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IN THE INCOME TAX APPELLATE TRIBUNAL, SURAT BENCH, SURAT BEFORE SHRI PAWAN SINGH, JUDICIAL MEMBER AND Dr. ARJUN LAL SAINI, ACCOUNTANT MEMBER ITA No. 495/SRT/2019 (AY 2014-15) (Hearing in Virtual Court) Shri Rahul Kalubhai Kakadia Income Tax Officer 59,Vishnu Nagar-1, Ankur Ward-3(3)(4), Surat Vs Chowkdi, Nr. Mini Bazar, A.K.Road, Varachha, Surat- 395 008 PAN AOLPK 7873 G nvbunha@yahoo.co.in Appellant / assessee Respondent / Revenue
Assessee by Shri Hiren R. Vepari, CA Revenue by Ms. Anupama Singla,Sr-DR Date of hearing 08.02.2022 Date of pronouncement 08.02.2022 Order under section 254(1) of Income Tax Act PER PAWAN SINGH, JUDICIAL MEMBER: 1. This appeal by assessee is directed against the order of ld. Commissioner of Income tax (Appeals)-3,Surat [‘CIT(A)’ for short] dated 12.09.2019 for assessment year (AY) 2014-15 which in turn arises from the assessment order dated 26.12.2016 passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 26.12.2016. The assessee has raised the following grounds of appeal:- “(I) Estimate of profit at 25% on the bogus purchases of Rs.7,30,390 and Rs.1,83,28,467. (1) On the facts and circumstances of the case, the learned CIT(A) was not justified in estimation of profit @ 25% of the purchases particularly there was no rationale for any addition at all. (2) In any case, the learned CIT(A) ought to have accepted the element where purchase were made both in cash and cheque. (3) Without prejudice to the above, the estimate needs to be reduced.
ITA No.495/SRT/2019 A.Y. 14-15 Sh. Rahul K Kakadia
(II) Miscellaneous: The appellant craves leave to add, alter or vary any of the grounds of appeal.” 2. Brief facts of the case are that assessee is doing his business in the name of a proprietary firm namely M/s Mahalaxmi Creations deals in sale and purchase of sarees and Jari material. The assessee filed his return of income for the year under consideration for assessment year (A.Y.) 2014-15 on 09.10.2014 declaring income of Rs.11,58,260/-.The case was selected for scrutiny. During the course of assessment, the Assessing Officer noted that assessee produced sale invoice of Raghuveer Jari from whom the assessee purchased Jari worth of Rs.7,30,390/- in cash. The Assessing Officer issued notice to the parties under section 133(6) of the Act and deputed inspector of his ward to conduct enquiry and to serve notice. The Assessing Officer recorded that inspector furnished his report that the said party was not available on the given address. The A.O. issued show cause notice to the assessee for disallowance of such purchases. The assessee filed his reply and stated and furnished the delivery challan of Raghuveer Jari. The Assessing Officer not accepted the explanation furnished by assessee by holding that inspector reported that Raghuveer Jari is not available on the given address. Further noted that assessee did not furnish confirmation and treated as bogus purchase and added to the income of assessee.
ITA No.495/SRT/2019 A.Y. 14-15 Sh. Rahul K Kakadia
The Assessing Officer further noted that there are various purchases from 34 parties. The Assessing Officer deputed inspector to serve notice u/s 133(6). The Assessing Officer in para-5.1 of his order recorded that some of the parties were not available or working with some other name or shifted their business address. On the basis of report of inspector of his ward and the purchases bill of various parties which were below Rs.20,000/- totaling to Rs.1.83 crores which were paid in cash, the Assessing Officer issued show cause notice why such expenses amount should not be treated as bogus purchase. The assessee filed his reply dated 22.12.2016 and submitted that delivery challans for transfer of goods and submitted that assessee cannot be faulty if the inspector could not find out the parties as their given addresses. On the show cause notice, entire disallowance of assessee stated that assessee has earned only 6.67% of gross profit from his trading activities. And that the purchases shown by the assessee are genuine. The assessee also explained that he has shown purchase of Rs.25.37 crores and have shown sale of Rs.26.16 crores and the sale and purchase of assessee is genuine and furnished the confirmation and bank statement of parties and that no adverse inference can be drawn on such purchases. The explanation of assessee was not accepted by Assessing Officer by taking view that assessee was unable to produce party-wise cash purchase books. The report of inspector with photographs shows that the address of
ITA No.495/SRT/2019 A.Y. 14-15 Sh. Rahul K Kakadia
sellers claimed by assessee is to be addressed of some other report of inspector with photographs that address claimed by assessee was the address of the parties from which the assessee made purchase in cash. Most of the existing shops at the location in occupation for more than 3 years. In some cases the shop No. mentioned by assessee was missing in the reported by inspector. The price of each saree of Rs.4400 to 4500/-- per piece. The assessee made efforts to keep the purchase cost below Rs.20,000/-. The invoice of all the parties were similar. On the aforesaid observation, the Assessing Officer disallowed the entire purchases of Rs.1.83 crores. 4. Aggrieved by the addition in the assessment order, assessee has filed appeal before Ld. CIT(A). Before Ld. CIT(A) the assessee filed detailed written submission as recorded in para-5 of his order. In sum and substances, the assessee stated that Assessing Officer on the basis of report of his inspector came to the conclusion that assessee made bogus transaction to suppress the profit and made addition during the assessment, the assessee provided copy of ledger account but to demonstrate that Jari purchased by assessee was genuine. The assessee has explained that primary ground of holding the purchase as bogus recorded in para-4.1 in assessment order. The assessee explained that he made purchase of Rs.1.83 crores in cash. The assessee sold sarees in cash aggregating Rs.1.64 crores and furnished the day-to-day cash sales book details
ITA No.495/SRT/2019 A.Y. 14-15 Sh. Rahul K Kakadia
for entire financial year. The Assessing Officer is not justified in doubting the sales of the assessee. The Ld. CIT(A) after considering the submission of assessee held that Assessing Officer in his assessment order inspector could not find out the parties on the given addresses. The Assessing Officer treated the purchases as bogus and made addition of Rs.7,30,390/- on purchase made from Raghuveer Jari. And on the addition of Rs.1,83,28,467/- on account of cash purchase, the Ld. CIT(A) concluded that before him assessee submitted that the inspector visited after three years of business transaction and it is possible that the parties might have changed their respective address. The inspector reported that some of the shops had closed down and some other parties could have been operating in the given address and disallowance of such purchases is not justified, the assessee explained the he made total purchase of Rs.25,35,33,264/- and only purchase aggregating to Rs.1,83,24,867/- made in cash. The remaining purchase of Rs.23,52,04,151/- was made through cheques. The Assessing Officer accepted the cheque payments and cash payment was treated as non-genuine. The Assessing Officer accepted the sale but not accepted the said purchases. The Ld. CIT(A) after considering the submission of assessee held that assessee has shown purchase of Rs.25,35,33,264/- and only purchase of Rs.1,83,24,867/- were made in cash. But fact is that parties were not found at their given addresses since the purchases of them were not verified.
ITA No.495/SRT/2019 A.Y. 14-15 Sh. Rahul K Kakadia
Keeping in view the decision of Hon'ble jurisdictional High Court in the case of Vijay Trading Co. vs. Income-Tax Officer (2016) 76 taxmann.com 366 (Guj) held disallowance of purchase was restricted to 25% of the total purchases. Further aggrieved the assessee has filed present appeal before the Tribunal. 5. We have heard the submissions of Ld. Authorized Representative (AR) for the assessee and Ld. Senior Departmental Representative (DR) for the Revenue and have gone through the orders of lower authorities carefully. At the outset of hearing, Ld. AR of the assessee submits that the assessee has engaged in business of trading saree with certain sarees with Jari (gold thread) embroidery. The Assessing Officer made addition primarily on the ground that certain suppliers were not found and on account of non-availability of parties at the given address the Assessing Officer disallowed the entire purchase made from Raghuveer Jari of Rs.7,30,390/- and Rs.1,83,28,467/- being cash paid for purchase of sarees. During the relevant financial year, the assessee has purchased sarees worth of Rs.25,35,33,264/-. The Assessing Officer disallowed 100% on account of purchase shown from Raghuveer Jari and entire purchase below Rs.20,000/- from respective parties. The Ld. CIT(A) restricted the addition @ 25% following the decision of Hon'ble jurisdictional High Court in the case of Vijay Trading Co. (supra). Ld. AR of the assessee submits that
ITA No.495/SRT/2019 A.Y. 14-15 Sh. Rahul K Kakadia
assessee has not shown purchase from Raghuveer Jari or related parties transaction. 6. The Assessing Officer has not doubted the sale of the assessee, no sale is possible in absence of purchase. The books of account of assessee was not rejected. The Ld. AR of the assessee submits that the profit margin in the line of assessee’s business is very low due to competitive in market. Ld. AR of the assessee submits that even if purchases are not verifiable due to lapse of time or non-availability of parties, the only profit element on such purchase is liable to be added and not the entire substantial part of purchase particularly when the books of account is not rejected nor the sales is disputed. The ld AR for the assesse relied on the following case laws; ITO vs. Navjivan Synthetics (2013) 32 taxmann.com 125 (Ahmedabad- Trib.) Yunus Haji Ibrahim Fazalwala vs. ITO (2016) 70 taxmnann.com 93 (Guj) CIT-III vs. Sathyanarayan P.Rathi (2013) 38 taxmann.com 402 (Guj) CIT vs. Bholanath Poly Fab (P) Ltd. (2013) 40 taxmann.com 494 (Guj) Vijay Trading Co. vs. Income-tax Officer (2016) 76 taxmann.com 366 (Guj) Vijay Proteins Ltd. vs.CIT (2015) 58 taxmann.com 44 (Guj) Mayank Diamonds Pvt. Ltd. vs. DCIT,Cir.3(1) Surat ITA No.341/AHD/2002 dated 30.09.2002 Mayank Diamonds Pvt. Ltd. vs. ITO TA No. 200 of 2003 dt. 07.11.2014
ITA No.495/SRT/2019 A.Y. 14-15 Sh. Rahul K Kakadia
On the other hand, Ld. Sr.DR for the Revenue submits that Assessing Officer during assessment in para 8.1 has clearly recorded his finding. The Assessing Officer recorded that assessee was unable to produce the said parties as most of the parties were not available only given address and in some of shops Nos are missing on the basis of which Assessing Officer came to definite conclusion that assessee simply created bogus parties. 8. We have considered the rival submissions of both the parties and gone through the orders of lower authorities. We have also considered the various documentary evidence furnished by assessee and the case laws relied by the ld AR for the assessee.We find that Assessing Officer made addition mainly on the ground that the parties were not available on the given addresses on the basis of reported of inspector of his ward. We find that the Assessing Officer neither rejected the books of account nor disputed the purchase of assessee. The assessee has shown turnover more than Rs.25 crores and only the instances of cash purchase that too below Rs.20,000/- was identified by Assessing Officer and treated as bogus purchases. The case of assessee before Assessing Officer as well as Ld. CIT(A) was that verification was after more than three years. And that the purchase shown by assessee is genuine. The Assessing Officer disallowed the entire purchases which was shown in cash. Similarly the entire purchase shown of Jari was also disallowed. The Ld. CIT(A) restricted the
ITA No.495/SRT/2019 A.Y. 14-15 Sh. Rahul K Kakadia
addition to the extent of 25% of purchase by following the decision of Vijay Trading Co. (supra), wherein the Hon'ble jurisdictional High Court held that in respect of bogus purchase, only profit element embedded therein would be subject to tax. We find that neither the Assessing Officer nor the Ld. CIT(A) tried to find out the profit element embedded in such transactions. Therefore, in absence of any material the conclusion to arrive that profit margin in the impugned transaction is 25%, the addition of 25% is not justified. The assessee has shown its profit @ 6.67%. It is settled law that even if the transaction of disputed purchases is not fully verified, the revenue authority are not entitled to tax the entire transaction, rather the profit element embedded in such transaction is to be tax. In our view, when the assessee himself has shown profit at 6.67%, the disallowance @ 8% of such disputed purchases would meet the possibility of revenue leakage. Therefore, we direct the Assessing Officer to restrict the purchase @ 8% on both the disallowances. We order accordingly. 9. In the result, the appeal of the assessee is partly allowed. Order pronounced in open court on 08/02/2022 and placed result on notice Board. Sd/- Sd/- (Dr ARJUN LAL SAINI) (PAWAN SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Surat, Dated: 08/02/2022 Dkp. Out Sourcing P.S
ITA No.495/SRT/2019 A.Y. 14-15 Sh. Rahul K Kakadia
Copy to: 1. Appellant- 2. Respondent- 3. CIT(A)- 4. CIT 5. DR 6. Guard File True copy/ By order // True Copy // Assistant Registrar, ITAT, Surat True copy/