ACIT 21(1), MUMBAI vs. GIRISH J GADA, MUMBAI

First we shall take up appeal for A.Y. 2008-09 in against the order passed by the Ld.CIT(A)-29, Mumbai “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in: (1) "On the facts and circumstances of the case and in law, the Id. CIT(A) has erred in deleting the addition of Rs. 3,87,81,689/- without considering the facts that assessee has not produced any corroborative evidences also such as transportation vouchers for such huge purchases (2) "On the facts and circumstances of the case and in law, the Id. CIT(A) has erred in not considering the decision of the Apex Court in the case of Sumati Dayal Vs. CIT, 214 ITR 80(SC) which clearly recognizes the principle of preponderance of probability which is relevant in the context of the statements recorded from Mukesh Choksi and group and the assessments completed by the department holding Shri Mukesh Chokshi as Hawala Operator which were confirmed by the Hon'ble ITAT, Mumbai." II. For this and other reasons it is submitted that the order of the CIT(A) may be set aside and that of the AO restored.”

The solitary ground raised

Being aggrieved, assessee filed appeal before the CIT(A) and made elaborate submissions along with documentary evidences to demonstrate that the transaction of purchases from Vijayalaxmi Corporation was genuine and duly supported with bills, vouchers and other documentary evidences and that the entire payment was made through account payee cheques. Copy of bank statement of Vijayalaxmi Corporation was also submitted to demonstrate that no cash withdrawal was made by the said party against cheque issued by the assessee on account of purchases. It was submitted that the AO made presumption that purchases were bogus, and no contrary material was brought on record to negate the overwhelming documentary evidences in support of the transaction.

Ld. CIT(A) considered the assessment order as well as the submissions of the assessee and also the documentary evidences brought on record by the assessee in support of the transaction. After analysing all facts and circumstances of the case, Ld. CIT(A) was of the view that since sales have been accepted, purchases shown by the assessee cannot be doubted. But he doubted the purchase price shown on the invoices issued by the aforesaid party. He was of the opinion that the assessee has not been able to prove that the goods were purchased from the aforesaid party at arm’s length price. Under these circumstances, Ld. CIT(A) estimated net profit @5.5% of gross turnover as against 2.49% shown by the assessee. Under these circumstances, he calculated net profit of 5 Rs.78,12,826 on the gross turnover of Rs.14,20,51,382 as against net profit of Rs.20,64,720 shown by the assessee. Therefore, he made net addition of Rs.57,48,106 (i.e. 78,12,826 – 20,64,720) and deleted the addition of the balance amount.

Per contra, the Ld. DR contested the order of the Ld. CIT(A) and submitted that invoices submitted by the assessee were not reliable and there was delay in filing of VAT return by the supplier and therefore, he requested for restoring the order of AO and setting aside that of the Ld. CIT(A).

We have gone through the orders passed by both the authorities as well as the submissions made before us. It is noted that in this case, admittedly, sales have been accepted and quantitative reconciliation is not doubted. The payment was made by MCGM after having been satisfied with the goods supplied by the assessee. The payment so 6 received was duly included by the assessee in the sales which has been shown in the P&L Account. The income shown has been duly accepted by the revenue. Under these circumstances, the entire amount of purchases cannot be disallowed. Thus, the only aspect that needs to be examined here is whether the purchases have been recorded correctly or these were inflated. It is noted that in this regard that Ld.CIT(A) made detailed analysis of the transaction of the assessee and facts of this case and finally worked out the correct amount of purchases by making detailed observations in his order which are as below: “12. I have gone through the assessment order passed 'by the Assessing Officer, and the written submissions of the appellant on the' issue carefully.

As of now the issue of bogus purchases has been much discussed and debated by the various courts and tribunals. In many judicial pronouncements on the issue, the courts have taken a consistent view that in case of non-existent, parties from whom the purchases are shown to have been made, only part of such purchases can be disallowed, in the cases where the corresponding sales are 'treated as genuine, or 'alternatively the profit embedded in such sales against the alleged bogus purchases can only be brought to tax.

In the instant case the only assumption from where the AO has formed the. view about the bogus nature of the purchases made by the appellant from the above concern, 'i.e M/s Vijaylakshmi Corporation, who has supplied the materials, is that this concern belong to Mukesh Choksi, who had accepted in the statement recorded during the search at his premises that his group concerns were involved in the bogus billing racket.

On the contrary the AO has not appreciated the fact that the appellant has placed on record certain crucial evidences regarding the transactions of purchases from the above party, which cannot be ignored while deciding the issue at hand. It is not the case of the AO that the above 7 concern M/s.Vijaylakshmi Corporation has not paid VAT on the sales made to the appellant. The appellant has placed on record the VAT returns filed by the above concern before the sales tax department, for the period under consideration i.e. from 01/04/2007 to 31/03/2008, which shows that the sales made by them to the appellant firm are reflected in these VAT reports filed by the above concern. The copy of the said VAT report is placed at page no 570 to 691 of the paper book filed This report was also placed before the AO during the assessment proceedings but the Assessing Officer has not taken any cognizance of the same. The TIN of the supplier is also mentioned on the VAT reports, which is verifiable from the site MAHAVAT of the sales tax department. Once the above party is registered dealer with the sales tax department and paying regular sales tax and filing VAT reports of the sales made by them before the sales tax department, their identity is not in doubt. Further there is no adverse information available on the Website of the sales tax department regarding the above party that they have indulged in the evasion of VAT. Therefore treating these parties as bogus or the sale made by them to the appellant as bogus would be total negation of the above facts placed on record by the appellant.

The AO has not appreciated the fact that the party in question is registered dealers with the sales tax department and in respect of the transactions of sales of materials to the appellant, they paid the due sales tax under the Sales Tax Act which is mentioned in the VAT report filed with the department. All these facts goes to prove that the transaction of sale and purchase between the party and the appellant are genuine, otherwise there is no question of making payment of sales tax / VAT, if the transactions are bogus.

Further, the appellant has also maintained the proper stock inventory item wise. The closing stock inventory of the materials is placed at page 62 of the paper book filed during the appellate proceedings which indicate that the appellant has maintained proper records of the inward and outward materials and also the details of closing stock purchases from the unregistered dealers in cash is not 8 .placed by the AO. These are only the assumptions and presumptions which cannot be relied upon for making huge additions. The various courts have held in a number of decision that the suspicion even of highest degree cannot take place of evidence. 18 Further, nowhere in the assessment order, the AO has doubted the corresponding sales made by the appellant against these alleged bogus purchases made from the party in question during the year under consideration. From the details submitted, it can be observed that the total purchases made by the appellant for the period under consideration is at Rs. 13,57,88,871/- which included the purchases from the alleged bogus party i.e. M/s.Vijaylaxmi Corporation. Against these purchases made, the appellant has made total sales amounting to Rs.14,20,51 382 during the year. These total sales include the purchases made for the above party in .question and on these sales made, the appellant received payments from the MCGM and on all these payments received the appellant has already offered the profits for taxation in the return of income filed for the year under consideration'. The MCGM makes the payments in such cases of the contractors after proper scrutiny and strict verification of the materials supplied by the appellant. Such payments could not have been made without the actual supplies received by various schools to whom these items like school bags, shoes, socks were intended to be delivered. The tax at source has also been deducted by MCGM before making such payments to the appellant. This is the reason that the AO has given a categorical finding at page 3 of the assessment order that sales made by the appellant are beyond doubt. If the sales made by the appellant are not in doubt, how the corresponding purchases can be treated as bogus especially in view of the facts stated above.

To prove the fact that the purchases/sales from these parties are genuine, the appellant has also filed the copies of the bills/invoices received from these parties for the purchases made which includes the delivery challans in certain cases. The AO has not given any comments on these bills/invoices and delivery challans filed by the 9 appellant during the course of assessment proceedings. The, AO has not even doubted the invoices/bills issued by these parties to the appellant which proves the genuineness of these transactions of sale/purchase of materials.

Further, the payments for the purchases from the party has been made by cheques and through normal banking channels. The AR of the appellant has placed on record the copies of the bank statement of M/s Gin Fab account no. 20002104260 maintained with Bank of Maharashtra showing the payments made to the party against purchases made from the above party. On perusal of the, bank statement, it can be observed that these payments were made to this party right from the beginning of the year and are spread throughout the accounting period. It is not the case that the payments have been made at one go or only at the end of the year or the payments to the party are outstanding at the end of the year. All the payments have been made to the party in the normal routine as done in the case of other parties after availing the normal credit period. The AO has not made any investigations to .prove that the payments received by the parties in question for the sale made to the appellant were withdrawn in cash from their accounts and given back to the appellant after charging their commission. All these evidences placed on record for the purchases made cannot be set aside summarily without making further investigations in the matter to prove that these are not genuine. The purchases cannot be treated as bogus only for the reason Mr. Mukesh Choksi had admitted in the statement recorded during the search that the concerns floated by him indulged in bogus billing without actual delivery of. goods. The appellant has not been confronted with any material which the AO was in possession indicating any doubts about the genuineness of the purchases. It is therefore apparent that the confessional statement was uncorroborated by any material or information found or seized during the course of search or otherwise. Such confessional statement, in the absence of any corroborative evidences, does not justify adverse view taken by the Assessing Officer against the appellant. It would not be out of place to mention here that this statement, given during 10 the course of search, was later retracted by Mukesh Choksi during the assessment proceedings before the Assessing Officer.' 21. In view of the facts stated above, it is clear that the purchases made by the appellant from M/s.Vijaylakshmi Corporation cannot be disallowed only on the basis of a statement unless and until these statement are further corroborated by some other evidence placed on record to prove the same to be bogus, no cognizance of such statements can be taken. No such corroborative evidences have been placed on record by the Assessing Officer before declaring these purchases to be bogus and disallowing the same.

As is evident from the facts mentioned at aforesaid paras, the purchases of the materials by the appellant are not in doubt from the party in question but only flaw in these transactions is that these parties in question have not been verified or examined by the Assessing Officer to establish the correctness of the purchase price paid for the materials purchased from these parties. The AO has not made any verification of such purchases either u/s 133(6) or by calling the parties u/s 131 for examination, which was vital to determine as to whether the purchase price shown on the bills/invoices are as per prevailing market prices of the materials purchased. Without ascertaining, the correct purchase price of the materials purchased, the net profits shown by the appellant cannot be accepted as correct.

Since the purchases bills issued by the party are not verifiable from the concerned parties, there is every chance, that these purchases are over-invoiced to reduce the profits. Therefore, the correct approach in such transctions would be to tax only the estimated profit element embedded, over and above the net profit already shown, in such alleged bogus purchases which need to be estimated for taxation purposes. The disallowance of the entire amount of purchases from these parties would not be the correct approach to decide the issue judiciously.

While dealing with similar issues, the courts have taken a view- that in case of the alleged bogus 11 purchases, there is no justification for adding back the entire purchases What the Income Tax Act envisages is the taxation of the income element arising from any financial transaction and not the entire financial transaction as the income: Therefore only the profit embedded can be taxed. Similar approach has to be adopted in respect of the alleged bogus purchases in the instant case.

While dealing with an identical issue in the case of CIT-I Vs Simit P. Sheth, ITA no. 553 of 2012, order dated 16/11/2013, the Hon'ble High Court of Gujarat has held that "We are broadly in agreement with the reasoning adopted by the Commissioner (Appeals) with respect to the nature of disputed purchases of steel. It may be that the thre6 suppliers from whom the assessee claimed to have purchased the steel did not own up to such sales. However, vital question while considering the entire amount of purchases should be added back to the income of the assessee or only the profit element embedded ' therein was to ascertain whether the purchases themselves were completely bogus and non-existent or that the purchases were actually made but not from the parties from whom it was claimed to have been made and instead may have been purchased from grey market without proper billing or documentation. In the present case, CIT believed that when as a trader in steel the assessee sold certain quantity of steel, he would have purchased the same quantity from some source. When the total sale is accepted by the Assessing Officer, he could not have questioned the very basis of the purchases. In essence therefore, the Commissioner (Appeals) believed assesses theory that the purchases were not bogus but were made from the parties other than those mentioned in the books of accounts. That being the position, not the entire purchase price but only profit element embedded in such purchases can be added to the income of the assessee. So much is clear by decision of this Court. In particular, Court has also taken a similar view in case of 12 Commissioner of Income Tax-IV vs. Vijay M Mistry Construction Ltd. vide order dated 10.01.2011 passed in Tax Appeal No. 1090 of 2009 and in case of Commissioner of Income Tax vs. Bholanath Poly Fab Pvt. Ltd. vide order dated 23.10.2012 passed in Tax Appeal No. 63 of 2012. The view taken by the Tribunal in case of Vijay Proteins Pvt. Ltd. Vs. CIT reported in 58 ITC 428 came to be approved."

Similarly, in the case of CIT, Vs Bhalanath Poly Fab. (P) Ltd., l.T.A.No. 63 of 2012, in the order dated 23/10/2012, the Hon'ble High Court of Gujarat has held as under:- We are of the opinion that the Tribunal committed no error. Whether the purchases themselves were bogus or whether the parties from whom such purchases were allegedly made were bogus is essentially a question of fact. The Tribunal having examined the evidence on record came to the conclusion that the assessee did purchase the cloth and sell the finished goods. In that view of the matter, as natural corollary, not the entire amount covered under such purchase, but the profit element embedded therein would be subject to tax. This we. the view of this court in the case of Sanjay coke Industries v CIT 316 ITR 274 (Gui). Such decision is also followed by this court in a judgment dated August 16, 2011, in Tax Appeal No.679 of 2010 in the case of CIT v. Kishor Amrutlal Patel. In the result, tax appeal is dismissed.'

In view of the facts and circumstances and the judicial pronouncements cited above, what can be disallowed or taxed in the instant case of the alleged bogus purchases, as held by the Hon'ble High Court of Gujarat in the above cited case, is only the profit element embedded in such purchases shown to have been made from the alleged bogus parties. There is no rationale for disallowing the entire purchases made from1bparty in question. 28. in the instant case, all the facts and circumstances outlined above leads to the conclusion that although the purchases made by the appellant from the party is not in doubt but at the same time it difficult to accept the purchase price shown on 13 the invoices/bills issued by the party in question. The appellant has not placed any evidence on record that the goods were purchased from the above parties at arms length price. The appellant has not placed on record any comparable bills/invoices for purchases of similar items made from other parties to establish that the purchases from the party in question were also at par with the purchases made from other parties during the period under consideration. In absence of any such evidence placed on record, the correctness of the purchase price mentioned on such bills/invoices issued by the party i.e. M/s Vijaylakshmi Corporation, cannot, be accepted, which in turn cast doubt about the authenticity of the books of account as well as the net profit shown by the appellant for the year under consideration. in view of the same, the books of accounts of the appellant need to be rejected and the net profit for the year to be estimated. Since the assessee is basically a retail trader in the goods which are supplied to MCGM and even the I.T. Act. u/s 44AF provides for 5% net profit on the gross receipts in case of certain eligible business having total turnover of Rs. 6O,00,000I- However, in the case of the appellant, the total turnover or gross receipts for the year under consideration are more than Rs. 60 lacs, therefore the same rate of profit cannot be applied in the instant case it would, therefore, be fair and reasonable if the net profit in this case is estimated at 5.5% of the gross turnover.

in view of the facts narrated above, the books of accounts of the appellant for the year under consideration i.e. A.Y. 2008-09 are rejected and the net profit of the appellant is estimated at 5.5% of the gross turnover as against shown by the appellant at 2.49% for the year under consideration. By applying the net profit rate at 5.5%, on gross turnover for the year which is at Rs.14,20,51,3821-, the ret profit for the year comes to Rs.78,12,826/- as against shown by the appellant at Rs.20,64,720i. Therefore the net addition for the year under consideration would be Rs.57,48,106/- (7812,826 - 20,64,720). Thus, the addition made to the income to the extent of Rs 5748,106/- is sustained for the year under consideration and balance addition made 'is 14 deleted The Assessing Officer is directed accordingly. The Assessing Officer is directed accordingly.

As far as the contention of the Assessing Officer that the case of the appellant is also covered u/s 40A(3) is concerned, the same cannot be accepted. There is no evidence placed on record to prove that the appellant had paid money in cash to the other parties to purchase the materials by making the payments through cheques, which is evident from the banking statements. Therefore, there is no question of considering the payments made in violation of section 40A(3) of the I.T. Act, 1961.”

Perusal of the order of the Ld. CIT(A) reveals that he had made detailed analysis of the facts involved in this case and applied correct position of law in this regard as was clarified by Hon’ble Gujarat High Court in the case discussed by Ld. CIT(A). It is further noticed by us that the Ld. CIT(A had estimated the net profit of the assessee at 5.5% of the gross turnover as against 2.49% shown by the assessee with a view to nullify or even out any possible leakage in the form of the amount of inflation done by the assessee in the amount of purchases. The assessee accepted the order of the Ld. CIT(A) in all fairness. The Revenue has filed the appeal before us, but the Ld. DR is not able to explain how total amount of purchases could be disallowed especially when the entire sales have been accepted. There is nothing in possession of Ld. DR to show us it there is anything wrong in the quantitative reconciliation of the items purchased by the assessee and items sold by the assessee. If the items sold by the assessee have been accepted, then the assessee must have produced these items and, therefore, the entire purchases cannot be disallowed. Further, nothing has been brought on record by the Ld. DR that the net profit rate estimated by the Ld. CIT(A) at 5.5% is less than the appropriate rate.

As a result, appeal filed by the Revenue is dismissed.

It has been jointly stated by both the parties that the facts involved in appeals of the Revenue for A.Y. 2009-10 (ITA No.913/um/2015) and for A.Y. 2010-11 (ITA No. 914/Mum/2015) involve identical facts and issues. Therefore, in view of our above order, these appeals are also dismissed.

In the result, all the appeals filed by the Revenue are dismissed.