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Income Tax Appellate Tribunal, DELHI BENCH: ‘G’: NEW DELHI
Before: SH. I.C. SUDHIR & SH. O.P. KANT
ORDER PER O.P. KANT, A.M.: These three appeals of the Revenue are directed against three separate orders of the Commissioner of Income-tax (Appeals) for assessment years 2006- 07 to 2008-09 respectively. Since the common issue of disallowances of purchases is involved in all the three appeals, same are heard together and decided by this consolidated order. for AY: 2006-07 2. First, we take up the ITA No. 512/Del/2010. The grounds of appeal
raised by the revenue are as under:
1. Learned Commissioner of Income Tax(Appeals) erred in law and on the facts and circumstances of the case in deleting the additions of Rs. 1,44,53,981/- made by the Assessing Officer on account of bogus purchase.
2. Learned Commissioner of Income Tax(Appeals) failed to appreciate that the genuineness & the creditworthiness of the relevant purchase parties could not be substantiated. & 2811/Del/2010; 482/Del/2013 AYs: 2006-07 to 2008-09
3. The appellant craves to amend modify, alter, add or forego any ground of appeal at any time before or during the hearing of this appeal.
3. The facts in brief as culled out from the records are that the assessee, a domestic company, was engaged in business of trading in surgical items, equipments (primarily ‘Sutures’) which were imported mainly from the USA and European countries and also procured locally products of Chinese/Korean/Taiwanese origin and further supplied to Government/other hospitals. For the year under consideration, the assessee filed return of income declaring total income of Rs. 18,42,973/- on 30/11/2006. The case of the assessee was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short ‘the Act’) was issued and served within stipulated period. In the course of scrutiny proceedings, the Assessing Officer (in short ‘the AO’) observed that out of the total purchases of Rs. 6,75,46,178/- purchases of Rs. 1,50,46,781/- was made from local suppliers, the details of which are as under: SI No. Name & address of the party Amount M/s A.R. Traders , Rs. 25,25,250/- 1 A-30, Bapu Park, Kotla Mubarkpur Rs. 12,49,985/- M/s. Advance Surgical, 2 A-30, Bapu Park, Kotla Mubarkpur 3 M/s Alok Surgical Rs. 16,56,003/- H. No.A-41, Bapu Park, Kotla Mubarkpur 4 M/s Shiva Enterprises H.No. 1869, Kotla Mubarrkpur Rs. 8,26,615/- 5 M/s Bala Surgical Rs. 6,30,375/- H. No. 1-96,1st Floor, Lajpat Nagar. 6 M/s Amit Traders Rs. 24,36,380/- H. No. E-147, Lajpat Nagar. 7 M/s G. Health Care Rs. 5,92,800/- H. No. F-193, Hari Nagar Extn. Part-II, Badarpur 8 M/s Reliance Medicare H.No. A-126, Defence Colony Rs, 6,29,998/- 9 Rs. 20,20,000/- M/s Parag Surgical Instrment Co. H. No, P-29, Triloki Colony, Kotla Mubarakpur Rs. 24,79,375/- M/s Sharma Enterprises,
10. Q-305, Janak Park, New Delhi-18 Total Rs. 1,50,46,781/- & 2811/Del/2010; 482/Del/2013 AYs: 2006-07 to 2008-09
4. For verification of the parties, the AO sent his Office Inspector at the addresses of the above local suppliers. The Inspector after verification of the places at the addresses reported that he could not locate the party at serial No. 9 in the about table i.e. M/s Parag Surgical Instruments Company, P-29, Triloky colony, Kotla Mubarakpur. In respect of the other parties, he reported that the places were located in residential areas and no indication of any shop or business establishment was found and local enquiries revealed that no business activity was carried out from those addresses. On 11/12/2008, the AO confronted the assessee with the result of the inspector’s report and asked to produce Principal Officers of the firms/concerns along with copies of their purchase bills against supplies to the assessee, their Permanent Account Number (PAN), income tax returns and their statement of bank accounts in which check issued by the assessee company were credited. However, the assessee could not produce the parties except M/s. G. Healthcare (party at serial No. 7 of the above table), in whose case, the AO accepted genuineness of the purchases. The AO observed that the assessee in letter dated 18/12/2008 submitted that all the parties were requested to come on the appointed date and time with requisite details which means the assessee was in touch with those parties, however the assessee did not provide their current business address or whereabouts to the AO for carrying out further verification from those parties. The assessee raised objections in respect of authenticity of Inspector’s report which were not accepted by the AO on the ground that he had visited all places and reported that those places were located in residential areas and at one place i.e. Reliance Medicare, he even reported name of the occupant Sh. Sunil Bagga. The AO further asked the assessee to produce documents of entire cycle of placing purchase orders to those parties till the delivery to the assessee, which included purchase orders containing specifications of the items, rates and proof in support of transportation or mode of delivery. According to the AO, the assessee failed to produce these documents in respect of parties other than M/s. G. Healthcare. The contention of 3 & 2811/Del/2010; 482/Del/2013 AYs: 2006-07 to 2008-09 the assessee that the purchase of those parties were appearing in the stock list, was not accepted by the AO, on the ground that same did not explain the entire cycle of transaction. Further the AO carried out enquiries through notice under Section 133(6) of the Act from the banks in which bank accounts of the supplier parties were maintained. The AO collected copy of bank statements/account opening forms etc. from banks and he found that in these bank accounts only cheques from the assessee were credited and most of the amount was withdrawn either by self cheques or bearer cheques after a few days of presenting cheques received from the assessee and almost all the bank accounts were either closed or remain non-operative after 31st March 2006. In these bank accounts no cheque payments for purchases were appearing although the equipments supplied were very technical nature and manufactured by large companies. The AO attempted to verify the Permanent Account Number (PAN) of the suppliers provided in their confirmations furnished by the assessee from the database of the Income Tax Department, however, in not a single case, PAN provided were belonging to the respective suppliers. In view of the above findings, the AO observed that except M/s. G Healthcare, the local purchases shown in books of accounts were bogus and fictitious and created to route its own money back through banking channel and thus held purchases of Rs. 1,44,53,981/- as unexplained and from undisclosed sources.
5. Aggrieved, the assessee filed appeal before the Ld. Commissioner of Income-tax(Appeals). The submissions made by the assessee before the Commissioner of Income-tax(Appeals) in brief are as under:
1. the assessee mainly purchased ‘Sutures’ of Chinese/Korean/Taiwanese origin from the local suppliers as the same were substantially cheaper than the ones imported directly from the USA and Europe and the demand of these products was not at large as compared to the superior quality items therefore the assessee preferred to buy them from these petty vendors who not only gave door delivery to the assessee but also & 2811/Del/2010; 482/Del/2013 AYs: 2006-07 to 2008-09 extended periodic credit to it besides being cost-effective resulting into a hassle free and a profitable business proposition.
2. The quantity of goods traded tally with the stock in hand as on the close of the accounting year as per the books of accounts, which were not rejected by the Assessing Officer. 3. Major portion of the alleged bogus purchases was actually sold during the year itself and the remaining items of Rs. 6, 89, 306/-formed part of the closing stock declared by the assessee on 31st of March 2006 . The profit accrued on the sale of those item was duly declared in the net profit by the assessee and also subjected to income tax. The cost of the remaining items was added to the closing stock and therefore nullifying any impact on the profit/loss arising thereon. 4. The sales corresponding to these purchases were not doubted by the Assessing Officer. 5. The goods were received by the assessee from vendors at its business place and the payments had been made through account payee cheques. 6. The inspector’s report did not contain the name and addresses of the witnesses on the basis of who the statement he concluded that no such businesses ever existed on those premises, but no such witness was produced for cross-examination by the assessing officer. The inspector did not examine any occupant of the building in his verification process. 7. The suppliers were petty person and peoples engaging such supply businesses need not to hold shop or sign board and they could conveniently operate from the residential premises, since most of the business was conducted over phone by them. 8. The assessee was aware of the main suppliers of those goods but could not purchase material directly from them as either they do not give bills for supplies more they take payments in cash and not by check or draft and it may be probably that their sources of imports were not par. Further they are located either in Kolkata or Chennai and to send anybody there to pick of the purchases was also quite cumbersome and therefore assistance was sought from the persons in New Delhi for such supplies and thus the observations of the inspector report was not material in the light of the nature of business activities which those suppliers were engaged in. 9. The hospitals cannot buy these goods from said importers and or their petty agents or retailers and perforce take supplies from the established suppliers like the assessee. 10. Only because the said addresses were found in predominantly residential areas and also since no banners or boards were on display, & 2811/Del/2010; 482/Del/2013 AYs: 2006-07 to 2008-09 an adverse conclusion was drawn by the Assessing Officer that no business activity could possibly be carried out from those premises. 11. On producing the party M/s G Healthcare, it was accepted as genuine supplier, however, said party was also could not be located at the address by the inspector. 12. Without admitting, presuming that the said parties or not the actual supplier but only the name lender, but since the goods were also sold by the assessee then there must be some source of supplies. 13. The identity of the suppliers got confirmed from the said bank accounts itself where the address, photographs, identity proofs, residence proof etc. were duly filed by the suppliers. 14. The goods were actually supplied at the office of the assessee by those vendors without levy of any additional transportation charges at the goods were not heavy or bulky for which an tempo etc were to be specially hired for delivery. No purchase orders were issued for procuring goods locally. 15. If the said parties were not forthcoming in filing their particulars of income arising from the sales made to the assessee, the assessee company cannot be faulted for the same. There was no evidence that the money withdrawn in cash actually flowed back to the assessee company. 16. The bank accounts of vendors revealed that it was not the case that the entire amount of deposits was immediately withdrawn in cash. No adverse cognizance of the cash transactions appearing in their bank accounts can be taken against the assessee in any manner and the assessee company could not be held responsible for another’s action. 17. Regarding certain discrepancy in PAN the assessing officer was required to carry out enquiries and the confirmation letters of the said vendors which contained their respective PAN’s were obtained from those parties by the assessee, thus, the appellant could not be faulted for incorrectness or otherwise of the PAN’s of the suppliers, 18. it was wrong to say that the assessee company introduced own concealed money from undisclosed sources into the business activity under the garb of purchase by reducing the profit by booking bogus purchases, as the assessee had already declared around 14% gross profit at Rs. 21, 77, 167/-on the sale of the impugned purchase items as well as declared closing stock of Rs. 6, 89, 306 for unsold stock as on 31/03/2006.
The Ld. Commissioner of Income-tax(Appeals), forwarded photocopies of the replies of the assessee to the AO calling for a remand report on the issue whether there was any connection between the introducers of the bank accounts 6 & 2811/Del/2010; 482/Del/2013 AYs: 2006-07 to 2008-09 of the suppliers and the assessee company and verify whether the purchases held as bogus were in fact sold to the hospitals. In compliance, the Assessing Officer reported that bank accounts of M/s Advanced Surgical, M/s Alok Surgical and M/s Bhalla Surgical were introduced by one company, namely, M/s Aerobridge Cargo Services Private Limited, which also had a current account with the same branch, however, the name and whereabouts of the director could not be gathered from the introduction forms. In the rejoinder report, the assessee denied having any connection with M/s. Aerobridges Cargo Services Private Limited. The Ld. Commissioner of Income-tax(Appeals) also forwarded details of quantity-wise purchase and sales in respect of the local supplies and other documents with the direction to verify whether purchases held bogus had in fact been sold, item-wise to the hospital etc. but according to the learned Commissioner of Income-tax( Appeals), no specific adverse comment was made by the Assessing Officer in the remand report.
In view of the above submissions of the assessee, the Ld. Commissioner of Income-tax(Appeals) was of the view that impugned items had been accepted as sold by the Assessing Officer then their existence cannot be put to any questions simultaneously and as a corollary the purchase of said items cannot be held as bogus. Ld. Commissioner of Income-tax (Appeals) also admitted that even if the goods in question had not been bought from the impugned suppliers, but definitely same had been bought from someone somewhere else against a price. He further observed that no cash was introduced in the books of accounts of the assessee during the year which could suggest that money was rooted back to the books of the assessee. He further observed that the impugned bank accounts cannot be said to have been operated by and on behalf of the assessee company. He further observed that PAN’s details were provided to the assessee by the suppliers and therefore the assessee was not responsible for discrepancy in PAN’s details. He further observed that merely the suppliers situated in residential areas and no sign boards of the suppliers business found hanging 7 & 2811/Del/2010; 482/Del/2013 AYs: 2006-07 to 2008-09 anywhere, it cannot be concluded that no business particularly of the supply nature could be conducted from those premises. The learned Commissioner of Income-tax( Appeals) after considering the submissions of the assessee held the impugned local purchases of Rs. 1, 44, 53, 981 as genuine and the addition was accordingly deleted. 8. Aggrieved with the deletion of the addition of unexplained purchases of Rs. 1,44,53,981/- the Revenue is in appeal before the Tribunal. 9. The Ld. Senior Departmental Representative (in short ‘Sr. DR’) relying on the order of the Assessing Officer submitted that the assessee neither provided current addresses or whereabouts of the supplier parties nor produced those parties along with their books of accounts and vouchers etc. which could establish the fact of purchases made from them. She insisted that the material fact of purchases of alleged suppliers has not been proved and in absence of purchases, the alleged suppliers cannot supply goods to the assessee and they were supplies only on papers and goods have been procured in cash from somewhere else. 10. On the other hand, the Ld. Authorized Representative (in short ‘the AR’) of the assessee relying on the order of the Ld. Commissioner of Income- tax(Appeals), submitted that when the sales are not doubted by the AO, how the sales can be done without the corresponding purchases of the goods. He further reiterated the submissions made before the learned Commissioner of Income-tax (Appeals). 11. We have heard the rival submissions and perused the material on record including the paper book containing pages 1 to 362. The main findings of the ld. AO in respect of the purchases from the local suppliers are that those parties were not produced before him along with evidence in support of their purchases, bank statements of the suppliers revealed that they were having transaction of sale to the assessee only and no corresponding payment for purchases were appearing in bank statements, the assessee provided wrong Permanent Account 8 & 2811/Del/2010; 482/Del/2013 AYs: 2006-07 to 2008-09 Number (PAN) of the suppliers, and Inspector enquiry revealed that addresses of the suppliers were located mostly in residential areas and no business activities from those places were reported by the persons in neighborhood. 12. The ld. Commissioner of Income-tax(Appeals), after considering the submission of the assessee concluded that in absence of purchase, no sales can be made and, therefore, since sales corresponding to the local purchases have not been doubted, logically the purchases have been made by the assessee. He has also observed that there was no cash introduced in the books of accounts of assessee. As regard to inconsistency in the PAN’s of the suppliers, the Ld. Commissioner of Income-tax(Appeals) held that though PANs were mentioned by the suppliers in their confirmations, and therefore assessee cannot be held responsible for the inconsistency in PANs. 13. We find that in the circumstances, when sales are not doubted and no inconsistency in item-wise inventory is found, but, on the other hand, the purchases from supplier parties are not getting substantiated with necessary documentary evidence, the logical presumption will be that the assessee had made actual purchases from one set of parties in cash and obtained purchase bills from another set of parties and the payment made in cheques to second set of parties, was received back in cash and utilized in making cash payments to first set of parties. 14. Before the learned Commissioner of Income-tax(Appeals), the assessee itself has admitted that the goods purchased from local suppliers is of a technical nature and not a commodity which easily available in the market. The assessee has admitted that these Chinese/Korean/Taiwanese products were being imported by some persons but those did not issue bills and used to transact in cash. The relevant submission of the assessee summarized by the learned Commissioner of Income-tax(Appeals) in his order in para 5.11 are as under : & 2811/Del/2010; 482/Del/2013 AYs: 2006-07 to 2008-09 “3.4 In this regard the appellant further submits that it is also aware of the said main suppliers but cannot purchases material straight from then as they either do not give bills for supplies or they take payments in cash only and not by cheque or drafts. Probably it may be that their sources of imports are not above par. It is well known that from China goods are being delivered by the suppliers to the importers in India on COD basis inclusive of India import duties etc. and at highly competitive and cheaper raters. It is stated that it is well known that practically all types of Chinese origin goods are available in Indian markets at a much cheaper price, which is far less than the cost of production in India. In this regard the appellant encloses a photocopy of a cartoon published in the newspaper Times of India dated 29.09.2008, which is self-explanatory and also supports the said fact now well seen and already appreciated by all. Further they are located either in Kolkata or in Chennai and to send anybody there to pick up the purchases is also quite cumbersome. Therefore, assistance was sought from the persons in New Delhi for such supplies. Thus, it has been claimed that the observations of the Inspector in his report are not material in the light of the nature of business activities which those suppliers were engaged. 15. These submissions of the assessee itself lead us to conclude that the assessee has purchased goods in cash from sources exclusively within the knowledge of the assessee and which may be importers of Chinese/Korean/Taiwanese goods, referred in its submission, whereas obtained bills from the so-called local suppliers parties. Non-production of the parties along with evidence in support of their purchases, cash withdrawals in their bank accounts after getting cheques from the assessee and no proof of purchases or payment for purchases by these parties, not having any correct PAN’s, etc. facts and circumstances goes to establish that these parties are only supplier on paper and issued only bills to the assessee without supplying the goods. It is impossible for these parties to supply goods without corresponding purchases. Whether transactions of purchase are genuine, is a question of fact and the primary onus was on the assessee to prove the genuineness of the purchases, which in the facts of the above case is not discharged by the assessee. The assessee cannot take the plea that it was not responsible for failure of suppliers in substantiating their purchases . 10 & 2811/Del/2010; 482/Del/2013 AYs: 2006-07 to 2008-09 16. Thus, in the facts and circumstances of the case in hand, we hold that the purchases from the said supplier parties are not established, however, simultaneously, the sales corresponding to the purchases are not doubted and this obvious contradiction get resolved only when the assessee purchases goods in cash from the open market and supply to the buyer parties. The presumption in such circumstances is that purchases have been made in cash for supplying to the sales parties and at that time unexplained cash has been utilized by the assessee for purchases. The addition is required to be made for such unexplained cash payment made and not for purchases booked in books of account. However, the supplier parties to whom cheque payments were made for purchases booked in books of account, returns the corresponding cash back to the assessee after deducting certain commission, and this cash is available for making subsequent cash purchases. In such circumstances, only the peak of the unexplained cash utilized in cash purchases can be added to the income of the assessee. Accordingly, we restore the matter back to the file of the Assessing Officer with the direction to compute the peak of the unexplained cash utilized in making cash purchases. Needless to mention that assessee shall be provided sufficient opportunity of hearing. The assessee is also directed to provide all the details required to the Assessing Officer for computing the peak of unexplained cash utilized towards cash purchases. Accordingly, both the grounds of the appeal are allowed partly for statistical purpose.
ITA Nos. 2811/Del/2010 & 482/Del/2013 for AYs: 2007-08 & 2008-09 17. The ground of appeal raised in both the above appeal is identical to the ground No. 1 of and the fact and circumstances being identical, we restore the grounds in both the appeal to file of the Assessing Officer for computing peak of unexplained cash following our finding in ITA No. 512/Del/2010. Accordingly, the grounds of the appeals are allowed partly for statistical purpose. 11 ITA Nos. 512 & 2811/Del/2010; 482/Del/2013 AYs: 2006-07 to 2008-09
18. In the result, all the three appeals filed by the Revenue are partly allowed for statistical purposes. The decision is pronounced in the open court on 20th May, 2016.