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Income Tax Appellate Tribunal, MUMBAI BENCH “I”, MUMBAI
Before: SHRI G.S. PANNU & SHRI AMARJIT SINGH
This appeal by the Revenue is directed against the order of CIT(A)-33, Mumbai dated 14.11.2014, pertaining to the Assessment Year 2006-07, which in turn has arisen from the order passed by the Assessing Officer, Mumbai under section 143(3) r.w.s. 147 of the Income Tax Act, 1961 (in short ‘the Act’).
In this appeal, Revenue has raised the following Grounds of appeal :-
“1. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the addition of Rs.1,50,56,316/- made by the AO u/s 69C of the act and in restricting the addition to Rs.15,05,631/- being 10% of the bogus purchases without appreciating the fact that the assessee has failed to prove the genuineness of the purchases by not producing purchase parties for verification.
2. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in restricting the addition to Rs.15,05,631/- being 10% of the bogus purchases without appreciating the fact that the parties have been declared as bogus hawala providers by the Sales Tax Department on the basis of corroborative evidence available with them and inference based on the findings of such agencies cannot be constituted as suspicious.
3. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in restricting the addition to Rs.15,05,631/- being 10% of the bogus purchases without appreciating the fact that the proprietor of M/s. Janta Transport Service and M/s. D’met Laboratory has denied of providing any services to the assessee.”
In brief, the relevant facts can be summarized as follows. The respondent-assessee is an individual who is engaged in the business of manufacture/fabrication and job work of all kinds of machine parts. In this case, assessment u/s 143(3) of the Act was finalised on 19.11.2008 whereby the total income was assessed at Rs.77,29,800/-. Subsequently, Assessing Officer reopened the assessment by issuance of notice u/s 148 of the Act on 20.3.2013 on the ground that certain income had escaped assessment. As per the Assessing Officer, based on the information received from the Maharashtra Sales Tax authorities and Investigation Wing, assessee had made purchases from two concerns, namely, M/s. Manoj Trading Company – Rs.89,19,089/- and M/s. Sampak Steels – Rs.61,37,227/- which were non-genuine. As per the information received, the said concerns were a part of the list of suspicious dealers compiled by the Sales Tax Department of Maharashtra. In the ensuing assessment, Assessing Officer considered the purchases made from the aforesaid two parties as bogus, non- genuine and unproved and, therefore, held that the claim of expenditure of Rs.1,50,56,316/- on purchases was not acceptable. According to Assessing Officer “these facts squarely fall within the parameters prescribed in Sec. 69C of the Income Tax Act, 1961” and accordingly added the sum of Rs.1,50,56,316/- to the total income.
In this background, assessee carried the matter in appeal before CIT(A) and made varied submissions. Before the CIT(A), assessee pointed out that purchases were made from the two parties and the material has been fully consumed in manufacturing of finished products, which were subsequently sold. It was also pointed out that manufacturing activity required various parts and if the purchases from these two parties are treated as bogus, the material consumption ratio would fall so drastically that it would not be possible to envisage manufacturing of products in the absence of such consumption. It was also pointed out that if the disputed purchases are removed, then the gross-profit ratio would increase from 11.5% to 23.43% during the year and the net profit ratio will increase from 4.82% to 16.68%, which is unrealistic and impossible to earn in such line of business. It was, therefore, contended that Assessing Officer had made the addition merely on basis of assumptions and presumptions. The CIT(A) called for Remand report from Assessing Officer and after considering such report of Assessing Officer and the further submissions of the assessee, he has found it fit to scale down the addition to Rs.15,05,631/-. As per the CIT(A), it would be fair if the disallowance for alleged bogus purchases is restricted to 10% of the alleged bogus purchases. The CIT(A) has justified his decision by relying on the judgments of Hon'ble Gujarat High Court in the case of Sathyanarayan P. Rathi, 351 ITR 150 and in the case of CIT vs. Bholanath Poly Fab (P) Ltd., of 2012 dated 23.10.2012 holding that the entire amount covered by unproved purchases could not be taxed, but only the profit embedded therein could be subject to tax. As a consequence, CIT(A) has retained the addition to the extent of Rs.15,05,631/- and deleted the balance. Against such a decision of CIT(A), Revenue is in appeal before us.
Before us, the stand of ld. DR is that the Assessing Officer made no mistake in disallowing the entire amount of unproved purchases because the assessee could not produce the parties for appropriate verification. It was also pointed out that the verification exercise carried out by Assessing Officer revealed that the so-called parties from whom purchases have been effected were not genuine, based on the information received from Sales Tax Department of Maharashtra.
On the other hand, the learned representative for the respondent-assessee has pointed out that the CIT(A) made no mistake in disagreeing with the stand of Assessing Officer. In particular, our attention has been invited to para 2.5 of the order of CIT(A) wherein a categorical finding has been arrived at that the material in question was indeed used for the purpose of manufacturing because otherwise the sale of machineries could not have been effected. In this context, it was pointed out that CIT(A) justifiably relied on the judgments of Hon’ble Gujarat High Court in order to sustain the addition only with respect to the profit element embedded in the alleged unproved purchases and not the entire amount of purchases.
We have carefully considered the rival submissions. In the present case, the sum and substance of the charge made by the Assessing Officer against the assessee is that the purchases effected from the two concerns are bogus. In the above background, Assessing Officer has asserted that Sec. 69C of the Act is attracted and accordingly made an addition of Rs.1,50,56,316/- representing the value of such purchases. The moot question is, is the Assessing Officer justified in invoking Sec. 69C of the Act qua his finding that the purchases are bogus or unproved? Sec.69C of the Act deals with situation where an assessee is found to have incurred an expenditure for which he does not offer any explanation about the source of such expenditure or the explanation offered is not found to be satisfactory by the Assessing Officer. It empowers the Assessing Officer to treat the amount covered by such expenditure as deemed income of the assessee. The significant point is that the deeming character of Sec. 69C of the Act is triggered where the explanation about the source of such expenditure is not found to be satisfactory. In the present case, there is no dispute so far as the source of funds used for making payment of the instant purchases is concerned. In fact, claim of the assessee has been that the payments to the two suppliers have been made through account payee cheques or bank RTGS, an aspect which is not in dispute. Therefore, in our considered opinion, invoking of Sec. 69C of the Act in the background of the fact-position sought to be made by the Assessing Officer is quite suspect in the eyes of law. In any case, we also find no error on the part of CIT(A) in applying judgements of Hon'ble Gujarat High Court in the case of CIT vs. Bholanath Poly Fab (P) Ltd., of 2012 dated 23.10.2012 (supra) and Sathyanarayan P. Rathi (supra) whereby only the profit element embedded in the instant purchases is sought to be taxed. The CIT(A) recorded a finding that the material was indeed used in the process of manufacture and that in such a situation, the decisions of Hon’ble High Court of Gujarat are fully attracted. Before us, the ld. DR apart from reiterating the stand of Assessing Officer has not raised any credible point so as to assail the decision of CIT(A) as erroneous or infirm in law. Therefore, in view of our aforesaid discussion, we hereby affirm the order of CIT(A) and, accordingly Revenue fails in its appeal.
Resultantly, appeal of the Revenue is dismissed.
Order pronounced in the open court on 21st September, 2016.