ASST CIT 25(2), MUMBAI vs. PARSHVA ENTERPRISES, MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य राजे राजे राजे�� राजे �� केकेकेके अनुसार अनुसार अनुसार PER RAJENDRA, AM- अनुसार सद�य सद�य �� �� Challenging the order dt.16.5.13 of CIT(A)-35, Mumbai the assessee and the Assessing Officer(AO),have filed Cross appeals for the year under consideration.Assessee-firm engaged in the business of reselling of iron and steel filed its return of income on 28.9.10 declaring total income at Rs.42.45lakhs.The AO completed the assessment u/s.143(3) of the Act,on 05. 02.13,determining the income of the assessee at Rs.1.22Crores. 2.During the assessment proceedings,the AO found that the assessee had debited purchase of 25.25 Croresores.He directed it to file details of purchases,TIN and names and addressed of the parties from whom purchases were made.In reply to notice it filed details. Meanwhile,the AO received information received from Sales Tax Department which was also available on the official website of Sales tax Department regarding suspicious parties who were providing accommodation entries without doing any actual business.On going through the details submitted by the assessee he found that M/s.Niddhish Impex Pvt. Ltd.(NIPL),M/s. S.M. Trading Co.(SMTC)and M/s. Tulsiani Trading Pvt. Ltd. (TTPL) were among the list of the bogus parties from whom the assessee had made purchases.He further found that assessee had claimed to have purchased goods worth Rs.80.09 lakhs from the above mentioned three parties.He observed that the Sales tax Department had conducted independent enquiries in 1

5288 & 5436/M/13-Parshva each of the hawala parties and had conclusively proved that those parties were engaged in activity of providing accommodation entries only. The AO received affidavit cum declaration dated 05.08.2011 of Ketan Shah,Proprietor of SMTC,statement DTD. 11.08.2008 of R.B. Shah of NIPL,affidavit of N. K. Shah of TTPL,dt. 05.08.2011.He provided the copies of above documents to the assessee.He issued summons to u/s. 131 of the Act on 14.12.2012 and deputed an Inspector to obtain genuineness of the purchase.Vide his report,dt.17.12.2012 the Inspector stated that concerns mentioned in earlier part of the paragraph were not existing at the given addresses.The AO issued notice u/s.133(6) of the Act to the above mentioned three parties.The postal authorities returned the notice with the remark “not known” in the case of NIPL and “left” in the case of TTPL He issued a show cause notice to the assessee on 11.01.2013 asking it as to why the alleged purchases from the above mentioned three parties aggregating to Rs.80.09 lakhs should not be treated as unexplained expenditure and added back to its returned income.The assessee ,vide its letter dt. 31.03.2013,submitted copies of bills and delivery challans along with bank statement of the three parties. After considering the submissions of the assessee,the AO observed that submission made by the assessee were not acceptable, that Ketan Shah of SMTC had accepted in his affidavit on declaration that he did not sell or purchase goods, that N.K. Shah in his stated accepted that he was director for name sake only and that all other work was looked after by R.B. Shah that NK Shah also admitted that TTPL and NIPL were issuing bogus bill,that RB Shah in his deposition had accepted that he was issuing bogus bills, that NK shah had also accepted of issuing bogus bills,that the assessee did not purchase any goods from the above mentioned parties. Accordingly aggregate of the above mentioned purchases totaling to Rs.80.09 lakhs was treated as unexplained expenditure as per the provisions of section 69C of the Act.

3.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appeallate Authority(FAA).Before him,it argued that the AO had passed the order without considering the submissions made by it and had violated the principles of natural justice, that the assessee had made a request from Cross examination of parties whose statements and affidavits were furnished along with the show cause notice,that details of stock tally were furnished during the assessment proceedings, that it had received goods from the NIPL, SMTC and TTPL in its warehouse for which it had paid transport as well as loading /un- loading charges,that the payments had been made through A/c. payee cheques after deducting tax at source, that the goods sold by the assessee were shown in the books of account, that 5288 & 5436/M/13-Parshva profit arising out of such transaction was offered to tax by the assessee, that there was no dispute in the amount or genuineness of the sales made by the assessee,that it had produced copies of stock statement confirming the inward movement of goods and copies of inward movement of the transport, that sales as well as the stock statements had not been rejected by the AO, that there could not be any sale without corresponding purchases.The assessee referred to cases of Balaji textile Industries P. Ltd.(49ITD177),Nikunj Exim Enterprises Pvt. Ltd. (ITA5604 of 2010), Fortune Steel Industries(ITA/2894-95/ Mum/ 2007),that the statements recorded by the sales tax authorizes were taken behind the back of the assessee without giving it any chance to revert the statement by way of Cross examination, that the AO without affording an opportunity of Cross examination had made the addition, that the AO had relied upon the statements of the three suppliers of goods, that the onus was on him to produce the parties, that the additions based on the observation on the sales tax department could not be sustained, that the GP ratio over the years had remained more or less same, that in case the addition to the extent of Rs.80.09 lakhs was made the GP ratio would go up to 7.38% as against GP range of 4.29% to 5.5%.

3.1.After considering the submission of the assessee and the assessment order,the FAA held that the purchases made by the assessee were supported by third party evidences such as transport bills and unloading bills, that the payment for the purchases were made through A/c. payee cheques that were duly reflected in the bank statement, that the AO had not rejected any of the evidences, that the stock sheets submitted by the assessee clearly reflected the inward movement of goods in the books of account, that no discrepancy has been found in the sales or closing stock of the assessee .Referring to the case of Balaji Textiles Industries (supra),he held that no sales were likely to be effected if there were no purchases. He also referred to the case of Fortune Steel Industries(supra).He further held that the affidavit / statements given by the supplier before the ST Authorities provided the addresses of those parties, that if the summons/notices issued by the AO were returned with the remark left/ unknown no adverse inference could be drawn against the assessee, that the assessee was denied an opportunity to cross examine the suppliers, that the affidavit had no evidential value.Finally ,he held that the disallowance made by the AO on the ground of bogus purchases could not be sustained in toto.

5288 & 5436/M/13-Parshva 3.2.He further held that as per his direction the assessee had filed the GP ratio for the previous three AY.s. Referring to the GP of 5.5% , 4.93% and 4.49% for the AY.s.2007- 08,08-09 and 09-10 respectively he held that during the year under consideration the assessee had shown GP ratio @4.29%.He directed the assessee to explain the reason for fall in GP ratio. The assessee submitted that GP ratio had fallen because of inCroresease in turnover.After considering the submission of the assessee , the FAA held that assessee was a trader in the business of Iron and Steel, that in the case of Fortune steel Industries (supra) the assessee had shown GP @ 16.13% in the AY 03-04 and 10.81% in the immediate preceeding year, that the Tribunal did not confirm any addition on the GP ratio, that still it was an indication that GP margin in the trading business of Iron & Steel would be higher than the GP shown by the assessee. Considering the fact that the assessee had shown GP @4.29%,the FAA referred to the case of Fortune Steel Industries (supra) and held that it would not be unreasonable to estimate the GP ratio @5.5% for the year under consideration.He rejected book results of the assessee by invoking the provisions of section 145 of the Act. He held that GP @5.5% on the turnover of 25.89 Crores would be Rs.1.42Crores. the difference between the GP worked out to 1.42 Crores and the GP shown by the assessee at 1.11 Crores was added to the income of the assessee.As a result the addition made the AO was restricted to Rs.39.19 lakhs and the balance addition of Rs.48.90 lakhs was deleted .

4.Before us,the Authorised Representative(AR)argued that the FAA could not make an enhancement to income of the assessee by introducing a new source of income, that where quantitative details were furnished books of account could not be rejected, that mere reduction in gross profit from the preceeding year could not be a ground for rejection of books of account u/s. 145 of the Act especially when stock register was maintained, that the alleged bogus purchases were of Rs.80.00 lakhs only whereas the FAA had applied the GP for the entire purchases.Alternatively, it was argued that GP @ 5.5% should be restricted to bogus purchases only.The AR relied upon the cases of M.K. Brothers (30 Taxman 547) (163ITR249); Rajeev G. Kalathil (5t1 taxmann.com 514); (67 SOT 52)(Mum Trib.); Ramesh Kumar & Co.(ITA No.2959/Mum/2014 dated 28.11.2014 A.Y. 2010-11).

4.1.The Departmental Representative(DR) supported the order of the FAA to the extent of the addition sustained by the FAA.With regard to the addition deleted by him,the DR argued that assessee had not filed confirmation from the sellers, in purchase bills details of the goods

5288 & 5436/M/13-Parshva were not available,that the expenditure made by the assessee was not explained during the assessment proceedings, that the AO provided reasonable opportunity of hearing to the assessee.The AR referred to pages-159,162-164 of the PB and stated that affidavits/ statements of Dilip Shantilal Shah, M.K.Shah/K.G.Shah/ R.B.Shah did not name the assessee to whom the bogus bills were issued, that payments were made through banking channels, the AO had not doubted the genuineness of the sales made by the assessee ,that it had asked for Cross examination(Pg.86-88 of the PB),but the AO did not allow him to Cross examine the parties.

5.We have heard the rival submissions and perused the material before us.We find that the FAA had given partial relief to the assessee,that he had applied the provision of section 145(3) of the Act,that applying the GP of the earlier year, partial addition was upheld, that the AO had not disturbed the GP shown by the assessee,that he had not issued notice as envisaged by provisions of section 251(2) of the Act,that for applying the earlier years GP the FAA had not given any reasonable basis.In our opinion,enhancing the income of the assessee without issuing a notice u/s 251(2) was bad in law.Secondly, the adoption of GP at 5.5% for the entire purchase cannot be endorsed in our opinion the order of Fortune Steel Industries relied upon by FAA does not justify the addition.Therefore,reversing his order,we decide the effective GOA in favour of the assessee .

5.1.As far as appeal of the AO is concerned,we want to hold that the order of the FAA does not suffer from any legal infirmity, that the AO had accepted sales made by the assessee,that without purchases there could not be any sales,that the assessee had produced delivery challans,bank statement,stock register during the assessment proceedings.All these documents along with the undoubted sales cannot be brushed aside.The only basis for making the addition was the information available on the website of the sales tax department. In our opinion it was a good lead to start investigation,but in itself it was not an evidence to make the addition.It is also a fact that the assessee had asked for Cross-examination of the parties, whose statements were relied upon by the AO. It is a matter of record that request made for Cross examination was not heeded to.Therefore,only on the basis of non observation of principles of natural justice the addition made by the AO could be deleted. However,other factors are there to uphold the order of the FAA,as discussed earlier.

5288 & 5436/M/13-Parshva 5.2.Here,we would like to discuss the applicability of section 69C also,that has been invoked by the AO while making the additions. It is said that section 69C of the Act stipulates that the deemed income(where the source of the expenditure is not explained)cannot be allowed as a deduction under any head of income.In other words,even if the assessee can justify the expen -diture,but cannot explain its source,the section disentitles him from claiming a deduction on the deemed income under any head of income.In short,what is postulated in section 69C of the Act is that first of all the assessee must have incurred that expenditure and thereafter, if the explanation offered by the assessee about the source of such expenditure is not found satisfactory by the AO,the amount may be added to his income.In the case before us,expenditure has been incurred for purchasing goods and the assessee had explained the sources.It is not the case of expenditure that was incurred by the it was not entered in the books of accounts.The AO has nowhere held that as to how the explanation offered by the assessee about the source of the expenditure was unsatisfactory.Therefore,in our opinion,the AO had wrongly invoked the provisions of the section 69C of the Act.Considering the above, effective GOA,raised by the AO is decided against him.