HARVINDER SINGH D LAMBA,MUMBAI vs. ITO 23(1)(5) OLD WD 19(3)(2), MUMBAI

We heard the parties and perused the record. The assessee is manufacturer and exporter of readymade garments. During the course of assessment proceedings, the AO issued notices u/s 133(6) of the Act to seven persons from whom the assessee had purchased textile cloth asking them to confirm the purchases made by the assessee. All the notices were returned un- served. Thereafter the assessee gave new addresses of the above said seven parties and hence the AO issued notices u/s 133(6) to them again. However, all the notices were returned back again un-served. Hence the AO treated the 2 Shri Harvinder Singh Lamba purchases made from them as bogus by rejecting the books and added a sum of Rs.1,25,33,116/- to the total income of the assessee.

Before Ld CIT(A), the assessee submitted that the aggregate amount of purchases made from the above said seven parties was Rs.55,96,265/- only. The assessee also furnished confirmation letters obtained from six parties out of the seven parties. The Ld CIT(A) examined the confirmation letters and found them to be not reliable for the reasons stated in his order. Accordingly he rejected the explanations of the assessee. However he reduced the addition to Rs.55,96,265/-, i.e., to the extent of actual amount of purchases made from the seven parties. Still aggrieved, the assessee has filed this appeal.

Before us, the Ld A.R submitted that the assessee is exporter of readymade garments and all the purchases have been duly accounted for in the books of accounts. He submitted that the assessee has made the payments to the suppliers by way of cheques and the said payments have been duly reflected in the bank statements of the assessee. He submitted that the addition of entire purchases would result in abnormal net profit rate. He submitted that the disallowance of purchases could not have been made merely on the reason that the notices issued to suppliers have been returned back as held in the case of Nangalia Fabrics (P) Ltd (40 taxmann.com 206)(Guj). He also submitted that the net profit shown by him is comparable with other years.

On the contrary, the Ld D.R submitted that the assessee has failed to prove the purchases to be genuine. He submitted that the notices were issued by the AO u/s 133(6) of the Act twice and both the time they have been returned back un-served. The confirmation letters filed by the assessee before Ld CIT(A) were also found to be not satisfactory. Accordingly he submitted that the Ld CIT(A) was justified in confirming the disallowance of purchases.

In the rejoinder, the Ld A.R submitted that the assessee could not have sold the readymade garments without manufacturing them out of the textile materials purchased.

We notice that the assessee has purchased textiles from the seven parties under consideration and the payments have also been made by way of cheques. All the purchases and payments have been duly accounted for in the books of accounts. It is the contention of the assessee that he could not have sold the goods without purchasing it. We notice that, in the instant case, the assessee has claimed in the written submission to have manufactured and sold textile goods, whereas the AO records that the assessee has manufactured and sold readymade garments. Thus, there is apparent contradiction about the nature of activities of the assessee. A perusal of profit and loss account of the assessee would show that the assessee has not accounted for any manufacturing expenses. We also notice that the assessee has not produced any stock register before the tax authorities as well as before us. Hence it is not clear as to whether the assessee would be in a position to make one to one reconciliation between purchases and sales. Hence the contention of the assessee that he could not have sold the goods without making purchases could not be accepted in its entirety. In our view, the various case laws relied upon by the assessee are distinguishable on facts.

It is well settled proposition that the responsibility to prove expenditure is placed upon the assessee. We notice that the assessee himself has made an alternative contention that the addition could have been restricted to Net Profit rate declared by it, meaning thereby, the assessee himself is accepting rejection of books of accounts in his alternative contention. However, there is merit in the contention of the assessee that the disallowance of entire value of purchases would give to abnormal rate of profit, which is beyond normal trade practice. In 4 Shri Harvinder Singh Lamba that view of the matter, we are of the opinion that the disallowance of entire amount of purchases was not justified. Since the assessee has failed to prove the consumption or sale of textile goods, we are of the view that the addition could be restricted by estimating the possible profit that could have been made by the assessee in these purchases. In our view, estimation of profit @ 10% would be reasonable and the same would meet the ends of justice. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to restrict the addition to 10% of the aggregate amount of purchases made from the above said seven parties. We order accordingly.

In the result, the appeal filed by the assessee is partly allowed. Order has been pronounced in the Court on 4.1.2017.