Addition in case of bogus purchases restricted to the extent of gross profit involved in business

Bhavesh Punmaji Devasi Vs ITO (ITAT Mumbai)

ITAT Mumbai held that 100% addition in case of bogus purchases unsustainable. Notably, addition to the extent of rate of gross profit in case of bogus purchase is duly sustained.

Facts- The assessee is an individual running a proprietary concern in the name and style of Bhavik Metal, engaged in the business of trading in ferrous and non-ferrous metals.

Based on the information from Sales Tax Department and Directorate General of Income Tax (Investigation), Mumbai [DGIT (Inv.)] that the assessee is one of the beneficiaries of the bogus purchase bills during the year under consideration, the assessment was reopened by initiating the proceedings under section 147/148 of the Act.

As per information received from office of DGIT (Inv.), Mumbai the assessee has taken entries of bogus purchases totaling amount to Rs. 58,69,921/-. CIT(A) dismissed the appeal ex-parte by making 100% addition of Rs. 58,69,921/- on account of bogus purchase.

Conclusion- We are of the considered view that gross profit in the business of ferrous and non ferrous metal trading which is to the tune of 5% to 8%, the addition made by the AO @ 12.5% of the bogus purchases of Rs.58,69,921/- appears to be fair and reasonable. The Ld. A.R. for the assessee has candidly admitted that addition @ 12.5% of the bogus purchases made by the AO may be upheld. So in view of the matter, the impugned order passed by the Ld. CIT(A) is hereby set aside and the order passed by the AO making the addition of Rs.7,33,740/- @ 12.5% of the bogus purchases of Rs.5,86,991/- is restored. Consequently, the appeal filed by the assessee is partly allowed.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

At the very outset the Ld. A.R. for the assessee contended that the present appeal is time barred by 952 days and sought to condone the delay by moving an application supported with an affidavit that the appellant Shri Bhavesh Punmaji Devasi (hereinafter referred to as ‘the assessee’) had filed an appeal against the assessment order in form 35 before the Ld. Commissioner of Income Tax (Appeals)-35 [hereinafter referred to as the Ld. CIT(A)], but the consultant of the assessee has neither attended the appeal before the Ld. CIT(A) nor informed the assessee to make some alternate arrangements and consequently the Ld. CIT(A) got annoyed and decided the appeal on 07.08.2019 by making 100% addition of bogus purchases as against addition of 12.5% made by the Assessing Officer (AO) on the alleged bogus purchases that all the papers/bills were in the possession of previous tax consultant who looked after the income tax matters of the assessee and unfortunately due to some personal reasons he was out of town so the assessee could not get the necessary papers to prefer the appeal.

2. However, on the other hand, the Ld. D.R. for the Revenue opposed the application for condonation of delay on the ground that the late filing of appeals in this case is apparently malafide due to callous attitude of the assessee and prayed for dismissal of the application.

3. Keeping in view the reasons for delay in filing the present appeal as put-forth in the application supported with an affidavit inter-alia that the entire delay is attributed to the negligence of the consultant of the assessee who has neither put in appearance before the Ld. CIT(A) as is evident from the impugned order passed by the Ld. CIT(A) under challenge before the Tribunal nor intimated the assessee to make any alternative arrangement nor he has supplied the necessary documents to the assessee, we are of the considered view that due to negligence or inadvertent mistake on the part of the tax consultant, the assessee cannot be punished and keeping in view the law laid down by the Hon’ble Supreme Court in case of Land Acquisition Collector vs. MST Katiji & Others 167 ITR 471 (SC) wherein it is held that “it is on contention of delay that when substantial justice and technical considerations are pitted against each other, the case of substantial justice deserves to be preferred, for the other side cannot claim to have a vested right in injustice being done because of a non deliberate delay,” we hereby condone the delay of 952 days to entertain the present appeal. So appeal is ordered to be registered and is hereby heard.

4. The assessee by filing the present appeal, sought to set aside the impugned order dated 07.08.2019 passed by Commissioner of Income Tax (Appeals), Mumbai [hereinafter referred to as the CIT(A)] qua the assessment year 2010-11 on the grounds inter-alia that :-

“GROUND I

To condone the delay in filing the Appeal:

The appellant crave leave to condone the delay in filing the appeal as the circumstances were beyond his control. Neither I was aware of any such order by CIT-A nor received the order copy. I have shifted to Nashik and received the order copy in May’22 when I visited my old place of business.

The above facts have been mentioned by her in the first Para and Para-4.1 also of the order. In this situation your appellant request your justice to kindly condone the delay. Your appellant has given the affidavit also in this regards. For the sake of “Natural Justice” kindly condone the delay. (Refer ITA No. 141/MUM/2021 (A.Y.2011-12) in the matter of M/s Sangeeta Metal (India) vs ACIT-19(3), Mumbai) para -5 reads “Having heard both the sides on the condonation petition, we are of the view that in the interest of substantial justice, the assessee’s prayer for condonation should succeed. The reasons explained for filing the appeal beyond the due date is genuine and convincing. Therefore, we condone the delay in filing the appeal and appeal is admitted for adjudication” (Order copy enclosed).

GROUND II

Re-opening u/s 147 of the Income Tax Act, 1961:

The issue of notice was bad in law and your appellant objected the same during assessment proceedings. The action of the Ld. A.O. was bad in law as there were drastic change in the provisions of the Act. We are quoting from the Hon’ble Apex Court decision in the matter of CIVIL APPEAL NOS.2009-2011 OF 2003 Commissioner of Income Tax, Delhi Vs M/s. Kelvinator of India Limited.

In view of Supra, appellant request to dismiss the proceedings initiated by the Ld. A.O. and CIT-A.

2. On the facts of the case the learned CIT (A) has erred in not granting benefit of proviso to section 40(a)(ia) when the copy of ITR and duly audited accounts which included receipts from appellant were submitted during the proceedings.

GROUND III

To Delete the alleged additions

Appellant is trader in “Non-ferrous Steel” and there were corresponding sales made by me. The Ld. A.O has verified all the sales and relevant records say Purchase Bills, Sales Bills, Delivery Challans, Ledger Accounts, Bank book etc. Appellant books were neither rejected by Ld. A.O. nor by CIT-A. therefore alleged additions made by CIT-A should be deleted.

GROUND IV

To Drop the penalty levied u/s 271(1) (c)

Kindly delete the penalty levied by the Ld. A. O. of Rs. 53,21,430 on me as Penalty cannot be levied on estimated additions.

GROUND V

1. Appellant craves leave to add or delete the grounds of Appeal at the time of hearing.

2. Appellant will submit the paper book at the time of hearing along with various finding- ITAT and High Courts.”

5. Briefly stated facts necessary for consideration and adjudication of the issues at hand are : the assessee is an individual running a proprietary concern in the name and style of M/s. Bhavik Metal, engaged in the business of trading in ferrous and non-ferrous metals. The original return of income filed by the assessee was processed under section 143(1) of the Income Tax Act, 1961 (for short ‘the Act’). Subsequently on receipt of information from Sales Tax Department and Directorate General of Income Tax (Investigation), Mumbai [DGIT (Inv.)] that the assessee is one of the beneficiaries of the bogus purchase bills during the year under consideration, the assessment was reopened by initiating the proceedings under section 147/148 of the Act. In response to the notices issued to the assessee under section 148, 143(2) & 142(1) of the Act, the assessee appeared and filed necessary details through his chartered accountant.

6. As per information received from office of DGIT (Inv.), Mumbai the assessee has taken entries of bogus purchases from the following parties:

7. Declining the contentions raised by the assessee that he has made purchases to comply with the VAT provisions and make payment accordingly which fact is proved from TAN and VAT number supported with bank accounts which proved the identity of the supplier and as such purchases were not bogus, the AO proceeded to make an addition of Rs.7,33,740/- to the business income of the assessee equivalent to 12.5% of Rs.58,69,921/-, unproved purchases and thereby framed the assessment under section 143(3) read with section 147 of the Act.

8. The assessee carried the matter before the Ld. CIT(A) by way of filing appeal who has dismissed the appeal ex-parte by making enhancement of the addition made on the basis of bogus purchases from Rs.7,33,740/- to Rs.58,69,921/- i.e. @ 100% of the bogus purchases. Feeling aggrieved with the impugned order passed by the Ld. CIT(A) the assessee has come up before the Tribunal by way of filing present appeal.

9. We have heard the Ld. Authorised Representatives of the parties to the appeal, perused the orders passed by the Ld. Lower Revenue Authorities and documents available on record in the light of the facts and circumstances of the case and law applicable thereto.

10. The Ld. A.R. for the assessee contended that the impugned order has been passed by the Ld. CIT(A) at his back without providing any opportunity of being heard and he was also denied the opportunity to withdraw his appeal and further contended that in case of bogus purchases when sale is not disputed, addition is to be made on the basis of gross profit earned by the assessee in the genuine purchases and relied upon the decision rendered by the Hon’ble Bombay High Court in the case cited as Pr. CIT vs. JK Surface Coatings Pvt. Ltd. in ITA No.1850 of 2017 order dated 28 October, 2021 and the decision rendered by the co-ordinate Bench of the Tribunal cited as M/s. Pavapuri Metals & Tubes vs. Income Tax Officer in ITA No.1148/M/2019 order dated 29.09.2020 and in the case of Ravindranathan Nair vs. Income Tax Officer in ITA No.2662/M/2018 order dated 31.12.2018.

11. However, on the other hand, the Ld. D.R. for the Revenue to repel the argument addressed by the Ld. A.R. for the assessee contended that in such cases total amount of the bogus purchases needs to be added to the income of the assessee and relied upon the order passed by the Ld. CIT(A).

12. In the identical facts and circumstances of the case where though the purchases found to be bogus by the Revenue Authorities but sales by the assessee have been accepted as genuine as against these bogus purchases, we are of the considered view that when sales have been accepted being genuine the entire purchases cannot be treated as non genuine to make addition of the entire bogus purchases amount. Hon’ble High Court of Bombay in the case of JK Surface Coatings Pvt. Ltd. (supra) upheld the view taken by the Tribunal that in such circumstances gross profit should be in the range of 5% to 12.5% as reasonable estimation of profit element embedded in the bogus purchases by returning following findings:

“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.

5. Whether the purchases were bogus or whether the parties from whom such purchases were allegedly made were bogus was essentially a question of 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.”

13. Undisputedly on the basis of material/evidence available on record before the AO as well as the Ld. CIT(A) it is proved that the assessee has made bogus purchases to the tune of Rs.58,69,921/-from 9 parties detailed in the preceding paras. It is also not in dispute that the Revenue Authorities have not disputed the sales made by the assessee during the year under consideration. Even otherwise there cannot be any sale without purchases.

14. In the backdrop of the aforesaid undisputed facts when we examine the impugned order assed by the Ld. CIT(A), though the order is passed by touching the merits but it is proved on record that the order has been passed in haste without considering the complete documents brought on record. When we examine para 4.3 of the impugned order passed by the Ld. CIT(A) there was a categoric prayer of the assessee before the Ld. CIT(A) that “the appellant vide letter dated 19.12.2018 sought withdrawal of appeal. This is denied as there is no basis for the same. We fail to understand that when at the first appellate stage the assessee has sought to withdraw the appeal which was prerogative of the assessee disallowing the assessee to withdraw the appeal is against the rules and justice.

15. In view of what has been discussed above and following the judgment passed by the Hon’ble High Court and co-ordinate Bench of the Tribunal, we are of the considered view that in the light of the facts and circumstances of the case and prevalent gross profit in the business of ferrous and non ferrous metal trading which is to the tune of 5% to 8%, the addition made by the AO @ 12.5% of the bogus purchases of Rs.58,69,921/- appears to be fair and reasonable. The Ld. A.R. for the assessee has candidly admitted that addition @ 12.5% of the bogus purchases made by the AO may be upheld. So in view of the matter, the impugned order passed by the Ld. CIT(A) is hereby set aside and the order passed by the AO making the addition of Rs.7,33,740/- @ 12.5% of the bogus purchases of Rs.5,86,991/- is restored. Consequently, the appeal filed by the assessee is partly allowed.

Order pronounced in the open court on 31.05.2023.