Addition in case of bogus purchases restricted only to the extent of profit element

DCIT Vs Parth Developers (ITAT Ahmedabad)

ITAT Ahmedabad held that addition in case of bogus purchases are restricted only to the extent of profit element involved on such purchases. Accordingly, CIT(A) correctly restricted addition to the extent of 10%.

Facts- AO held that the claim of expenditure of Rs.4,17,13,702/- on account of creditors as bogus expenditure and added the same as the assessee’s total income and demanded tax thereon.

Aggrieved against the Assessment Order, the assessee filed an appeal before CIT(A). CIT(A) restricted the disallowance by estimating at 10% on account of alleged bogus purchase and directed to confirm the addition of Rs. 41,71,370/- and to delete balance addition of Rs. 3,75,42,332/- on account of bogus purchase and thereby partly allowed the assessee appeal. Being aggrieved, revenue has preferred the present appeal.

Conclusion- The Hon’ble Gujarat High Court in the case of CIT-II vs Gujarat Ambuja Exports Ltd [2014] 43 taxmann.com 244 (Guj), wherein, the addition of 5% of the bogus purchase confirmed by the Tribunal was upheld.

Respectfully following the above judicial pronouncements, we have no hesitation in confirming the addition to the extent of 10% on account of alleged bogus purchase. Thus the grounds raised by the Revenue is devoid of merit and the same is hereby dismissed.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

This appeal is filed by the Revenue as against the appellate order dated 10.06.2019 passed by the Commissioner of Income Tax(Appeals)-10, Ahmedabad, arising out of the assessment order passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Year (A.Y) 2016-17. The Cross Objection is filed by the Assessee as against the above Revenue appeal.

2. The brief facts of the case is that the assessee is a partnership firm engaged in the business of civil construction, filed its Return of Income declaring total income of Rs.82,28,850/- for the Assessment Year 2016-17. The return was processed u/s. 143(1) and then taken for limited scrutiny. The assessee was asked to furnish name, PAN, current communication address and address as per invoices of some of the suppliers from which purchases were allegedly made for the year under consideration. The assessee was also asked to provide party-wise ledger of the suppliers in which large amount remained due to be paid at the end of the year. Further the A.O. noticed that the assessee has shown large purchases from the parties without any regular payments during the year on physical verification by the Inspector such parties were not available in those addresses and after issuance of summons to the various parties, the bogus purchases made by the assessee were determined by the Assessing officer as follows:

2.1. Thus the Assessing Officer held that the claim of expenditure of Rs.4,17,13,702/- on account of these creditors as bogus expenditure and added the same as the assessee’s total income and demanded tax thereon.

3. Aggrieved against the Assessment Order, the assessee filed an appeal before Commissioner of Income Tax (Appeals)-10, Ahmedabad. The Ld. CIT(A) restricted the disallowance by estimating at 10% on account of alleged bogus purchase and directed to confirm the addition of Rs. 41,71,370/- and to delete balance addition of Rs. 3,75,42,332/- on account of bogus purchase and thereby partly allowed the assessee appeal observing as follows:

“….In view of the aforesaid judicial pronouncements of the jurisdictional Gujarat High Court and also considering the fact that the appellant firm itself has made the alternate plea in the submission that profit element embedded on such purchase should be considered for addition instead of adding the total amount of purchases, I am of the view that if profit element embedded on such purchases is added to the total income, that will meet the ends of justice. In the light of the decision of the Hon’ble Gujarat High Court in Gujarat Ambuja Exports (Supra), CIT vs. Bholanath Poly Fab Pvt. Ltd 355 ITR 290 (Guj.) and the decision of the Hon’ble Supreme Court in the case of PCIT vs Tejua Rohitkumar Kapadia arising out of the decision of the Hon’ble Gujarat High Court in Tax Appeal No. 691 of 2017, judgment dated 18.09.2017, the decision of Hon’ble Mumbai ITAT “G” Bench in the case of ACIT, Circle 19(1), Mumbai vs. M/s. HBS Mall Nahur, ITA No. 817/Mum/2017 A.Y. 2009-2010 order dated 03.10.2017 and the decision of Hon’ble ITAT, Mumbai “A” Bench, vide ITA No. 196/Mum/2017 AY. 2009-10, order dated 06.09.2017 in the case of DCIT, Circle 6(2)(1), Mumbai vs. Della Tecnica Interior Design Pvt. Ltd, it is difficult to dispute the quantitative aspects of the purchases made. This leaves me to the limited aspect of pricing of alleged bogus purchases and what percentage of the same can be estimated as income as the total purchases cannot be added as per ratio laid down in the case laws (supra). Having regard to the facts and circumstances of the case and more particularly in view of the profits already declared on the entire project which works out to 10.45%, I am of the view that an estimated disallowance of 10% of the alleged bogus purchase of Rs. 4,17,13,702/-and the profit already declared would cover the possible suppression in profits and will balance the equity. Such estimation would also be in tune with the judicial pronouncement of Gujarat High Court and Tribunal decisions cited supra and is considered to meet the ends of justice. Accordingly, I direct the AO to restrict the estimated disallowance @ 10% on account of alleged bogus purchase of Rs. 4,17,13,702/- which works out to Rs. 41,71,370/- and the AO has been directed to make the addition of Rs. 41,71,370/- and the balance addition of Rs. 3,75,42,332/- on account of bogus purchases is hereby deleted. This Ground of appeal is partly allowed”

4. Aggrieved against the same, the Revenue is in appeal before us in ITA No. 1334/Ahd/2019 raising the following Grounds of Appeal:

1. The Ld. CIT(A) has erred in law and on facts in restricting the quantum of disallowance of bogus purchases to 10% of bogus purchases

2. The Ld. CITIA) failed to appreciate the fact that when the entire purchase was found to be bogus, it could not be restricted to a certain percentage.

2.1. The Ld. CIT(A) has failed to take note of the decision of Apex Court in the case of N. K. Protiens Ltd vs. Dy. CIT (250 taxmann 022) in which it has clearly been held that addition on basis of undisclosed income could not be restricted to certain percentage when the entire transaction was found to be bogus.

3. The appellant craves leave to amend alter any ground or add a new ground, which may be necessary.

5. The Ld. Sr. D.R. Shri Rakesh Jha appearing for the Revenue submitted that when the Assessing Officer had made spot enquiry and found the suppliers of materials were not existing. The Ld. CIT(A) is not correct in restricting the quantum of disallowance of bogus purchase to 10% and argued to restore the order passed by the Assessing Officer.

6. Per contra, the Ld. Counsel Shri Dhiren Shah appearing for the assessee submitted during this assessment year, the assessee was under going with the construction of the project ‘Parmeshwar-5’ for which materials were purchased from six parties and received the purchase invoices showing the name of suppliers, date of purchase, invoice number, bills are signed buy the authorized person, name and address of the seller and VAT/Sales Tax Number as well as the assessee firm name clearly depicted. The assessee made payments to the six suppliers through account payee cheques/RTGS during the Financial Years 2015-16 & 2016-17, the above payments receipt with bank statements were very much filed before the Assessing Officer. However the Assessing Officer relying upon the report given by the Inspector treating the above purchases as bogus purchases and made addition thereon. The A.O. failed to verify that the building materials were supplied at the site namely “Parmeshwar-5” and without the consumption of the said material, it is not possible to construct the building of the residential building. The A.O. further failed to verify VAT Department about the existence of the six parties. Thus the assessee has discharged its onus cast upon it by giving the details about the six parties their address and payments made to them through banking channels. Thus as an alternative plea to estimate the profit element in the above purchase of goods which was done by the Ld. CIT(A) following Judicial precedents of the Jurisdictional High Court and various Tribunal orders restricted the disallowance to 10% of the bogus purchase, thereby directed to delete the balance Rs. 3,75,42,332/- in the hands of the assessee. Thus the findings arrived by the Ld. CIT(A) does not require any interference as the same may be upheld by dismissing the Revenue appeal.

7. We have given our thoughtful consideration and perused the materials available on record including the Paper Books filed by the assessee. It is seen from the pages 296 to 414 of the Paper Book filed by the assessee, the final reply filed by the assessee dated 07­12-2018 wherein the invoices raised by the six parties are enclosed. The invoices carries proper Serial No., GST, TIN No, full communication address and Telephone No. The Invoices carries VAT Tax and additional tax on the sale of the goods. However the Assessing Officer has not cross checked the above details and invoices with the VAT Department, but simply treated the above purchases as bogus transactions. Further the assessee also provided respective PAN Number of the purchasers. It is seen from the bank statements of the assessee, payments were made by the assessee during the Financial Years 2015-16 & 2016-17 which is forming part of the Paper Book filed before us.

7.1. Further the Assessing Officer has not doubted the sale of flats in the residential scheme ‘Parmeshwar-5’. The assessee firm being in the nature of construction, it is practically not possible one to one co-relation of purchase and sales as the purchases will go into the construction in regular intervals. Without purchase of materials, the construction of the building cannot be done. The Assessing Officer having not doubted about the sales of the flats cannot doubt about the purchase of materials from the six suppliers, without cross verifying the sales with VAT Department. It is in the above circumstances, the Ld. CIT(A) determined the element of profit in the purchases made by the assessee firm and thereby determined profit element at 10% of the purchase amount which in our view does not require any interference.

8. In this regard, it is appropriate to refer to the decision of the Gujarat High Court in the case of Bholanath Poly Fab Pvt. Ltd 355 ITR 290 (Guj.) where the Hon’ble Court was dealing with the issue as regards to the finding of Hon’ble ITAT that purchases have been made from bogus parties since notice issued by the A.O. to these parties were allegedly received returned/unserved’ and the assessee was unable to produce any confirmation from these parties. The Tribunal had held that though purchases were made from bogus parties, nevertheless, the purchases themselves were not bogus as the entire quantity of opening stock, purchases and sales were tallying and hence, only the profit margin embedded in such amount would be subjected to tax. The Hon’ble Gujarat High Court taking cognizance of the fact held that whether purchases themselves were bogus or whether parties from whom such purchases were made were bogus, in essentially a question of fact and the Tribunal having examined the evidence on record and concluded that the assessee did produce cloth and sell finished goods, the entire, amount covered under such purchase would not be subjected to tax and only the profit element embedded therein was to be taxed. While coming to the above conclusion, the Hon’ble High Court also relied on the decision in the case of Sanjay Oil Cake Ind. 316 ITR 274 (Guj), wherein, it was held in Para 12 as under:-

“12. Thus, it is apparent that both the Commissioner (Appeals) and the Tribunal have concurrently accepted the finding of the Assessing Officer that the apparent sellers who had issued sale bills were not traceable. That goods were received from the parties other than the persons who had issued bills for such goods Though the purchases are shown to have been made by making payment thereof by account payee cheques, the cheques have been deposited in hank accounts ostensibly in the name of the apparent sellers, thereafter the entire amounts have been withdrawn by bearer cheques and there is no trace or identity of the person withdrawing the amount from the bank accounts in the light of the aforesaid nature of evidence it is not possible to record a different conclusion, different from the one recorded by the Commissioner (Appeals) and the Tribunal concurrently holding that the apparent sellers were not genuine, or were acting as conduit between the assessee-firm and the actual sellers of the raw materials. Both the Commissioner (Appeals) and the Tribunal have, therefore, come to the conclusion that in such circumstances, the likelihood of the purchase price being inflated cannot be ruled out and there is no material to dislodge such finding. The issue is not whether the purchase price reflected in the books of account matches the purchase price stated to have been paid to other persons. The issue is whether the purchase price paid by the assessee is reflected as receipts by the recipients. The assessee has, by set of evidence available on record, made it possible for the recipients not being traceable for the purpose of inquiry as to whether the payments made by the assessee have been actually received by the apparent sellers. Hence, the estimate made by the two appellate authorities does not warrant interference. Even otherwise, whether the estimate should be at particular sum or at a different sum, can never be an issue of law.”

8.1. Similarly, in yet another decision of Hon’ble Gujarat High Court in the case of CIT vs. Simit Sheth (2013) 38 Taxmann.com 385 (Guj), Hon’ble Court was seized with a similar issue where the A.O. had found that some of the alleged suppliers of steel to the assessee had not supplied any goods but had only provided sale bills and hence, purchases from the said parties were held to be bogus. The AO, in that case added the entire amount of purchases to gross profit of the assessee. Ld. CIT(A) having found that the assessee had indeed purchased though not from named parties but other parties from grey market, partially sustained the addition as probable profit of the assessee. The Tribunal however, sustained the addition to the extent of 12.5%. Taking into account the above facts, the Hon’ble Gujarat High Court held that since the purchases were not bogus, but were made from parties other than those mentioned in books of accounts, only the profit element embedded in such purchases could be added to the assessee’s income and as such no question of law arose in such estimation While arriving at the above conclusion, the Hon’ble Court also relied on the decision in the case of Vijay M. Mistry Construction Ltd. 355 ITR 498 (Guj) and further approved the decision of Ahmedabad Bench, ITAT in the case of Vijay Proteins 58 LTD 428.

8.2. The Hon’ble Gujarat High Court in the case of CIT-II vs Gujarat Ambuja Exports Ltd [2014] 43 taxmann.com 244 (Guj), wherein, the addition of 5% of the bogus purchase confirmed by the Tribunal was upheld.

9. Respectfully following the above judicial pronouncements, we have no hesitation in confirming the addition to the extent of 10% on account of alleged bogus purchase. Thus the grounds raised by the Revenue is devoid of merit and the same is hereby dismissed.

C.O. No. 187/Ahd/2019

10. The Grounds of Appeal raised by C.O. of the Assessee reads as under:

1. The 1d. CIT(A) has erred in law and on facts in confirming the estimated disallowance @ 10% on account of alleged bogus purchases of Rs. 4,17,13,702/-which works out to Rs. 41,71,370/- and the AO has been directed to make the addition of Rs. 41,71,370/- and balance addition of Rs. 3,75,42,332/- on account of bogus purchase has been deleted. On facts and circumstances of the case as well as various judicial pronouncements relied upon by the appellant, the 1d. CIT(A) ought to have deleted the entire disallowance of Rs. 4,17,13,702/- and allowed the appeal in full.

2. The Respondent craves right to add, amend, alter, modify, substitute, delete or modify all or any of the above grounds of cross objection.

11. We do not find any merits in the C.O. filed by the Assessee that the entire disallowance is liable to be deleted for the elaborate reasons stated in the Revenue Appeal in ITA No. 1334/Ahd/2019. Therefore the present C.O. filed by the Assessee is hereby dismissed.

12. In the result, the appeal filed by the Revenue and Cross Objection filed by the Assessee are hereby dismissed.

Order pronounced in the open court on 23-06-2023