upon the order of the G Bench of Mumbai Tribunal delivered in the case of Western Extrusion Industries. (ITA/6579/Mum/2010-dated 13.11.2013). Authorised representative (AR) contended that payments made by the assessee were supported by the banker's statement, that goods received by the assessee from the supplier was part of closing stock, that the transporter had admitted the transportation of goods to the site. He relied upon the case of Babula Borana (282 ITR251), Nikunj Eximp Enterprises (P) Ltd. (216Taxman 1 71) delivered by the Hon'ble Bombay High Court.

2.4 We have heard the rival submissions and perused the material before us. 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 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 trial.

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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."

Considering the totality of facts and the foregoing discussion including various judicial pronouncements, we find that the assessee duly maintained tax audit books of account, which includes stock register incorporating quantity of item-wise purchased, consumed and lying in the stock. The contract receipts are completely verifiable as they are paid/received through accounts payee cheque and subjected to TDS. This factual matrix was not even controverted by the Revenue. It is also noted, as discussed earlier, the net profit rate of 8.5%, which is better than the rates, accepted by the Department is quite reasonable in the preceding three Assessment Years, more specifically when the assessment was framed under scrutiny assessment u/s 143(3) of the Act, thus, mere appearance of the purchase parties on the website of the Sales Tax Department does not falsify the purchases, claimed to be made by the assessee. There is a possibility that some other parties might have engaged with such parties in a suspicious manner but in the present case, no evidence has been brought on record to fortify the suspicion raised by the Assessing Officer, more specifically when the purchase was made through account payee cheque and the payment of receipt from the contractee party/MCGM is also through banking channel. There is no evidence that any payment was paid back in cash. In the light of the foregoing discussion, we find no infirmity in the conclusion of the Ld. Commissioner of Income Tax (Appeal), it is affirmed, resulting into dismissal of appeal of the Revenue. Finally, the appeal of the Revenue is dismissed.”

In the light of the foregoing decision and before coming to any conclusion, we are expected to analyze the facts of the case in the light of section 69C of the Act, therefore, we

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are reproducing hereunder the relevant provisions of for ready reference and analysis:-

“69C. Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the Assessing Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year : Provided that, notwithstanding anything contained in any other provision of this Act, such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income.” 2.5. The aforesaid section deals with unexplained expenditure, incurred by the assessee, for which, no explanation about the source of expenditure or, part thereof, is not explained satisfactorily by the assessee. Thus, under the aforementioned facts, this section is not applicable in the present case, because, the Assessing Officer himself has only doubted the purchases made from certain parties and has not discussed anything with respect to the payments and issuance of cheque to the respective parties. The Ld. Assessing Officer has also not doubted the availability of funds or source thereof with the assessee. On the other hand, the assessee duly filed the necessary details of such purchases, name of the parties, place of their business, etc and the amount was paid through account payee cheque as was duly explained before us. These cheques were encashed in the accounts of the respective party, meaning thereby, the payment made for such purchases/transaction is not in

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doubt. When the cheques were encashed in the accounts of the respective party, therefore, their existence also cannot be doubted. The ld. Assessing Officer made the addition merely on the basis that the particular parties from whom purchases were claimed to have been made were in the suspicious list of the Sales Tax Department and were not traceable. The ld. Assessing Officer is having all the powers to secure the attendance of the parties by issuing them notices with the help of law enforcing agencies like police, if so desired/required. However, since, the assessee duly produced the relevant details, books are audited then the whole addition seems to be made on suspicion only. Our view is supported by the decision from Hon'ble jurisdictional High Court in the case of Nikunj Eximp Enterprises Ltd. (ITA No. 5604 of 2010) order dated 17/12/2012, wherein, Hon'ble Bombay High Court held that where, if the sales have been accepted the purchases could not be treated as non-genuine in those cases, where the assessee submitted all the details of purchases/sales and payment for such purchase were made through cheque. Identical is the situation in the appeal before us. The ld. counsel for the assessee from the bank statement available at page-67 of the paper book demonstrated with respect to genuineness of the payment. We have also gone through pages 202 and 203, which are photocopy of the cheque/cheques, paid to the parties and the same were encashed in the respective accounts of such parties. Thus, considering the totality of

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facts and the judicial pronouncements discussed hereinabove, we find no infirmity in the conclusion of the Ld. Commissioner of Income Tax (Appeal). It is affirmed.

Finally, the appeal of the Revenue is dismissed.

This Order was pronounced in the open court in the presence of ld. representatives from both sides at the conclusion of the hearing on 01/02/2017. Sd/- Sd/- (Manoj Kumar Aggarwal) (Joginder Singh) लेखा सद�य / ACCOUNTANT MEMBER �या�यक सद�य /JUDICIAL MEMBER

मुंबई Mumbai; �दनांक Dated : 02/02/2017

f{x~{tÜ? P.S/.�न.स.

आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant (Respective assessee) 2. ��यथ� / The Respondent. 3. आयकर आयु�त(अपील) / The CIT, Mumbai. 4. आयकर आयु�त / CIT(A)- , Mumbai, 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड� फाईल / Guard file.

आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy//

उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील�य अ�धकरण, मुंबई / ITAT, Mumbai