MAGNOLIA MARTINIQUE CLOTHING PRIVATE LIMITED,DELHI vs. DCIT, CENTRAL CIRCLE 17, NEW DELHI, DELHI

to4293/Del/2025 1. The assessee has filed appeals against the order of the Learned Commissioner of Income Tax (Appeals)-27, New Delhi [“Ld. CIT (A)”, for short] dated 29.01.2025 for the Assessment Years 2013-14 to 2016-17.

Since the issues are common and the appeals are connected, hence the same are heard together and being disposed off by this common order. We take up the assessee’s appeal being for Assessment Year 2013-14 as lead case to adjudicate the issues under consideration.

Brief facts of the case are, the assessee has filed its return of income on 30.09.2013 declaring an income of Rs.2,33,30,710/- and tax paid was Rs.80,39,017/-. Thereafter, the assessee has revised its return on 07.06.2014 declaring an income of Rs.2,33,30,710/- and tax paid was Rs.92,39,017/-.

Subsequently, a search and seizure action was carried out on Mr. Himanshu Verma Group on 13.04.2017. Shri Himanshu Verma was an entry operator who provided accommodation entries in lieu of commission. Shri Himanshu Verma was found to be operating and managing more than 200 shell companies and he admitted that he provided bogus bills/entry of loan/capital to the beneficiaries and ultimately transferred the amount to its beneficiaries. On perusal of list of to4293/Del/2025 companies/entities provided by him, it was found that assessee has also taken accommodation entries in form of bogus purchases from companies managed and operated by him.

Consequently, a survey operation was carried out at the premises of the assessee on 07.11.2017. During the course of survey action on the assessee, no inward and outward stock registers for the purchases made from F.Y. 2012-13 to 2015-16 were found and the same could not be provided by the assessee during the post survey enquiries also. Further, during the course of survey, statement on oath of Shri Siddharth Mohan, the Director of the assessee company was recorded who confirmed the purchase transactions made with the shell companies held by Shri Himanshu Verma and offered the bogus purchases made from the said parties for taxation for buying peace.

On the basis of information, proceedings u/s 147 were initiated and notice u/s 148 of the Act was issued on 30.06.2021 after obtaining necessary approval. In response, the assessee vide its letter dated 29.06.2022 & 21.07.2022 submitted reply.

After considering the reply of the assessee, order u/s 148(d) dated 26.07.2022 and notice u/s 148 dated 29.07.2022 were issued. In response to notice u/s 148 dated 29.07.2022, the assessee filed its return of income declaring an income of Rs. 2,33,30,710/-. Various notices u/s 142(1) to4293/Del/2025 along with questionnaire and 143(2) were issued and served on the assessee. In response, the assessee furnished its reply from time to time.

Further vide notice u/s 142(1), the assessee was asked to furnish party wise and item wise details of purchases made above Rs.5 Lacs along with supporting documentary evidences. However, the assessee failed to furnish any details on the issue. Therefore, a show cause notice dated 26.04.2023 was issued. In response, the assessee furnished its reply vide letter dated 11.05.2023.

Assessing Officer observed that the assessee has also contended that assessee maintains complete records for receipt of material/fabric and export of readymade garments including export invoices, shipping bills, AWB/Bill of lading which are also authenticated through custom clearance by utilization of such fabric. In this regard, it is stated that it is beyond doubt that the assessee is in the business of manufacturing of readymade garments, which were exported to other countries. However, Export Invoice, Shipping Bills, AWB/Bill of landing authenticated through custom clearance does not prove the genuineness of the purchase of material made by the assessee during the year under consideration.

Further, the Assessing Officer observed the contention of the assessee that Shri Siddharth Mohan (director of the assessee company) had made surrender under tremendous pressure during the course of survey. In this to4293/Del/2025 regard, he observed that the assessee had also failed to provide inward and outward registers for the captioned period during the course of post search enquiries. From the above, he observed that Shri Siddharth Mohan was well aware about the bogus purchases made during the year under consideration and made surrender without any fear, pressure and coercion as undertaken by him on oath while recording during the course of survey as well as post search enquiries. Moreover, attention is invited to the fact that the director Sh. Sidharth Mohan, himself made his handwritten declaration after the conclusion of statement which is clearly self- explanatory. Assessing Officer observed that in fact, the objection raised by the assessee seems to be an afterthought with an intention to derail the assessment proceedings. Hence, the contention of the assessee on this ground is incorrect and not acceptable.

In the meantime, notices u/s 133(6) dated 11.05.2023 were issued to these parties at the last known addresses. However, the same were returned back by the postal authorities un-served as such party does not exist.

Subsequently, ld. AR of the assessee appeared and produced copy of purchase bills and inward/outward registers, ledger and confirmations. After examining the same, AO asked the assessee to furnish sample copies of bills of the few parties along with relevant pages of inward register/ledger/confirmations. In response, AR of the assessee appeared to4293/Del/2025 and filed replies vide letters dated 23.05.2023 and 25.05.2023. He also relied on various case laws.

After going through the submissions and case laws, AO observed that it is clear that the assessee has shown purchases of Rs.7,20,49,000/- from bogus/shell entities (Rs. 4,37,22,000/- from M/s. Garnet Textiles Pvt. Ltd. and Rs. 2,83,27,000/- from M/s. Clarrisa Fabrics Pvt. Ltd.). These purchases have been established as nothing but accommodation entries. However, considering the fact that the assessee has booked sales corresponding to such purchases. It is clear that the assessee would have made actual purchases from some other entities which would have given leverage to the assessee to negotiate on prices. Further, the assessee must have paid some commission to the accommodation entry providers. All these factors indicate that the assessee has booked purchases while inflating the same, by taking purchase entries from accommodation entry providers. Accordingly, to protect the interest of Revenue and to prevent the leakage of tax on unaccounted income and also in the interest of natural justice, expenses to the extent of Rs.57,63,920/- calculated on estimate basis @ 8% out of the total purchases of Rs.7,20,49,000/- (Rs. 4,37,22,000 + Rs. 2,83,27,000) shown from accommodation entry providers, are hereby disallowed and added to the total income of the assessee under the head “Income from business and Profession” as per to4293/Del/2025 the provisions of Section 28 of the Act for the year under consideration.

Further AO observed that the assessee has debited Rs.29,20,771/- on account of Application Software Expenses under the head “Other Expenses”. Therefore, vide notice u/s 142(1), the assessee was asked to furnish details and documentary evidence in respect to the same. However, the assessee failed to furnish the same. AO asked the assessee to show cause as to why such expenditure should not be treated as Capital Expenditure and added to the income of the assessee. After going through the reply of the assessee, AO observed that the expense falls under the Capital Head. Hence, net amount of expenditure Rs.11,68,308/- (cost Rs.29,20,771/- less Depreciation Rs.17,52,463/-) is disallowed and added to the total income of the assessee. Accordingly, AO assessed the income of the assessee at Rs.3,02,62,940/-.

Aggrieved assessee preferred an appeal before the ld. CIT (A) and filed grounds of appeal