NKG INFRASTRUCTURE LTD,NEW DELHI vs. JCIT(OSD), CENTRAL CIRCLE-27, NEW DELHI

The issues involved in both these appeals are common and, hence, they are taken up together and disposed of by this common order for the sake of convenience.

The only effective issue on merits to be decided in this appeal is as to whether the ld.CIT(A) was justified in giving partial relief in respect of disallowance made on account of bogus purchases by the ld. AO in the facts and circumstances of the instant case. The interconnected issue involved therein is as to whether the ld.CIT(A) was justified in upholding the adhoc addition made in respect of commission payment on estimation basis as unexplained expenditure u/s 69C of the Act in the facts and circumstances of the instant case.

We have heard the rival submissions and perused the material available on record. The return of income for the assessment year 2014-15 was filed by the assessee company u/s 139(1) of the Act on 30.09.2014 declaring total income of Rs.35,84,80,808/-. The assessment was completed u/s 143(3) r.w.s. 153A of the Act on 18.05.2016 accepting the returned income. Later, pursuant to the 2

The assessee is engaged in the business of civil construction and execution of infrastructure sector/projects and generation of solar electricity. In response to the notice issued u/s 148 of the Act, the assessee electronically filed its return of income on 14.04.2021 declaring total income of Rs.35,84,80,810/- which was same as the assessed income earlier u/s 143(3) r.w.s. 153A of the Act dated 18.05.2016. The assessee requested the ld. AO to furnish the copy of reasons recorded for reopening the assessment proceedings and the same were provided to the assessee vide letter dated 02.03.2022. The assessee company had shown purchases of Rs.1509,66,81,333/- in the Profit & Loss Account which included 3

The assessee was show-caused as to why the said purchases should not be disallowed in its entirety in view of the statements given on oath by Shri Anil Kumar Singhal that the bill supplied by Giriraj Global Limited is only an accommodation entry. The assessee also sought for copy of statement of Shri Anil Kumar Singhal which was provided to the assessee by the ld. AO vide letter dated 14.03.2022. The show cause notice issued by the ld. AO also mentioned the fact that a notice u/s 133(6) of the Act was issued by the ld. AO to Giriraj Global Limited and the same had been returned unserved. In response to the show-cause notice, the assessee submitted that it had purchased TMT bars, MS Angle, MS Channel, etc., from Giriraj Global Limited by paying due VAT thereon. The assessee company had also made payment to the said party through proper banking channel. The purchases have been duly accounted for in the books of the assessee company. TMT bars, MS Angle, MS Channel, etc., purchased from Giriraj Global Limited were sold to Barsana Fabtex Pvt Ltd., for Rs.3,00,14,776/- and to M/s Anirudh & Raj Builders Pvt. Ltd., for Rs.27,31,750/-. It was submitted that both the sales made to these two parties were duly accounted in the books of the assessee company. The assessee also submitted that merely because the supplier, i.e., M/s Giriraj Global Limited, had not responded to the notice issued u/s 133(6) of the Act, no adverse inference could be drawn on the assessee company by disbelieving the purchase made from the said party. The ld. AO, however, ignored the contentions of the assessee and by placing reliance on the statement of Shri Anil Kumar Singhal, proceeded to disallow the entire purchases made by the assessee as unverifiable and bogus in the sum of Rs.3,26,18,066/- u/s 37(1) of the Act.

The ld. AO further observed that since the aforesaid purchase being an accommodation entry, the assessee company could have incurred commission expenditure for securing such accommodation entry. Accordingly, the commission expenditure was estimated by the ld. AO @ 3% of the value of disputed purchases and an addition of Rs.9,78,542/- was made as unexplained expenditure u/s 69C of the Act by the ld. AO.

The ld. CIT(A), on going through the list of entities and the statement of Shri Anil Kumar Singhal, concluded that both Giriraj Global Limited and Barsana Fabtex Pvt. Ltd., were entities managed and controlled by Shri Anil Kumar Singhal. He observed that out of purchases made from Giriraj Global Limited by the assessee company in the sum of Rs.3,26,18,066/-, the assessee had indeed made sale to Barsana Fabtex Pvt. Ltd. in the sum of Rs.3,00,14,776/- and the remaining sales were made to Anirudh & Raj Builders Pvt. Ltd. for Rs.27,31,750.The ld.CIT(A) concluded that both Giriraj Global Ltd. and Barsana Fabtex Pvt. Ltd. were engaged in the business of providing accommodation entries according to the statement of Shri Anil Kumar Singhal. Hence, both the purchases made from Giriraj Global Ltd., to the extent of sale made to Barsana Fabtex Pvt. Ltd., should be treated as bogus. In other words, the assessee had made bogus purchases and had made bogus sales was the conclusion of the ld.CIT(A). Hence, he observed that there is no case for making any addition in respect of this aspect of the transaction and the assessee had already disclosed the profit earned from such bogus transaction in its returns. Further, he concluded that sale made to Anirudh & Raj Builders Pvt. Ltd., ( which is genuine sale) were also made out of purchases from Giriraj Global Limited partially and hence to this extent, corresponding purchases of Rs.27,22,028/- is to be treated as unverifiable and bogus. But, since the said unverifiable and bogus purchases

The ld. CIT(A), with regard to the commission expenditure for certain accommodation entry, observed that the market rate for commission on an average is 1.5%. Since, in the instant case, the assessee company has secured one accommodation entry for purchase and one accommodation entry for sales, the total commission expenditure ought to have been incurred by the assessee would be 3%. Accordingly, he held that the action of the ld. AO in estimating commission @ 3% would be justified and does not require any interference.

Aggrieved by the aforesaid decision of the ld.CIT(A), both the assessee as well as the Revenue are in appeal before us for their respective grievances.

From the aforesaid narration of facts, it is not in dispute that the assessee had made bogus purchases from Giriraj Global Limited and bogus sales to Barsana Fabtex Pvt. Ltd. Hence, to that extent two accommodation entries had indeed been obtained by the assessee, i.e., one for purchase and one for sales. It is not in dispute before us that the average rate of commission for obtaining accommodation entry is 1.5% per transaction. Hence, we hold that the ld.CIT(A) was justified in upholding the addition made on account of commission expenditure u/s 69C of the Act @ 3% amounting to Rs.9,78,542/-. We do not deem it fit to interfere in the said order of the ld.CIT(A) in this regard.

Further, it is not in dispute that the assessee had made bogus purchase from Giriraj Global Limited and part of it had been sold to Barsana Fabtex Pvt. Ltd. The profit embedded in its transaction had already been disclosed by the assessee in the returns. We are in agreement with the observation of the ld.CIT(A) that out of bogus purchase made from Giriraj Global Limited, the assessee had made bogus sales to Barsana Fabtex Pvt. Ltd., i.e., bogus sales has been made out of bogus purchases. When both the transactions are bogus, only the profit element embedded thereon could be brought to tax. This has been rightly done by the ld.CIT(A).

With regard to determination of gross profit @ 11.69% on the corresponding purchases of Rs.27,22,028/- attributable to genuine sales made to Anirudh & Raj Builders Pvt. Ltd., we find that the ld.CIT(A) had determined the gross profit @ 11.69% based on gross profit declared by the assessee in the books. But, it is not in dispute that the said purchase of Rs.27,22,028/- made from Giriraj Global Limited is bogus and is clearly an accommodation entry. Though the payment has been made to Giriraj Global Limited through regular banking channel, still, it could be safely concluded in these facts and circumstances of the case, that the assessee had made purchases from grey market in order to have some savings in indirect tax and incidental cash benefit thereon. We find that though the purchases made from Giriraj Global Limited is bogus, the sale made to Anirudh & Raj Builders Pvt. Ltd. is genuine and this fact is not doubted by the Revenue. Hence, it would be just and fair to bring to tax only the profit embedded in the value of such disputed purchases. This profit has been consistently estimated by this Tribunal @ 12.5% on the value of disputed purchases which has been approved by the Hon’ble Bombay High Court and the Hon’ble Gujarat High Court. Hence, we deem it fit and appropriate, in ITAs No.2501 & 2662/Del/2022 the facts and circumstances of the instant case, to estimate the profit element embedded in the value of disputed purchases at 12.5% of Rs.27,22,028/- instead of 11.69% made by the ld.CIT(A). Accordingly, the grounds raised

With regard to ground No.6 raised by the Revenue on the applicability of provisions of section 40A(3) of the Act on the value of purchases, we find that it is not even the case of the ld. AO while making the addition and the ld.DR is not justified to improve the case of the Revenue before this Tribunal. Hence, ground No.6 raised by the Revenue is dismissed.

In the result, the appeal of the assessee and the appeal of the Revenue are partly allowed. Order pronounced in the open court on 27.06.2023