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Facts
The Revenue appealed against the CIT(A)'s order deleting an addition made by the AO for bogus purchases of textile commodities. The AO disallowed purchases from two parties as bogus because they could not be verified at the given addresses. The assessee claimed these purchases were supported by account payee cheques and bank statements.
Held
The Tribunal held that since the AO accepted the assessee's books of accounts, there was no reason to disallow the purchases, especially when payments were made via account payee cheques and supported by bank statements. The Tribunal confirmed the CIT(A)'s deletion of the addition and dismissed the Revenue's appeal.
Key Issues
Whether purchases claimed as bogus by the AO can be disallowed when the assessee's books of accounts are accepted and payments are supported by documentary evidence.
Sections Cited
143(3), 133(6), 145, 139(1), 271(1)(c), 127(3), 127(1), 127(4), 143(2)
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Income Tax Appellate Tribunal, DELHI BENCH “F”, NEW DELHI
ORDER
PER MAHAVIR SINGH, VICE PRESIDENT :
This appeal by the Revenue and Cross Objection by the Assessee are arising of the order of the Commissioner of Income Tax (Appeals-I), New Delhi in Appeal No. 442/16-17 dated 12.07.2017. Assessment was framed by the DCIT, Circle 1(2), New Delhi for the assessment year 2014- 15 u/s. 143(3) of the Income Tax Act, 1961 (hereinafter called the “Act”) vide his order dated 13.2.2016.
First we deal with Revenue’s Appeal No. 5877/Del/2017. The only issue in this Appeal of the Revenue is as regards the order of the Ld. CIT(A) deleting the addition made by the AO on account of bogus purchases of textile commodities amounting to Rs. 3,82,66,575/-.
Brief facts of the case are that assessee is engaged in the business of running the cruiseship and earns income from tourism business by way of cruise conducted on the Brahmaputra River. The assessee’s case was selected for limited scrutiny by issuing notice u/s. 143(2) of the Act, and in response to the same, return was filed by the assessee u/s. 139(1) on 09.10.2014. During the assessment proceedings the AO noticed from the balance sheet that there has been a sudden jump in trade payables i.e. for the year ending 31.03.2014 at Rs. 4,16,06,536/- and in the year ending 31.3.2013 at Rs. 18,89,542/-. According to the AO, revenue from operation has marginally been increased from Rs. 5,97,10,930/- as on 31.3.2013 to Rs. 6,15,07,898/- as on 31.3.2014. The AO required the assessee to give the breakup of trade payables and assessee submitted that these are in the name of two parties (i) SRS Industries Rs. 2,18,33,550/- 2 | P a g e and (ii) RS Industries Rs. 1,64,33,025/-. The assessee before the AO explained that it had purchased textile commodities from these parties and accordingly, the AO issued notices u/s. 133(6) of the Act to confirm the transactions and to provide the relevant details of the transactions. The notices returned unserved with the postal remarks that “no such person exists at the given addresses”. Even the Inspector from the Department visited these addresses and he reported that ‘no such company /firm exists on the above said addresses from the last 4-5 years’. Final, show cause notice was issued to the assessee dated 6.12.2016 asking the assessee to submit the explanation and also produce the evidences of purchase of textile material from these two parties. The assessee was also asked to produce other supporting evidences to substantiate its claim of purchase, i.e. proof of transportation and freight charges for the items purchased, name and address of the godown where the goods were kept. As the assessee has not produced any supporting evidences in support of its claim, AO held that these purchases are bogus claim of deduction and therefore, he added this amount of Rs. 3,82,66,575/- as unexplained purchases. For this, the AO also recorded that the entire purchases declared by the assessee is fictitious and this bogus purchase is generated to set off against the receipts of the assessee from tourism activities and to reduce the high profit generated from tourism activity. The assessee has adopted the ploy of showing these bogus purchases in textile commodities. Therefore, finally, AO held as under in para 4.8:- “4.8 As the assessee decided not to produce any supporting evidence in support of its claim, it is absolutely clear that the assessee does not have any explanation to substantiate the bogus claim of deduction amounting to 73,82,66,575/- claimed by it. The conduct of the assessee leaves the undersigned with 3 | P a g e
no doubt that the above transaction were sham transactions merely added to reduce the profit and taxable income from the tourism business conducted by it. The assessee has deliberately chosen to obtain and manufacturer the purchase bills for textile commodities because linen which he has claimed to have traded does not attract VAT and is not easy to detect or verify. The sham nature of transactions is further corroborated by the facts that in the profit and loss account filed by it, the assessee has not shown the so called purchase of textile as a separate head and the entire receipts are shown as revenue from operation. The assessee has by entering into these bogus transactions tried to reduce its taxable profit and inflate the deduction. As discussed in para 4.3 & 4.4, the address given by the assessee for the two company i.e. SRS Industries and R S Enterprises were found to be bogus and further investigation regarding the same revealed that no such entity ever existed at the given address. Apparently, the entire purchase shown by the assessee company is fictitious and cannot be allowed as deduction while determining the total income of the assessee. The entire receipt of the assessee is actually receipts from tourism activity and to reduce the high profit generated from the said activity, the assessee has adopted the ploy of showing this bogus transaction in textile commodity. By doing so, the assessee has on one hand, claimed excess deduction as per tourism activity to textile sale lases and has changed the nature of receipts from In view of the same, it is only the bogus purchase claimed as deduction which is disallowed and the receipts side of the P&L account has not been disturbed because admittedly the entire receipts i.e. Rs. 6,15,07,898/- are 'revenue from operations'. Accordingly, the sham purchase of textiles is disallowed and added back to the total income of the assessee. I am satisfied that the assessee has furnished inaccurate particulars of its income, penalty proceedings u/s 271(1) (c) initiated separately.”
Aggrieved, assesse preferred appeal before the Ld. CIT(A), who deleted the disallowance by observing as under:-
“I have considered submission of the appellant and observation of the AO in the assessment order. It is seen that appellant has shown sales of Rs.3,30,82,335/- to M/s Ganga Enterprises and Rs.1,16,02,500/- to M/s Mamta Traders during the year. For these sales, the appellant has shown purchases of Rs.2,18,33,550/- from M/s SRS Industries and Rs. 1,64,33,025/- from M/s RS Enterprises. During the course of assessment proceedings, Assessing Officer conducted enquiries with these parties by sending notice u/s 133(6) and also by deputing his Inspector on the given address. It is observed by the AO that said parties were not found at the given addresses, therefore, the purchases shown from these parties were treated as bogus. It is observed from the submission of the appellant and facts recorded in assessment order that appellant has produced books of accounts and also stock registers before the AO wherein the quantity details of fabric purchased and sold were maintained. It is also seen that Assessing Officer did not point out any defects in the books of accounts maintained by the appellant. If the books of accounts of the appellant are accepted by the AO, then there is no question of treating the purchases made from said two parties as bogus. The appellant has made purchases and for that it has made payment by account payee cheque during the year and in FY 2014-15. Similarly, the payment from the sales have been received during the year and in subsequent year through account payee cheque and in support of its contention, appellant has filed copies of bank statements establishing the payment made to the sellers as well as payment received from the purchasers. Appellant has also filed copies of the bills of the purchases and sales made. Simply because the parties from whom purchases were made were not found on the given address, it cannot be held that purchases shown are bogus. If the sales as well as profit declared thereon have been accepted as genuine then there is no question of treating the purchases as bogus or sham transaction. Without purchases there cannot be any sales. If the purchases are disallowed then 5 | P a g e corresponding sales has also to be treated as bogus which will lead to the fact that the profit of Rs.84,80,760/- declared by the appellant is also bogus. Therefore, it is held that appellant has genuinely made sales out of purchases made and profit of Rs.84,80,760/- has been declared on such transactions.” Aggrieved, Revenue is in appeal before the Tribunal.
We have heard the Ld.Sr. DR and gone through the facts and circumstances of the case. We have also perused the case records including the Paper Book filed by the assessee containing 29 pages and the Case Law Paper Book. We noted that assessee before the Ld. CIT(A) submitted that it had purchased fabrics from SRS Industries amounting to Rs. 2,18,33,550/- and from RS Enterprises of Rs. 1,64,33,025/-. The assessee has claimed these purchases in the trading account and all the payments have been made by account payee cheque which is duly reflected in the bank statement of the account for FY 2014-15. The assesse before us, filed copy of bank statement, copy of ledger of suppliers viz. SRS Industries and RS Enterprises. The assessee also filed details of purchases of fabrics, sale of fabric and quantity details of fabric. The assessee also explained before the CIT(A) that it had made the sale of fabrics of Rs. 3,30,82,335/- to Ganga Enterprises and Rs. 1,16,33,025/- to Mamta Trust making a total of Rs. 4,46,84,835/-. It is noted that assessee has earned gross profit of Rs. 84,80,760/- from this textile business. It is a fact that assessee has declared loss returned of Rs. 4,59,17,763/- because which is a carry forward loss from earlier year, which was allowed to be brought forward by the department amounting to Rs. 8,77,05,553/- and out of this, after declaring profit of Rs. 84,80,760/- from trading in textile industry and receipts from Cruise business at Rs. 6,15,07,898/- balance remains the loss. The entire
6 | P a g e premise of the assessee is on two aspects for making disallowance of bogus purchase (i) that the assessee want to set off profit arising out of the business receipts of cruise business, but that is not the case the assessee has declared from the trading of textile of Rs. 84,80,760/- and loss has arisen only on account of brought forward loss of earlier years and second aspect that these parties are not available on the addresses, the assessee had made purchased in financial year 2013-14 whereas assessment took place in 2016 and order passed on 13.12.2016. It means that there is time gap of almost 4 years. Assessee has produced complete bills and vouchers of daily sale and purchase of fabric and copy of ledger accounts of suppliers i.e. RS Enterprises as well as SRS Industries. The assessee has given complete names and addresses of the parties and itemized description of textile purchase including quantity.
6 Even the AO has not rejected the books of accounts and without rejection of books of account u/s. 145 of the Act, the AO resorted to treat the purchase as bogus. Once the AO has accepted the books of accounts and he has not resorted to section 145 of the Act , there is no reason that AO will disallow the purchases. In the given facts and circumstances of the case, we are of the view that the CIT(A) has rightly deleted the addition and we confirm the same and decide the issue in dispute against the revenue. Resultantly, the appeal of the Revenue is dismissed.
Coming to the Cross Objection of the assessee, it is noted that the Cross Objection is delayed by 256 days, but for this, assessee has filed the reasons for the same that first notice for hearing of the appeal of Revenue was received somewhere in February, 2022 fixing the date of hearing on 3.3.2022. After that the assessee was not served with grounds of appeal and appeal memo in Form no. 36 as the assessee has obtained the appeal memo supported by the grounds of appeal and after going through the same the assessee filed this Cross 7 | P a g e Objection with a delay. Hence, it was requested that the delay in dispute be condoned and also filed an affidavit supporting the contention of the condonation petition. After going through the reasons stated in the condonation petition, which were not controverted by the Sr. DR, we condone the delay in dispute and admit this cross objection.
8. The assessee has challenged that notice u/s. 143(2) of the Act which was not issued by the Jurisdictional Assessing Officer. Ld. Sr. DR has filed the Remand Report received from the AO by stating as under:- “In this connection, it is submitted that initially the jurisdiction over the case was with ITO, Ward 12(2), New Delhi. Subsequently, the case was selected for scrutiny under CASS and accordingly the ITO, Ward-12(2), new Delhi had issued the notice u/s. 143(2) of the Act, on 28.08.2015 which was duly served upon the assessee company through registered post and after that the case was transferred to DCIT, Circle 192), new Delhi vide Transfer Memo dated 11.9.2015. Further, the AO had issued the notice u/s. 143(2) of the Act on 14.9.2015 and served the assessee through speed post (the copy of the notice and delivery status of the notice is attached as attachment). Further, as per section 127(3) of the Act, there is no requirement of passing of order u/s. 127(1) of the Act, for transferring the case from any Assessing Officer to any other Assessing Officer situated in the same city, locality or place and as per section 127(4) of the Act, the transfer of a case under sub- section (1) or sub section (2) may be made at any stage of the proceedings, and shall not render necessary the re-issue of any notice already issued by the Assessing Officer from whom the case is transferred.”
8.1 The Ld. SR. DR already filed a copy of notice u/s. 143(2) of the Act dated 28.8.2015 and again on 14.9.2015. Since the evidences are available on record that there is notice u/s. 143(2) of the Act was issued within the limitation period which was served by the Revenue, through speed post which is 8 | P a g e evidenced by delivery status of the notice as per postal department remarks. Accordingly, we are of the view that the notice u/s. 143(2) of the Act, is issued by the Jurisdictional AO and served within the time and hence, we reject this issue raised by the assessee. Resultantly, the Cross Objection filed by the Assessee stand dismissed.