Case Law Details

Case Name : ACIT Vs Rashmikant V. Shah (ITAT Mumbai)
Appeal Number : ITA No. 7409/Mum/2018
Date of Judgement/Order : 20/01/2020
Related Assessment Year : 2009-10

ACIT Vs Rashmikant V. Shah (ITAT Mumbai)

The issue under consideration is whether the CIT is correct in restricting the disallowance u/s 69C against bogus purchase at rate of 12.5% of the bogus purchases?

ITAT states that, in the facts and the circumstances of the case, the total purchases shown to be made from the parties cannot be held to be entirely bogus. It needs to be appreciated that in order to achieve the reported sales/turnover, there must be some corresponding purchases, whether effected from the alleged entry providers or from the grey market without bills. Thus, there ought to be some purchases made and hence, entire disallowance is not justified. In this regard, the ratio laid down by the Hon’ble Bombay High Court in the case of CIT v. NikunjEximp Enterprises (P.) Ltd., is quite relevant. The CIT(A) has also gone through the case and restricted the bogus purchase to the extent of 12.5% . However, at the time of argument, the Ld. Representative of the assessee has no objection to restrict the addition to the extent of 12.5% of the bogus purchase. Anyhow, on seeing the facts and circumstances, it seems quite justifiable to restrict the addition to the extent of 12.5% of the bogus purchase. ITAT nowhere found any illegality and infirmity in the order passed by CIT(A) in question. Taking into account all the facts and circumstances, ITAT are of the view that the CIT(A) has decided the matter of controversy judiciously and correctly which is not liable to be interfere with at this appellate stage. Accordingly, all these issues are decided in favour of the assessee against the revenue.

FULL TEXT OF THE ITAT JUDGEMENT

The revenue has filed the present appeal against the order dated 08.10.2018 passed by the Commissioner of Income Tax (Appeals) -25, Mumbai [hereinafter referred to as the “CIT(A)”] relevant to the A.Y.2009-10.

2. The revenue has raised the following grounds: –

“(i) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.62, 792/- made by the Assessing Officer on account of bogus purchases, without appreciating the fact that the assessee had failed to produce bills, vouchers and other documentary evidences in support of his claim and without considering the latest Apex Court decision in the case of N.K. Protiens Ltd. wherein it is held that once it is proved that the purchases are bogus then addition should be made on entire purchases and not on profit element embedded in such purchases.

(ii) On the facts and circumstances of case and in law, the Ld. CIT(A) erred in estimating the profit from Hawala purchases by disallowing only Rs.24,672/- being 12.5% of the bogus purchases as even the basic onus of producing delivery challans, transport bills etc. were not fulfilled by the assessee.

(iii) The appellant prays that the order of the CJT(A) on the above grounds be reversed and that of the Assessing Officer be restored.

(iv) The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary.

3. The brief facts of the case are that the assessee filed his return of income on 29.09.2009 declaring total income to the tune at Rs.30,73,760/-. The return was processed u/s 143(1) of the I.T. Act, 1961. Thereafter, the case of the assessee was reopened after recording the reasons and according notice u/s 148 of the Act dated 13.03.2014 was issued and served upon the assessee. In pursuance of the notice, the assessee filed the return of income which he had already filed. Thereafter, notices u/s 143(2) & 142(1) of the Act were issued and served upon the assessee. The assessee is engaged in the business of Trading in Chemicals. The case of the assessee was reopened on the basis of an information received from the DGIT(In.) Mumbai in which it was conveyed that the assessee has taken the bogus purchase entries from the following 2 parties in sum of Rs.1,97,383/- which is hereby as under: –

S. No. TIN of Hawala Suppiers Hawala PAN Name of the Hawala Suppliers Amount (Rs.)
1 27710615362V AFDOC2720B Parshva & CO 87,464/-
2 27560556517V Mahavir Enterprises 1,09,919/-
Total 1,97,383/-

Thereafter, the AO raised the addition to the extent of peak of purchase which was works out to the tune of Rs.87,464/-. The total income of the assessee was assessed to the tune of Rs.31,61,225/-. Feeling aggrieved, the assessee filed an appeal before the CIT(A) who restricted the addition to the extent of 12.5% of the bogus purchase in sum of Rs.1,97,383/-. The revenue was not satisfied, therefore, the revenue has filed the present appeal before us.

4. We have heard the argument advanced by the Ld. Representative of the parties and perused the record. Before going further, we deemed it necessary to advert the finding of the CIT(A) on record: –

5.1 Vide the ground of appeal No.1, the assessee has challenged the action of the AO in disallowing an amount of Rs.87,464/- being peak of purchases of Rs.1,97,383/- which had been made from two parties as mentioned below. The AO had received information from the Sales Tax Department, Mumbai as well as DGIT(Inv.) Mumbai that the assessee had taken accommodation bills for purchases from the party declared as hawala operators by Maharashtra Sales Tax Department. During the course of re-assessment proceedings, the AO has seen that the assessee had made purchases from various parties out of which Rs. 1,97.383/-effected from the parties as mentioned below:

5.1.1 The name of the above parties figured in list of suspicious dealers on the Maharashtra Sales Tax Department, who had issued accommodation entries without actual delivery of goods.

S. No. Party who have issued bogus bills to the assessee Amount of such bogus bill (Rs.)
1 Parshva & CO 87,464/-
2 Mahavir Enterprises 1,09,919/-
Total 1,97,383/-

5.1.2 The AO, in his aforesaid assessment order has further mentioned that the Sales Tax Department had conducted independent inquiries in the case of each hawala operator, including in the case of above stated hawala operator and it was conclusively proved that these parties/operators were engaged in the business of providing accommodation entries only. These parties mostly indulged in following activities:

a) issuing only bills and doing non-genuine business (Hawala Business);

b) not maintaining stock and not keeping stock Register

c) not effecting any purchase; and

d) there was no transaction of goods.

e) entries were being provided by the parties for commission.”

5.1.3 During the course of re-assessment proceedings, in order to ascertain the genuineness of purchases made by the assessee, the AO conducted independent inquiries by issuing notice u/s. 133(6) of the Act dated 08.10.2014 to the parties which were returned unserved by the postal authorities. Thereafter, the AO brought this fact to the notice of the assessee during the course of assessment proceedings and the assessee was asked to produce the parties and also show cause as to why the purchases made from the aforesaid parties should not be disallowed. In response to the AO’s above query, the AR of the assessee made written submissions wherein it was submitted that the purchases shown by the assessee from the said parties are genuine purchases and payments to this parties credit also made through account payee cheque. Further, the assessee failed to produce any parties, brokers or transporter in spite of specific opportunity provided to him. Further, the assessee also failed to furnish evidences, such as, delivery challans, transportation details etc. to substantiate his claim of purchases from the aforesaid parties. The assessee could only furnish copies of bank statements claiming that the purchases made were genuine as the payments have been made through banking channels.

5.1.4 The AO did not accept assessee’s contention that the payment was made through banking channel and therefore, the purchases were genuine. Since, the assessee could not produce the above mentioned parties before the AO it could not provide the evidences of the purchase like delivery challans, transport bills etc., and the assessee has not given any evidence which leads to the conclusion that the purchases were actually made by the assessee from the above mentioned parties and the said parties actually existed, AO relying on various case laws mentioned in his order, held that purchases shown to have been effected from the above mentioned parties were not genuine transaction The AO came to the conclusion that the purchases from the said hawala operator is proved to be bogus and the payments made by cheque against such bogus purchase bills to the hawala operator is received back in cash. Further, the AO held that since the sales are genuine therefore the entire amount of Rs. 1,97,383/- being bogus purchases cannot be added to the income of the appellant as undisclosed income. The AO has taken peak of the credit standing in the names of the bogus parties which works out to Rs. 87,464/-. Accordingly, the AO has disallowed an amount of Rs. 87,464/- being peak of the purchases, treated as unexplained expenditure u/s. 69C of the Act and added the same to the total income of the appellant.

5.2 On the other hand, it is the contention of the assessee that the AO has termed the said purchases as bogus transaction merely based on the information of the Sales Tax Department. The AO disallowed Rs. 87,464/- u/s. 69C on ground of peak of the credit standing in names of above parties as unexplained expenditure. The details of purchases from the party along with the ledger account, copy of purchase bills, delivery challans and copy of bank statement evidencing payment through the banking channels were submitted in the course of assessment proceedings. The A.R. of the assessee also submitted that material purchased has been sold/consumed. However, the assessee could not produce the suppliers and transport bills. The appellant has further contended that no copy of documents received by the AO on the basis of which he has made the additions have been furnished to the appellant company. Nothing has been brought on record by the AO to suggest that the payments made to purchase party were received back in cash by the appellant company. The appellant has relied on various case laws as mentioned in his aforesaid submissions.

5.3 Having considered the assessment order of the AO and the submissions of the assessee, it is seen that the main plank of assessee’s arguments regarding the genuineness of the purchases was that the payment has been made by cheque/banking channels and which has not found favour with court’s/Tribunal’s pronouncements like in the case of M/s. Kanchwala Gems vs. JCIT 1TTA No.134/JP/2002 dated 10.12.2003 by the Hon’ble ITAT, Jaipur wherein it is held that payment by account payee cheque is not sufficient to establish the genuineness of purchases.

The said decision of the ITAT, Jaipur has been affirmed by the Hon’ble Supreme Court in the case of M/s. Kanchwala Gems vs. JCIT (2006) 206 CT!? (SC) 585: 288 LIR to (Sc.). Thus, the main contention of the appellant does not hold much water. The AO has formed his views about the bogus nature of the purchases made by the appellant from the above parties on the basis of statements recorded by the Sales Tax Authorities as well as further inquiries carried out by him independently. The information received from the Sales Tax authorities was only a piece of evidence to initiate in-depth independent investigation oil issue. The appellant 11.3 has been able to establish one to one relationship/nexus between the purchases and sale assessee has not been able to produce the parties front whom purchases have been alleged to have been made. The appellant has also failed to produce corroborative evidence in the form of transportation bills etc. to establish that the alleged purchases were actually transported to its premises. It is also a fact that the AO has not confronted the assessee with all the information in his possession like statements of the alleged hawala operators. Further, the AO stopped his investigation with the return of his 133(6) notices and Inspector’s field inquiry and his report. He did not go ahead with money trail of cheques debited in the appellant’s bank account towards the alleged purchases though such investigation do not lead to concrete results in the case of hawala dealers and investigators often reach dead end in such cases. It is not the case of the AO that the impugned purchases have conclusively been established as not having been effected at all. The AO has only found the impugned supplier as a bogus party.

5.3.1 In the facts and the circumstances of the case, the total purchases shown to be made from the aforesaid parties cannot be held to be entirely bogus. It needs to be appreciated that in order to achieve the reported sales/turnover, there must be some corresponding purchases, whether effected from the alleged entry providers or from the grey market without bills. Thus, there ought to be some purchases made and hence, entire disallowance is not justified. In this regard, the ratio laid down by the Hon’ble Bombay High Court in the case of CIT v. NikunjEximp Enterprises (P.) Ltd., is quite relevant wherein Hon’ble High Court has held that –

“When the assessee have filed letter of confirmations of the suppliers, Bank statements highlighting the payment entries through account payee cheque, copies of invoices, stock reconciliation statements before the AO; and merely because the suppliers did not appear before the AO, one cannot conclude that the purchase were not made by the assessee.

The AO cannot disallow the purchases on the basis of suspicion because the suppliers were not produced before them.”

5.4 In view of the discussion as above, it is clear that materials purchased and sold by the appellant cannot be doubted though it is not possible for the assessee to establish one to one nexus/link between purchases and sales. However, the fact of the matter remains that these transactions are not verifiable from the party in question as it could not be established that purchases had been effected from the party in question. Thus the purchase prices shown on the invoices produced could not be subjected to verification and as such it was difficult to establish the correctness of the purchase prices paid for the materials purchased. In the absence of any such verification as to the correctness of the price paid for the materials purchased by the appellant, the purchase price paid as mentioned on the invoices/bills cannot be accepted as the correct price paid for the goods purchased from such parties. In view of the same, the possibility of over-invoicing of the materials purchased to reduce the profit cannot be ruled out. Therefore, the gross profit rate shown by the appellant for the year under consideration cannot be relied upon. In the circumstances, the correct approach in such transactions would be to estimate the additional benefit or profit earned on these purchases and not to disallow the entire purchases from the aforesaid parties. In my view either the purchases from such parties over invoiced or the purchases were actually made but not from the party from which it was claimed to have been made and instead may have been purchased from grey market without proper billing or documentation.

5.4.1 In many judicial pronouncements on the issue, the Courts have taken a consistent view that in case of non-existent parties from which the purchases are shown to have been made, only a part of such purchases can be disallowed, particularly in such cases were not corresponding sales are not doubted. Alternatively the profit embedded’ sales against the alleged bogus purchases should be brought to tax.

5.4.2 In the case of CIT-1 Vs Simit P. Sheth, ITA no. 553 of 2012, order dated 16/01/2013, while deciding a similar issue, the Hon’ble High Court of Gujarat has held that:

“We are broadly in agreement with the reasoning adopted by the Commissioner (Appeals) with respect to the nature of disputed purchases of steel. It may be that the three suppliers from whom the assessee claimed to have purchased the steel did not own up to such sales. However, vital question while considering whether the entire amount of purchases should be added back to the income of the assessee or only the profit element embedded therein was to ascertain whether the purchases themselves were completely bogus and non existent or that the purchases were actually made but not from the parties from whom it was claimed to have been made and instead may have been purchased from grey market without proper billing or documentation. In the present case, CIT believed that when as a trader in steel the assessee sold certain quantity of steel, he would have purchased the same quantity from some source. When the total sale is accepted by the Assessing Officer, he could not have questioned the very basis of the purchases. In essence therefore, the Commissioner (Appeals) believed assessee theory that the purchases were not bogus but were made from the parties other than those mentioned in the books of accounts.

That being the position profit element embedded in such purchases can be added to the income of the assessee. So much is clear by decision of this Court. In particular, Court has also taken a similar view in case of Commissioner of Income Tax-IV vs. Vijay M Mistry Construction Ltd. vide order dated 10.01.2011 passed in tax Appeal No. 1090 of 2009 and in case of Commissioner of Income Tax-I vs. Bholanath Poly Fab Pvt. Ltd. vide order dated 23.10.2012 passed in Tax Appeal No. 63 of 2012. The view taken by the Tribunal in case of Vijay Proteins Pvt. Ltd. Vs. CIT reported in 58 ITD 428 came to be approved.”

5.4.3 Similarly, while dealing with an identical issue, in the case of CT, Vs. Bholanath Poly Fab (P) Ltd., I.T.A. No. 63 of 2012, in the order dated 23/10/2012, the Hon’ble High Court of Gujarat has held as under:-

“We are of the opinion that the Tribunal committed no error. Whether the purchases themselves were bogus or whether the parties from whom such Order Dote: 08.102018 purchases were allegedly made were bogus is essentially a question of fact. The Tribunal having examined the evidence on record came to the conclusion that the assessee did purchase the cloth and sell the finished goods. In that view of the matter, as natural corollary, not the entire amount covered under such purchase. but the profit element embedded therein would be subject to tax. This was the view of this court in the case of Sanjay Oileake Industries v. CIT 120093 316 ITR 274 (G4j). Such decision is also followed by this court in a judgment dated August 16,2011, in Tax Appeal No.679 of 2010 in the case of CIT v. Kishor Amrutlal Patel. In the result, tax appeal is dismissed.” (emphasis supplied).”

5.4.4 In view of the facts and circumstances of the case and the judicial pronouncements cited above, what can be disallowed or taxed in the instant case, is the excess profit element embedded in such purchases shown to have been made from aforesaid party. As narrated earlier, the AO in this case has held that the parties from whom the purchases were made by the appellant were found to be bogus, estimations ranging from 12.5% to 25% have been upheld by the Hon’ble Gujarat High Court, depending upon the nature of the business.

5.4.4.1 In a number/series of recent cases, involving the issue of bogus purchases carried out in a organized manner through some hawala operators and the modus operandi unearthed by the Maharashtra Sales tax department, the Hon’ble Mumbai Tribunal has estimated the G.P addition in the hands of the purchasers on account of such bogus purchases as 12.5%. Some of which are listed below:

(1) Smt. Kiran Navin Doshi in ITA No. 2601 /Mum/2mo dated 18.01.2017.

ii) Ashwin Purshotam Bajaj & Anr. Vs. ITO & Anr., in ITA. No.4736/M/2014, 5207/M/2014 dated 14.12.2016

iii) ITO & Anr. Vs. Manish Kanji Patel & anr. In ITA. No7299/M/2014, 7154/M/2012 & 7300/M/2014, 7627/M/2014 dated 18.05.2017

iv) Metroplitan Eximchem Ltd. ITA. No.2935/M/2015, dated 29.03.2017

v) Ronak Metal Industries vs. ITO, ITA No. 722/Mum.2o17 dtd. 04.09.2017;

vi) ITO vs. Jugraj R. Jain, ITA No. 2571 /Mum/2o16 & 257211VI12o16 dtd. 02.08 .2017;

vii) B. J. Exports vs. Asstt. commissioner of Income tax, ITA No. 5442 & 5444/Mum/2016 dated 13.09.2017;

 viii) Batliboi Environmental Engineering Ltd. vs. Deputy commissioner of Income-tax, ITA No. 2840 & 3482/M/2015 dated 15.03.2017;

ix) Deputy commissioner of Income-tax & Anr. Vs. Remi Process Plant & Machinery Ltd. & Anr., HA No. 1723/M/2o15, 1817/M/2015 dated 21.03.2017.

x) Smt. Usha B. Agarwal Vs. ITO, ITA No. 70341Mum12016, dated 01.09.2017.

6. In view of the above discussed factual matric and precedents, I am of the view that estimation of 12.5% as profit embedded in impugned purchases shown from the alleged hawala party and adding the same to the total income returned, would meet the ends of justice. Therefore, I direct the AO to estimate profit @ 12.5% of the alleged bogus purchases, which works out to Its. 24,672/-(@12.5% of Rs. 1,97,383/-) and restrict the addition to Rs. 24,672/-. The appellant gets a relief for the balance amount of Rs. 62,792/- (Rs. 87,464 – Rs. 24,672). Hence, ground of appeal No. 1 is partly allowed.”

5. On appraisal of the above mentioned order, we noticed that the CIT(A) has decided the matter of controversy on the basis of the decision of Hon’ble Bombay High Court in the case of CIT Vs. Nikunj Eximp Enterprises Pvt, Ltd. and CIT Vs. Simit P. Sheth ITA. No.553 of 2012 dated 16.01.2013 and CIT Vs. Bholanath Poly Fab (P) Ltd. ITA. No.63 of 2012 dated 23.10.2012. The CIT(A) has also gone through the case and restricted the bogus purchase to the extent of 12.5% of Rs.1,97,383/-i.e.24,672/-. However, at the time of argument, the Ld. Representative of the assessee has no objection to restrict the addition to the extent of 12.5% of the bogus purchase. Anyhow, on seeing the facts and circumstances, it seems quite justifiable to restrict the addition to the extent of 12.5% of the bogus purchase. We nowhere found any illegality and infirmity in the order passed by CIT(A) in question. Taking into account all the facts and circumstances, we are of the view that the CIT(A) has decided the matter of controversy judiciously and correctly which is not liable to be interfere with at this appellate stage. Accordingly, all these issues are decided in favour of the assessee against the revenue.

7. In the result, the appeal filed by the revenue is hereby ordered to be dismissed.

Order pronounced in the open court on 20/01/2020

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