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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI MAHAVIR SINGH & SHRI RAMIT KOCHAR
सुनवाई क" तार"ख /Date of Hearing : 4-10-2016 घोषणा क" तार"ख /Date of Pronouncement : 09-11-2016 आदेश / O R D E R
PER RAMIT KOCHAR, Accountant Member
This appeal, filed by the assessee, being 30th December, 2015 passed by learned Commissioner of Income Tax (Appeals)- 3, Nasik(Camp office Thane) (hereinafter called “the CIT(A)”), for the assessment year 2010-11, the appellate proceedings before the learned CIT(A) arising from the assessment order dated 22nd January, 2015 passed by the learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) r.w.s. 147 of the Income Tax Act,1961 (Hereinafter called “the Act”).
ITA 492/Mum/2016 2
The grounds of appeal raised by the assessee in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called “the Tribunal”) read as under:-
1. The ld. CIT (Appeal) erred in confirming addition of Rs. 3,96,333/- as profit on purchases of Rs. 31,70,670/-. 2. The appellant requests to delete the addition confirmed by the Ld. CIT(A).
3. The Brief facts of the case are that the assessee is a government electrical contractor working under the name and style of Shanti Electricals and Services. In this case, certain information was received by the AO from the DGIT (lnv.), Pune vide letter No.PN/DGIT/Sales Tax Hawala/2012- 13/2179 dated 6th February, 2013 to the effect that the Sales Tax Department, Mumbai has unearthed a racket involving more than 1935 hawala dealers involved in issuing bogus invoices to allow a trader to claim tax credits and there are more than 37,000 beneficiaries who claimed such bogus purchases as well as bogus tax credits. It was also revealed from the statements recorded by the Sales Tax Department u/s.14 of the Maharashtra Value Added Tax, 2002 of the hawala dealers and the affidavits filed by them, that the hawala dealers, in fact, did not do any genuine business and they have only issued the bogus sale bills to various parties without supplying any goods. There were no corresponding purchases to such bogus sale bills. The bogus sale bills were supplied on commission basis. The payments received in the form of cheques have been credited in the bank account and thereafter cash was withdrawn and returned to the beneficiary after deducting their commission. It was observed by the AO that the investigation carried out by the Sales Tax Department revealed that the hawala operator posing as the seller exists only on paper, issues fake bill to a concern and gets a cut in ITA 492/Mum/2016 3 return. The beneficiary , in return gets the input tax credit on the material , he had never purchased in reality the material represented by bogus bills issued by hawala dealers .As per the list received from the DGIT (lnv.), Pune, the assessee is found to be one of such beneficiary. Thus, the case of the assessee was reopened by the A.O. by issuance of notice u/s 148 of the Act on the belief that the purchases to the tune of Rs. 31,70,670/- are accommodation entries and are not genuine. Therefore as per the AO, these purchases of Rs. 31,70,670/- have escaped the assessment as envisaged u/s 147 of the Act for the impugned assessment year. The assessee in response to notice u/s 148 of the Act submitted that the original return of income filed u/s. 139 of the Act be treated as return of income filed in response to the notice u/s. 148 of the Act . The AO observed that as per information received from DGIT(Inv.), Mumbai, these hawala dealers have filed affidavit with Sales Tax Department also made deposition u/s 14A of MVAT Act, 2002 whereby they deposed of being hawala dealers engaged in accommodation entries and were not engaged in genuine business. During the course of assessment proceedings, assessee produced bank book, cash book, ledger, sales register, purchase register and financial statements. The assessee was asked to furnish names and addresses of parties from whom purchases were made and to whom sales were made. Also, it was specifically asked to furnish account extracts of purchases made along with confirmation, purchase bill, relevant delivery challan, lorry receipts, stock register and escort receipts so as to verify the purchases. The assessee submitted ledger extract for purchases and also copies of purchase bills. The A.O. observed from the details available that the purchases made from the following parties were suspicious:-
Tin of Hawala Name of Hawala Dealer PAN of Assessment Amount in Dealer hawala year rupees dealer 270503389521V Sidhivinayak Steels AGVPS7889Q 2009-10 2113302 ITA 492/Mum/2016 4 27120627472V Harish Metal & Tubes AHYPJ8223D 2009-10 1057368 Total 31,70,670 Notices u/s 133(6) of the Act were issued to the above vendors to verify the facts from whom the assessee had claimed to have made certain purchases and various details were called from them. However, the notices issued u/s 133(6) of the Act in respect of above parties were unserved with the reasons ‘not known’ and ‘left’. In view of this, the assessee was asked by the AO to produce these hawala operators before the AO but the assessee failed to produce these vendors before the AO and expressed its inability to produce these vendors. The A.O. after considering submissions of the assessee observed that the assessee could not produce the related documentary evidences for verification such as octroi receipts, lorry receipts , stock register and escort receipts for the purchases made from these parties , and also failed to produce the vendors and as such the purchases made from the so called vendors cannot be considered as genuine. The AO observed that books of account are not complete and correct. The A.O. accordingly rejected the books of account u/s 145(3) of the Act and treated the alleged purchases of Rs. 31,70,670/- as unproved purchases and added the investment made therein to the income of the assessee u/s 69-C of the Act , vide assessment order dated 22nd January, 2015 passed by the AO u/s 143(3) r.w.s. 147 of the Act.
Aggrieved by the assessment order dated 22-01-2015 passed by the A.O. u/s 143(3) r.w.s. 147 of the Act, the assessee filed first appeal before the ld. CIT(A).
Before the ld. CIT(A) , the assessee submitted copies of invoices in respect of all these purchases and ledger accounts of all the parties were also submitted , and it was submitted that the payments for these purchases ITA 492/Mum/2016 5 were made through cheques. The assessee submitted comparative chart of Gross Profit and Net Profit for the year under consideration and for the two preceding years, with and without hawala dealer purchases as under:
A.Y. SALES G.P(Rs.) G.P.(%) N.P.(Rs.) N.P.(%) 2008-09 1,04,40,263/- 23,52,190/- 22.53% 8,35,230/- 7.99% 2009-10 34,58,466/- 7,82,268/- 22.61% 3,60,670/- 10.43% 2010-11 90,70,063/- 19,12,587/- 21.09% 8,35,850/- 9.22% Particulars 2009-10 Net Profit as per books of a/c 8,35,850 Addition made by AO 31,70,670 Net profit after addition 40,06,520 Revised NP % 44% It was submitted by the assessee that if the entire bogus purchases are added, the Net Profit ratio would be 44% , which is abnormal in case of Contractor.
The assessee also relied on following judicial decisions : a) Nikunj Exim Enterprises of 2010- wherein Hon’ble Bombay High Court held that merely because suppliers have not appeared before the AO or CIT(A), one cannot conclude that the purchases were not made by the assessee. b) ITO v. Paresh Arvind Gandhi ITA No 5706/Mum/2013 – The tribunal held that the AO did not conduct any independent enquiry to establish that the purchases were not genuine. The absence of ITA 492/Mum/2016 6 delivery challans was not sufficient to prove non-genuineness of the transaction. c) Ramesh Kumar and Co – ITA no. 2959/Mum/2014- The additions have been made on the basis of report of the Sales Tax Department. The tribunal held that if there were no purchases the tax-payer would not have been in position to complete the civil works.
Without prejudice to the above submissions, the assessee vide letter dated 30-12-2015 requested that the addition of 12.5% of alleged Hawala purchases be made to the income of the assessee in order to buy peace of mind.
The ld. CIT(A) after considering the submissions of the assessee held that the assessee had shown purchases amounting to Rs. 31,70,670/- from various parties which were from hawala operators as appearing in the list prepared by Sales Tax Department and which were not genuine purchases. These dealers only gave the purchase bills and there were no actual sale and purchase transactions and no transfer of goods. The assessee could not produce transportation and octroi payment receipts to shown that the assessee had made actual purchases from the said hawala dealers. The assessee could not produce either the parties or confirmation/ledger extract of the assessee in the books of accounts of the said hawala dealers. The learned CIT(A) observed that the assessee received the bills and made payments through account payee cheques , but the assessee along with thousands of other tax- payer in collusion with the selling dealers subverted and manipulated the system, wherein the selling dealers were only giving the bills and the amount paid by the purchasing dealer in the form of cheques were returned to the purchasing dealers in the form of cash without actual transaction of goods. The assessee showed that the material purchased has been used in execution of Government contracts and running bills were produced to show that the ITA 492/Mum/2016 7 material namely MS Plates and sheets have been used in the manufacturing of goods and execution of contracts of various government departments. The ld. CIT(A) held that if the sales were there purchases have to be there as held by the Mumbai Tribunal in the case of Ramesh Kumar & Co. v. ITAT, Mumbai (ITA No. 2959/Mum/2014), hence, the inference that can be drawn is that the assessee had made purchases in the open market but had obtained bills from the hawala operators , but however there is no one to one correlation with the material purchased from the said hawala dealers to have been completely used in the execution of work contracts. Thus, the assessee actually made the purchases from third parties and the invoices being inflated. The learned CIT(A) held that the assessee is in the business of electric contracts and the total contract receipts during the year was Rs. 90,70,063/- on which gross profit and net profit has been shown at Rs. 8,35,850/- which works out to 9.22%. Following the decision of the Hon'ble Gujarat High court in the case of CIT vs. Simith P. Sheth, the learned CIT(A) held that it would be appropriate if 12.5% of the amount of unproved purchases of Rs. 31,70,670/- amounting to Rs. 3,96,333/- is disallowed in the hands of the assessee. This addition will be over and above the profits of Rs. 7,82,140/- shown by the assessee in his return of income. Thus, the net profit would be Rs. 11,78,473, approximately 12.9% of contact receipts. In the previous year, the net profit was 10.43% and in view of this, the profit margin of 12.9% was not unreasonable after making the addition and was also in line with the finding of Tribunal in the case of Ramesh Kuma (supra) regarding the reasonability of profit in the case of contractor. The ld. CIT(A) accordingly restricted the addition to Rs. 3,96,333/- , vide appellate orders dated 30-12-2015 passed by learned CIT(A).
Aggrieved by the appellate order dated 30-12-2015 passed by the ld. CIT(A), the assessee filed second appeal before the Tribunal.
ITA 492/Mum/2016 8
The ld. Counsel for the assessee submitted that additions have been made u/s 69-C of the Act on account of alleged bogus purchases of Rs. 31,70,670/- by the AO with respect to purchases from two parties. The ld. CIT(A) confirmed the additions @12.5% of the amount of unproved purchases of Rs. 31,70,670/- , amounting to Rs. 3,96,333/-. It was submitted that in the previous year, the net profit ratio was 10.43% which was accepted by Revenue. The ld. Counsel submitted that the assessee could not produce the vendors before the authorities below, however, all the details were furnished before the A.O.
8. The ld. D.R., however, relied upon the orders of authorities below.
We have considered the rival contentions and also perused the material available on record including the judicial decisions cited by the parties. We have observed that the assessee is a government electrical contractor working under the name and style of Shanti Electricals and Services . We have observed that certain information was received by the AO from the DGIT (lnv.), Pune vide letter No.PN/DGIT/Sales Tax Hawala/2012-13/2179 dated 6th February, 2013 to the effect that the Sales Tax Department, Mumbai has unearthed a racket involving more than 1935 hawala dealers involved in issuing bogus invoices to allow a trader to claim tax credits and there are more than 37,000 beneficiaries who claimed such bogus purchases as well as bogus tax credits. It was also revealed from the statements recorded by the Sales Tax Department u/s.14 of the Maharashtra Value Added Tax, 2002 of the hawala dealers and the affidavits filed by them, that the hawala dealers, in fact, did not do any genuine business and they have only issued bogus sale bills to various parties without supplying any goods. There were no corresponding purchases to such bogus sale bills. The bogus sale bills were supplied on commission basis. The payments received in the form of cheques have been credited in the bank account and thereafter cash was withdrawn ITA 492/Mum/2016 9 and returned to the beneficiary after deducting their commission. It was observed by the AO that the investigation carried out by the Sales Tax Department revealed that the hawala operator posing as the seller exists only on paper, issues fake bill to a concern and gets a cut in return. The beneficiary , in return gets the input tax credit on the material , he had never purchased in reality the material represented by bogus bills issued by hawala dealers . The said hawala dealers have given affidavit and statements before the Sales Tax Authorities that they were engaged in providing accommodation entries whereby bogus bills were issued against which no goods were supplied by them. As per the list received from the DGIT (Inv.), Pune, the assessee is found to be one of such beneficiary. The assessee submitted copies of purchase bills and also stated that payment have been made through cheques. The assessee could not produce the parties from whom the material was procured before the authorities below while notices u/s 133(6) of the Act issued by authorities below either remained un-served or not complied with. The AO rejected the books of accounts and made additions to the tune of unproved purchases aggregated to Rs. 31,70,670/- to the income of the assessee u/s 69-C of the Act . The learned CIT(A) restricted the disallowance to 12.5% of the net profit ratio . The assessee showed before the learned CIT(A) that the material purchased has been used in execution of Government contracts and running bills were produced to show that the material namely MS Plates and sheets have been used in the manufacturing of goods and execution of contracts of various government departments. The ld. CIT(A) after considering the replies of the assessee held that if the sales were there purchases have to be there as held by the Mumbai Tribunal in the case of Ramesh Kumar & Co. v. ITAT, Mumbai (ITA No. 2959/Mum/2014), hence, the inference that can be drawn is that the assessee had made purchases in the open market but had obtained bills from the hawala operators , but however there is no one to one correlation with the material purchased from the said hawala dealers to have been completely used in the execution of work ITA 492/Mum/2016 10 contracts. Thus, the assessee actually made the purchases from third parties and the invoices being inflated was the conclusion of the learned CIT(A) and accordingly addition was sustained by the learned CIT(A). It has not been brought on record that the Revenue has filed any appeal with the tribunal against the decision of learned CIT(A). The Revenue has accepted the profit rate of 10.43% earned by the assessee in the preceding year, while in the instant year the net profit rate was 9.22%. The turnover in the instant year is Rs. 90,70,063/- . Hence in our considered view , interest of justice will be best served keeping in view factual matrix of the case if the additions to the extent are made to the income of the assessee to make the profit comparable with that of the preceding year of 10.43%. We order accordingly.
In the result, the appeal filed by the assessee in 2010-11 is partly allowed as indicated above.