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Income Tax Appellate Tribunal, Hyderabad ‘ A ‘ Bench, Hyderabad
Before: Shri R.K. Panda, Vice- & Shri K. Narasimha Chary
Per R.K. Panda, Vice-President. These are cross appeals. The first one is filed by the assessee and the 2nd one filed by the Revenue and are directed against the order dated 10.05.2023 of the learned CIT (A) NFAC, Delhi relating to A.Y.2021-22. For the sake of convenience, these were heard together and are being disposed of by this common order.
Facts of the case, in brief, are that the assessee firm is engaged in the business of trading in high tensile steel wires and other steel products. It filed its return of income on 04.01.2022 admitting total income of Rs.80,64,210/-. The return was processed u/s 143(1)(a). Subsequently the case was selected for scrutiny and statutory notices u/s 143(2) and 142(1) were issued and served on the assessee in response to which the assessee filed the requisite details.
During the course of assessement proceedings, the Assessing Officer noted that the assessee has made total purchase of Rs.105,28,31,735/- (excluding GST amounting to Rs.18,95,09,711/-). The major portion of the purchases of Rs.89,09,33,586/- (excluding GST of Rs.16,03,68,046/-) is from Patil Rail Infrastructure Pvt Ltd. Also, out of the total sale of Rs.108,58,60,255/- (excluding GST of Rs.19,54,54,847/-), major portion of sales have been made to Patil Rail Infrastructure Pvt. Ltd amounting to Rs.90,80,98,299 (excluding GST of Rs.16,34,57,694/-. Further, out of the purchases, purchases amounting to Rs.16,86,10,466(including GST) are from the following parties who have not filed their return of income for the year under consideration despite making huge financial transactions:
He, therefore, asked the assessee to file complete details of above parties, confirmations regarding balances lying as creditors in the balance sheet, proof of payment, bills/invoices (top 5 in amount), transportation details etc., with supporting documentary evidence(s) with a view to verify the genuineness of the transactions. The assessee filed requisite details in response to these notice(s). Regarding proof of payment made to these suppliers, the assessee submitted that the payments to these suppliers were made by Patil Rail Infrastructure Ltd (PRIL) on behalf of the assessee as PRIL was a debtor to the assessee. However, he noted from the consolidated ledger account of Patil Rail Infrastructure Pvt. Ltd (PRIL) that PRIL was a creditor to the assessee throughout the whole year w.e.f. 01.04.2020 to 30.03.2021 on all days and became a debtor only on 31.03.2021 i.e. on the last day of the financial year. Since, the assessee claimed to having made purchases from the above said four parties starting w.e.f. 20.07.2020 onwards and on all those dates, PRIL was a creditor, claim of the assessee that PRIL makes the payment to these parties as it owes money to the assessee is not supported by the facts and it is also against the common business practice/prudence.
5. To ascertain the veracity of the facts related to the case and genuineness of the transaction(s) through independent enquiry, he issued notice(s) u/s 133(6) of the Act to Pashupati Steels India & Rudhra Impex. However, no compliance were made by these parties. Notice(s) u/s 133(6) could not be issued to Triveni Steels India & Rico Impex as no digital footprint of these two parties were available in ITBA database. Thereafter, keeping in view the totality of facts viz CASS rational, non-filing of ITR of these suppliers, payment to suppliers by bank account of other concern, non- compliance of notice(s) issued u/s 133(6) of the Act, non-availability of digital footprint of some suppliers, volume of transactions etc., spot/physical verification was conducted through Verification Unit to find out the existence of suppliers and the true nature of their business, correctness of transactions made with the assessee and to verify the genuineness of the transactions etc. at the addresses provided by the assessee. The addresses found similar to the address appearing in the copy of bills/invoices issued by these four suppliers and assessee had also filed confirmations reflecting same addresses. However, all these four suppliers were found to be non-existent at the given addresses in spot physical verification.
6. the Assessing Officer therefore, issued a show-cause notice asking the assessee to explain as to why purchases amounting to Rs.16,86,10,466/- from the above parties should not be treated as bogus purchases and added back to the total income of the assessee. Rejecting the various explanation given by the assessee the Assessing Officer made addition of Rs.16,86,10,466/- as bogus and non-genuine. While doing so he relied on the decision of the Hon'ble Gujarat High Court in the case of NK Industries Ltd vs. DCIT reported in 72 Taxmann 289 and the decision of the Mumbai Bench of the Tribunal in the case of Lifeline Drugs and Intermediates (P) Ltd vide order in ITA No.5535/Mum/2007.
7. In appeal, the learned CIT (A) NFAC) directed the Assessing Officer to restrict the addition limited to the extent of bringing the GP rate of purchases at the same rate of other genuine purchases. The relevant observation of the learned CIT (A) NFAC reads as under:
Aggrieved with such order of the learned CIT (A) the Revenue as well as the assessee are in appeal before the Tribunal by raising the following grounds:
Revenue: 1. Whether on facts and circumstances of the case and in law, the CIT (A) is correct in restricting the additions limited to the extent of bringing the GP rate on purchases at the same rate of other genuine purchases”.
Assessee:
The learned Counsel for the assessee submitted that the assessee has made purchases after due verification of the bonafides of the GST Registration of the impugned suppliers namely Passhupati Steels India (GST No.27EOVPP8483K1ZM), Rudra Impex (GST No.27DJEPR6797B1ZQ), Triveni Steels India (GST No.27CGTPK4790C2ZY) and RICO Impex (GST No.27LQSPS4226F1Z5). After receipt of the material from the impugned suppliers and also the documents such as Invoices, E-way Bills generated from GST Portal, computerized way Bills, etc., the payment was released through Banking channels after being completely satisfied about the bonafides of the purchases made. He submitted that the assessee could not make further inquiries about the impugned suppliers and their bonafides due to COVID 19 conditions prevalent at the time of receipt of supplies. He submitted that the assessee has furnished the entire documentation and also the payment details during the assessement proceedings for verification by the Assessing Officer to establish that the purchases are bonafide. He submitted that once the bonafides of the supplies and bonafides of purchase of goods are met, the assessee is not expected under the law to speak about the business activities of the suppliers of the material. The assessee has established its own credentials and further established that the purchases are bonafide and furnished the required documentation to prove the purchases and receipt of goods are genuine.
Referring to the decision of the Hon'ble Andhra Pradesh High Court in the case of M/s. Arhaan Ferrous and Non Ferrous Solutions Pvt Ltd vs. Dy. CIT of GST and other in W.P No.15481, 15482, 15486 and 15487 of 2023, he submitted that the Hon'ble High Court in the said decision, after considering the facts of the case, has held that the responsibility of the purchaser of goods will be limited to the extent of establishing that he bonafidely purchased goods from the suppliers for valuable consideration by verifying GST Registration of such supplier available on the official web portal and such purchaser may not be aware of the credential of the supplier. Further, the purchaser of goods has to establish the mode of payment of consideration and the mode of receiving of goods through authenticated documents. Except that it cannot be expected to speak about the business activities of the suppliers and whether such suppliers obtained GST registration by producing fake documents. In essence the purchaser has to establish their own credentials but not credentials of the supplier. He submitted that although the above observation of the A.P High Court in the above case rendered in the context of confiscation of goods purchased from a supplier whose GST Registration was alleged to have been obtained on the basis of some fake documentation, the ratio that the purchaser’s responsibility is limited only to the extent of establishing its own credentials and bonafides of its purchases and this responsibility of the purchaser cannot be extended to establish the credential of the suppliers.
The learned Counsel for the assessee submitted that its purchases are bonafide and material from such impugned purchases was received and the same after some process was also sold and such sales were declared in its accounts and I.T.R filed declaring sales including sales relating to bogus purchases have been accepted by the Revenue since the sales are not doubted. He submitted that without purchases, there cannot be sales.
11.1. So far as the allegation of the Assessing Officer that the GST registrations of the impugned suppliers have been cancelled by the GST authorities are concerned, he submitted that these 4 impugned suppliers have filed their GST returns on the official web portal which were accepted by the GST Authorities till the financial year 2021-22 and in one case in financial year 2022-23. Further, during all these years, the GST made by the above suppliers was accepted by the GST authorities. Therefore, it is incorrect to brand the genuine purchases as sham transactions and treating them as bogus purchases especially when the assessee has proved beyond doubt regarding the receipt of such material and sale of such material and the payments were made through banking channels. He submitted that the Assessing Officer has only disputed about the impugned suppliers and basing on incomplete and half backed enquiries made by their Inspector jumped to a conclusion that the Suppliers are not in existence and that the purchasers are bogus. He submitted that if the impugned suppliers are non-existing, such non-existing suppliers cannot be issued GST Registrations and such non- existing suppliers cannot file their GST returns for the financial year 2020-21 and in one case even for financial year 2022-23.
The learned Counsel for the assessee submitted that the fact of acceptance of sales automatically implies that there are purchases and even the purchases which were treated as ‘bogus’ by the Assessing Officer are also possessing all the characters of genuine purchases. He accordingly submitted that the addition made by the Assessing Officer is not justified. He accordingly submitted that the entire additions made by the Assessing Officer be deleted.
12.1 In his alternate contention, he submitted that the learned CIT (A) NFAC in his order while accepting the plea of the assessee to the extent that the impugned purchases are also genuine, however, directed the Assessing Officer to delete the disallowance and apply the GP Rate of the other genuine purchases. He submitted that the learned CIT (A) NFAC after considering various judicial decisions has directed the Assessing Officer to delete the addition and apply the GP rate. Referring to the following decisions, he submitted that the Hon'ble Bombay High Court in all these decisions has held that when purchases were made and related sales are accepted as a natural corollary not the entire amount of purchases but the profit element embedded therein is to be subjected to tax: i. Hon'ble Bombay High Court in of 2017 in the case of PCIT vs. Pinaki D. Panani ii. Hon'ble Mumbai High Court in ITA No.1004 of 2016 in the case of Pr.CIT vs. Mohammed Haji Adam & Co. iii. Hon'ble Bombay High Court Pr.CIT vs. Rishabdev Technocable Ltd of 2017 dated 28.10.2021.
12.2 He submitted that He submitted that the Coordinate Bench of the Tribunal in the following decisions has held the proposition that where the related sales were accepted, the amount of ‘bogus purchases’ in its entirety cannot be added to the returned income and only certain percentage of profit embedded in such tainted purchases is to be added as additional income: i) Vithal Das & Co. in ii)M/s. Amaravati vs. Dy.CIT – ITA No.1483 to 1486/Hyd/2023 iii) ACIT vs. Vaishnavi Bullion P Ltd – ITA No.560/Hyd/2020 iv) Gujarat High Court in Pr.CIT vs. Surya Impex – 451 ITR 395.
12.3 He also relied on the decisions of the Mumbai Bench of the Tribunal in the case of Shri Ganpatraj A Sanghavi vs. ACIT in dated 5.11.2014 and the decision of the Hon'ble Bombay High Court in the case of PCIT vs. JK Surface Coatings (P) Ltd order dated 28th October, 2021.
He submitted that since the order of the learned CIT (A) NFAC in the instant case is in accordance with the judicial decisions of various High Courts and the Coordinate Benches of the Tribunal, therefore, the order of the learned CIT (A) NFAC should be upheld and the grounds raised by the Revenue be dismissed.
So far as the levy of interest u/s 234A is concerned, the learned Counsel for the assessee submitted that the assessee has filed the return before the due date and therefore, interest u/s 234A is not chargeable.
The learned DR, on the other hand, heavily relied on the order of the Assessing Officer. He submitted that when the Assessing Officer has given clear cut finding that the purchases are bogus, as the concerned parties from whom purchases were made are not available and their GST registration has been cancelled, and in some cases, the notices u/s 133(6) were not complied with, the learned CIT (A) NFAC was not justified in deleting the addition by restricting the same to the profit element embedded in such purchases.
Referring to the decision of the Hon'ble Gujarat High Court in the case of N.K Industries Ltd vs. Dy.CIT reported in 292 CTR 354 (Guj.), he submitted that the Hon'ble High Court in the said decision has held that if material found during the course of search exposes falsity of entries made in regular books of account, consequent concealed income can be assessed as undisclosed income in block assessment. He submitted that the SLP filed by the Revenue has been dismissed by the Hon'ble Supreme Court in SLP No.769/2007 order dated 16.01.2017.
16.1 So far as levy of interest u/s 234A is concerned, he submitted that the same is mandatory and consequential.
We have heard the rival arguments made by both the sides, perused the orders of the AO and the learned CIT (A) NFAC and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us by both sides. We find the AO in the instant case made addition of Rs.16,86,10,466/- being purchases made from 4 parties, the details of which are given in Para No.3 on the ground that notices u/s 133(6) of the Act were issued to Passhupati Steels India and Rudra Impex but there was no compliance made by these parties. Further physical verification of offices of the above parties were also done and it was found that no such entities are operating from the addresses mentioned. Similarly, in the case of the above parties, the GST Registration was cancelled w.e.f. 24.03.2021 in case of Rudra Impex, the GSTIN of Rico Impex was cancelled w.e.f. 7.6.2019, in case of Passhupati Steel India was cancelled w.e.f. 16.04.2019 and GSTIN of Triveni Steel India was cancelled w.e.f. 28.10.2021. Further, the Assessing Officer noted that three of the purchase parties namely Rudhra Impex, Triveni Steels India & Rico Impex used the same transporter i.e. Shree Siddhi Vinayak Logistics to transport goods and all the four parties used same weighing scale situated at Thane in the name and style of Krishna Computerized Weight Bridge.
17.1 We find the learned CIT (A) NFAC deleted the addition made by the Assessing Officer but directed the Assessing Officer to apply the rate of profit on other genuine purchases, the reasonings of which have already been reproduced in the preceding paragraph. We do not find any infirmity in the order of the learned CIT (A) NFAC on this issue. We find the assessee in the instant case has filed the details of stock, copies of purchases invoices, E-waybills, computerized receipts from weigh bridges etc. The payments were also made through banking channels and the sales have not been doubted by the Assessing Officer.
17.2 We find an identical issue had come up before the Hon'ble Gujarat High Court in the case of CIT vs. Simit P. Sheth (356 ITR 0451). In that case the Hon'ble High Court has observed as under: (Held Portion) The assessee was engaged in the business of trading in steel on wholesale basis. During the course of the reassessment proceedings for the year 2006-07, the Assessing Officer noticed that some of the suppliers of steel to the assessee had made their statements on oath to the effect that they had not supplied the steel to the assessee but had only provided sale bills. In turn, they were receiving a small commission. The Assessing Officer concluded that the total purchase of Rs.41,04,903/- cumulatively made from the three parties were bogus. He thus treated such purchases as bogus purchases and added the entire amount of Rs.41,04,903/- to the gross profit of the assessee. He also rejected the books of account and estimated the assessee's business profits at Rs. 5 lakhs. The Commissioner (Appeals) held that the assessee had made purchases from other parties in the open market. Therefore, he retained 30 per cent. of the purchases cost as the probable profit of the assessee. He reduced the additions from Rs. 41,04,903/- to Rs.12,31,471/- and deleted the balance of Rs. 28,73,432. While doing so, he deleted the addition of Rs. 5 lakhs as made by the Assessing Officer on the ground that the addition on account of bogus purchases had already been made. The Tribunal was of the opinion that twelve and half per cent of the disputed purchases should be retained in the hands of the assessee as business profits. On appeal to the High Court : Held, dismissing the appeal, the Commissioner (Appeals) believed that the purchases were not bogus but were made from the parties other than those mentioned in the books of account. That being the position, not the entire purchase price but only the profit element embedded in such purchases could be added to the income of the assessee. In essence, the Tribunal estimated the possible profit out of purchases made through non-genuine only parties. The estimation of rate of profit return must necessarily vary with the nature of business and no uniform yardstick could be adopted”.
Similarly, in the case of CIT vs. Bholanath Poly Fab (P) Ltd (355 ITR 290 (Guj.), the Hon'ble High Court has observed as under: (Held Portion) “The assessee, for the assessment year 2005-06, was engaged in the business of trading in finished fabrics. The Assessing Officer held that purchases worth Rs. 40,69,546 were unexplained and disallowed the expenditure claimed by the assessee and computed the total income of Rs. 41,10,187. In so far as the question of bogus purchases was concerned, the Tribunal concurred with the Revenue's views that such purchases were made from bogus parties. The Tribunal noted that the Assessing Officer had issued notices to all the parties from whom such purchases were allegedly made. Such notices were returned unserved by the postal authorities with the remark that the addresses were incomplete. The inspector deputed by the Income-tax Department also could not find any of the parties available at the given addresses. The assessee was unable to produce any confirmation from any of the parties. Though the assessee had claimed to have made payment by account payee cheques, upon verification, it was found that the cheques were encashed by some other parties and not by the supposed sellers. However, the Tribunal was of the opinion that though the purchases might have been made from bogus parties, the purchases themselves were not bogus. The Tribunal adverted to the facts and data on record and came to the conclusion that the entire quantity of opening stock, purchases and the quantity manufactured during the year 2005-06 were sold by the assessee. Therefore, the purchases of the entire 1,02,514 meters of cloth were sold during the year 2005-06. The Tribunal, therefore, accepted the assessee's contention that the finished goods were purchased by the assessee, though not from the parties shown in the accounts, but from other sources. The Tribunal was of the opinion that not the entire amount, but the profit margin embedded in such amount would be subjected to tax. On appeal: Held, dismissing the appeal, that whether the purchases themselves were bogus or whether the parties from whom such purchases were allegedly made were bogus was 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 fabrics. Therefore, as a natural corollary, not the entire amount covered under such purchases, but the profit element embedded therein would be subject to tax.”
We find the Hon'ble Bombay High Court in the case of PCIT vs. JK Surface Coatings (P) Ltd order dated 28th October, 2021. While deciding an identical issue has observed as under: “4. Having considered the memo of Appeal and the Orders passed by AO/CIT(A) and the Order of ITAT, the only issue that comes up for consideration is with respect to the extent of ad-hoc disallowance to be sustained with respect to bogus purchases. The AO has observed 100% of the purchase value to be added to the income of Assessee, the CIT(A) has said it should be 15% and ITAT has said it should be 10%. First of all, this would be an issue which requires evidence to be led to determine what would be the actual profit margin in the business that Assessee was carrying on and the matter of calculations by the concerned authority. According to the Tribunal, in all such similar cases, it is ranged between 5% to 12.5% as reasonable estimation of profit element embedded in the bogus purchase when material consumption factor do not show abnormal deviation.
Whether the purchases were bogus or whether the parties from whom such purchases were allegedly made were bogus was essentially a question or fact. When the Tribunal has concluded that the assessee did make the purchase, as a natural corollary not the entire amount covered by such purchase but the profit element embedded therein would be subject to tax.
Therefore, in our view, this would not raise any substantial questions of law.
Appeal dismissed”.
We find the Hon'ble Bombay High Court in the case of PCIT vs. Pinaki D. Panani in of 2017 has observed as under:
We find the Hon'ble Bombay High Court in the case of PCIT vs. Rishabhdev Technocable Ltd in ITAT (IT) No.1330 of 2017 order dated 10th February, 2020 has observed as under:
The various other decisions relied on by the learned Counsel for the assessee also support his case to the proposition that only the profit element embedded in such alleged bogus purchases can be added and not the entire purchases especially when such purchases are recorded in the books of account, quantitative details are given and the sales have been accepted.
22.1 So far as the decision relied on by the Revenue in the case of N.K. Industries Ltd (Supra) is concerned, the same is not applicable to the facts of the present case. In that case, the Hon'ble High Court at Para 3 of the order discussed the facts of the case which is as under: “3.The assessee company also popularly known as N.K. Group of companies is involved in trading and speculation of castor seed and also engaged in export of castor oil and castor oil derivatives. During the course of search proceedings at the office premises of NKPL, blank signed cheque books and vouchers of number of concerns were found. Endorsed blank cheques of NKPL by these concerns were also found from the office premises of NKPL wherein the endorsement was on the back of the cheques. Blank bill books, letter heads and vouchers of these concerns were found and seized from the factory premises of NKPL. Purchases made from these concerns have been treated by the Assessing Officer as bogus purchases in view of elaborate reasons recorded in the assessment order. The entire deposits in the bank accounts of these parties were treated as assessee's income on protective basis.”
22.2 Therefore, under the circumstances, the Hon'ble High Court had reversed the decision of the Tribunal and directed the Assessing Officer to add the entire bogus purchases. However, in the instant case, no such blank signed cheques and vouchers of the 4 alleged concerns were found nor there was any endorsement on the back of the cheque. Similarly, no blank bill books, letter heads and vouchers of these concerns were found and seized from the premises of the assessee. Therefore, the said decision is not applicable to the facts of the present case. In any case after the decision of the N.K. Industries Ltd (Supra), decision of various other High Courts have come in which case it has been held that only the profit element embedded in such bogus purchases can be added and not the entire purchases can be added especially when the sales have not been disputed. It has been held in various decisions that when two views are possible, the view which is favourable to the assessee should be adopted. Since the Hon'ble Bombay High Court and Hon'ble Gujarat High Court in various decisions, which have been reproduced in the preceding paragraphs held that only the profit element embedded in such bogus purchases has to be added, therefore, the decision relied on by the Revenue, in our opinion, is not applicable to the facts of the present case.
In view of the above discussion and in view of the detailed reasonings given by the learned CIT (A) NFAC, we do not find any infirmity in his order. Accordingly, the same is upheld and the grounds raised by the Revenue as well as the first ground raised by the assessee are dismissed.
So far as Ground No.2 raised by the assessee challenging the levy of interest u/s 234A of the Act made by the Assessing Officer is concerned, it is the submission of the learned Counsel for the assessee that the said return has been filed before the due date. We therefore, deem it proper to restore the issue to the file of the Assessing Officer with a direction to verify the extension of date by the CBDT if any, for that particular year and decide the issue as per fact and law. We hold and direct accordingly. Ground No.2 raised by the assessee is accordingly allowed for statistical purposes.