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Income Tax Appellate Tribunal, SMC Bench, Mumbai
Before: Shri D. Manmohan
The issue involved in both the appeals being identical I proceed to dispose of the appeals by a combined order for the sake of convenience.
Assessee was carrying on the business of manufacture and sale of plastic and rubber goods. Though the returns were processed for the years under consideration under section 143(1) of the Act, consequent to the information received by the AO from the Sales Tax Department giving names and addresses of persons who have provided entries/bogus purchase bills to a large number of tax payers, the AO reopened the assessment by issuing notice under section 148 of the Act and after considering the issue exhaustively he
2 Maya A Rohra A.K.A Indira A. Rohra observed that the assessee has not made any effort either to produce the parties or to furnish the exact whereabouts of them to prove the genuineness the purchase from Top Shop Trading Company Pvt. Ltd., Mahavir Enterprises, etc. Assessee neither produced the seller nor submitted cogent evidence in support of the purchases. Under the circumstances he held that the entire purchases made from the party, and debited to the Profit & Loss Account, are liable to be treated as non genuine and the said amount was treated as unexplained expenditure for the purpose of making addition. For A.Y. 2009-10 an addition of `3,20,965/- was made whereas for A.Y. 2011-12 the addition made under section 69C works out to `4,83,563/-.
Aggrieved, assessee contended before the CIT(A) that the addition made on account of alleged information of non genuine purchases is not in accordance with law. It was contended that reconciliation of transaction of purchases and receipt of material, etc., after a gap of more than two years, may be difficult for the assessee - to produce the parties - and so long as the sales are accounted for, assessee cannot be expected to discharge her onus of proving the source of purchase. Therefore the AO should not have made addition under section 69C of the Act.
The learned CIT(A) considered the issue exhaustively in para 5 of his order. He observed that the assessee, instead of justifying the genuineness of purchase made from third parties - by filing confirmations, correctly mentioning the addresses, etc. - she has mainly reiterated that payments have been made through banking channel and corresponding sales have been made whereas in the absence of the above mentioned details it is not possible for the Department of ascertain the correct amount of income from the records/books maintained by the assessee. He further observed that the onus is on the assessee to prove the claim of expenditure and in the absence of proving the same the AO was justified in making the addition. He also observed that the assessee failed to furnish
3 Maya A Rohra A.K.A Indira A. Rohra quantitative and qualitative details of opening stock, purchases, sales and closing stock, item-wise and party-wise and thus the books of the assessee are not complete in every respect in which event it is not possible to compute the correct amount of profit. At this juncture the assessee made an alternative contention that if it is assumed that the purchases are not proved, since the sales were made against such purchases the reasonable course of action would to bring to tax only the profit from such purchase. Having regard to the fact that the assessee might have saved on account of sale tax duties and income tax, by buying goods from grey market at lower rate but taking the purchase by normal rate, the disallowance can at best be 25% of the unexplained purchases. In para 5.5 of the order of the CIT(A) it is noticed that the learned A.R. for the assessee prayed that at the most 25% of bogus purchases need be disallowed as the assessee is not in a position to prove the purchases.
The learned CIT(A) has taken into consideration several case law in support of his conclusion that in the case of unproved purchases even 100% addition can be made though in the given circumstances 25% disallowance would be reasonable. In this regard he observed as under: -
“5.6 I have carefully considered the submissions of the Ld. AR and noticed that the claim of the appellant, i.e. sales against hawala purchases have also been credited in the P&L a/c., appears to be in order, keeping in view the GP/NP rates, shown in past and in subsequent years. Therefore, this is not a case where the entire amount has been siphoned off, by way of debiting bogus purchases. In my considered opinion, it is a case where, at the most, purchases might have been inflated. Considering the decision of Hon'ble Gujarat HC in the case of Sanjay Oil Cake Mills & Vijay Proteins etc. as above, in my opinion, 25% disallowance, out of hawala purchases, will be reasonable. Accordingly, I hereby confirm 25% disallowance of above purchases i.e. Rs.80,240/- [25% of Rs.3,20,965/-] and delete the balance amount of Rs.2,40,725/- (Rs.3,20,965- 80,240/-), out of total disallowance of Rs.3,20,965/-. Both the ground of appeal are, therefore, decided accordingly.”
4 Maya A Rohra A.K.A Indira A. Rohra 7. However, with regard to the interest charged under section 234A, 234B and 234C of the Act the learned CIT(A) observed that in the light of the decision of Hon'ble Supreme Court in the case of CIT vs. Anjum M.H. Ghoswala 252 ITR 1 there is no discretion to the AO except to charge interest as per the procedure prescribed therein and therefore directed the AO to charge interest based on the addition as confirmed by him.
Further aggrieved, assessee is in appeal before the Tribunal contending, inter alia, that even 25% of the original addition as confirmed by the CIT(A) is not according to the law. It was further contended that the learned CIT(A) erred in confirming charging of interest under section 234A, 234B and 234C of the Act.
The learned counsel for the assessee submitted that in this line of business the profit earned by the assessee works out to around 18% whereas the learned CIT(A) has taken into consideration 25% of the purchases as income which increases the gross profit rate and hence it deserves to be scaled down bearing in mind the normal profit earned in this line of business. However, as can be seen from the summary of gross profit chart filed for A.Y. 2008-09 to 2013-14 assessee declared gross profit varying between 18.85 to 22.45%. In the case of bogus purchase the learned CIT(A) observed that assessee would have saved on sale tax and other such levies on account of purchase made in the grey market and therefore 25% is reasonable. The learned D.R. in this regard submitted that in the circumstances of the case addition of 25% of the unexplained purchases can said to be unreasonable.
I have carefully considered the rival submissions and perused the record. It is not in dispute that the assessee made sales out of the purchases made from grey market and even if some benefit is accrued it has to be in tune with the normal profit earned in this line of business. Learned counsel furnished summary of GP earned for A.Y. Total Sales Gross Profit 2008-09 1,48,50,562 22.34% 2009-10 1,31,17,898 19.49% 2010-11 1,48,35,786 19.12% 2011-12 1,39,93,958 18.85% 2012-13 1,31,81,807 21.45% 2013-14 1,07,21,090 22.46%
We are concerned with A.Ys. 2009-10 and 2011-12 wherein the assessee has declared gross profit of 19.49% and 18.85%. For A.Y. 2008-09 she declared 22.34% GP and for 2013-14 it was 22.46%. Thus by taking into consideration the additional benefit, if any, availed by the assessee by making purchases in the grey market, I am of the view that an estimate of income at 22.5% of the gross purchases would meet the ends of justice and I direct the AO accordingly. In other words, addition reference to 22.5% of purchases made in grey market is hereby directed to be added to the total income.
As regards interest charged under section 234A, 234B and 234C of the Act, as rightly observed by the learned CIT(A), the AO has no discretion in this regard. However, the assessee would get substantial relief, if any, in the light of the fact that the disallowance is scaled down further. I direct the AO accordingly.
In the result, the appeals filed by the assessee are partly allowed. Order pronounced in the open court on 12th October, 2015.