Case Law Details
K L Tambi & Company Vs DCIT (ITAT Jaipur)
Conclusion: Tribunal upheld 20% addition instead of 25% on alleged bogus purchases due to unverified sellers agreeing that assessee failed to prove the genuineness of the transactions, and confirmed penalty proceedings.
Held: AO disallowed 25% of bogus purchase, which came to Rs. 15,13,844/-, added the same to the income of the assessee, and calculated the total income at Rs. 62,32,210/-.Notice for initiating preceedings u/s 271(1)(c) r.w.s 274 , also came to be issued by AO separately. AO rejected the books of accounts of the assessee u/s 145(3) and while applying GP rate of 17.50% on the declared turnover of Rs. 12,14,470/-and having regard to the past history of the assessee, calculated the same at Rs. 2,17,02,532/-. Also, AO disallowed certain expenses, namely, vehicle- running- expenses, telephone expenses and miscellaneous expenses, to the tune of Rs. 6,50,752/-. The assessment order initially passed, was challenged by assessee before CIT(A). Vide order dated 18.06.2008, the same was upheld and AO was directed to estimate the gross profit at 17.5% on exports sales of Rs. 11,26,64,469 as against 15.16% declared by assessee by allowing a relief of Rs. 50,50,137/- sustaining the trading addition to the tune of Rs. 26,36,608/-. Since the department and assessee both felt aggrieved by the above said order passed by CIT(A). Appellate Tribunal allowed the assessee’s appeal however, the High Court remitted the case for a fresh decision. AO passed the assessment order disallowing 25% on the purchases and adding a sum of Rs. 15,13,844/- by way of trading addition to the total income of the assessee. The assessment order had been upheld by CIT(A), vide impugned order. Hence, the appellant was before the Appellate Tribunal for the second time. It was held that nothing had been placed on record to prove that there was decrease in the price of US Dollar as against Rupee or that said fact affected the G.P. rate. As the books of accounts was rejected for the third time, and assessee having failed to prove the claim put forth before this Appellate Tribunal in the written submission about decrease in US dollar or its any effect on the G.P.rate, the turnovers and GP rates of previous 2 years as well, and that assessee had debited purchase account with fictitious invoices in order to inflate expenditure and lower the taxable profits, it was deemed a fit case to apply Gross Profit at the rate of 20% for the AY 2005-6, as regards the bogus purchases.
FULL TEXT OF THE ORDER OF ITAT JAIPUR
On 08.12.2018, assessment order qua, the assessee company was passed by the Assessing Officer, relating to the A.Y 2005-06. The AO disallowed 25% of bogus purchase, which came to Rs. 15,13,844/-, added the same to the income of the assessee, and calculated the total income at Rs. 62,32,210/-.
Notice for initiating preceedings u/s 271(1)(c) of the Act r.w.s 274 of the Income Tax Act [here in after referred as “Act”], also came to be issued by the Assessing Officer separately.
The assessee felt aggrieved by the said assessment order and as such filed appeal.
Ld. CIT(A), vide order dated 05.12.2023, dismissed the appeal while observing that the invoices were obtained by an assessee from bogus parties and the goods are deemed to have been procured from some other unknown party, and further that in such a case 25% of such purchase is to be disallowed on account of inflation of purchase and saving tax, duties, compliance costs etc. In this manner, ld. CIT(A) upheld the assessment order dated 08.12.2018.
Hence, this appeal before this Appellate Tribunal
2. Arguments heard. File perused.
At the outset, it may be mentioned here that this is the 2nd round of litigation between the parties. In the first round, assessment order dated 24.12.2007 was passed by the AO, calculating the total income of the assessee, relating to the same A.Y 2005-06, at Rs. 1,23,85,730/-, u/s 143(3) of the Act. At the same time, penalty proceedings were also initiated u/s 271(1)(c) of the Act.
While framing that assessment, the Assessing Officer rejected the books of accounts of the assessee u/s 145(3) of the Act and while applying GP rate of 17.50% on the declared turnover of Rs. 12,14,470/-and having regard to the past history of the assessee, calculated the same at Rs. 2,17,02,532/-.
At the same time, the Assessing Officer disallowed certain expenses, namely, vehicle- running- expenses, telephone expenses and miscellaneous expenses, to the tune of Rs. 6,50,752/-.
The assessment order dated 24.12.2017, initially passed, was challenged by the assessee before ld. CIT(A). Vide order dated 18.06.2008, the same was upheld and the Assessing Officer was directed to estimate the gross profit at 17.5% on exports sales of Rs. 11,26,64,469 as against 15.16% declared by the assessee by allowing a relief of Rs. 50,50,137/- sustaining the trading addition to the tune of Rs. 26,36,608/-.
3. Since the department and the assessee felt aggrieved by the above said order passed by ld. CIT(A). The assessee filed ITA No. 1290/JP/2008 whereas the assessee filed ITA No. 1325/JP/2008, before this Appellate Tribunal.
Vide judgment dated 09.09.2009 allowed the appeal filed by the assessee and dismissed the appeal filed by the department. In the given situation, department felt dissatisfied with the order passed by Appellate Tribunal and filed Income Tax Appeal No. 249/JP/2011.
Our Hon’ble High Court, Jaipur Bench, Jaipur while disposing of the appeal filed by the department remitted the matter to the Assessing Officer for decision afresh on the factual matrix.
That is how, the Assessing Officer passed the assessment order dated 08.12.2018 disallowing 25% on the purchases and adding a sum of Rs. 15,13,844/- by way of trading addition to the total income of the assessee.
4. As noticed above, the assessment order has been upheld by ld. CIT(A), vide impugned order dated 05.12.2023. Hence, the appellant is before this Appellate Tribunal for the second time.
5. Ld. AR for the appellant has referred to the order dated 30.05.20217 passed by our Hon’ble High Court, in DB Income Tax Appeal No. 249/2011 and submitted that on behalf of the department- appellant therein, the contention raised was that the issue is squarely covered by the decision of Hon’ble High Court in the case of CIT v. Gems Paradise DB Income Tax Appeal No. 201/2000 decided on 02.11.2016.
6. Ld. AR for the appellant has further submitted that in Gems Paradise case (supra), Hon’ble High Court observed that the parties to the said appeal were bound by principle of law pronounced in the following three cases:
i. Sanjay Oilcake Industries vs. CIT [2009] 316 ITR 274 (Gujarat)
ii. Vijay Proteins Ltd. vs. CIT [2015] 58 com 44(Guj.)
iii. K. Indsutries Ltd. vs. DCIT [2016] 72 taxmann.com 289 (Gujarat)
The contention raised by ld. AR for the appellant is that facts of the above said three cases are different from the facts of the present appeal, and as such, ld. CIT(A) has erred in upholding the disallowance of purchases to the extent of 25%.
Further, ld. AR for the appellant has contended that where books of accounts are rejected, proper yard stick to estimate the profit is to look into account the past history of such profits in the case of assessee itself.
In the written submissions, comparative table depicting history of gross profit of the assessee, for the A.Ys 2003-04, 2004-05 and 2005-06 has been submitted, to point out that export turnover of the assessee increased by 33%. Further, it has been submitted that during the assessment proceedings, the assessee had explained fall in GP rate to 15.16% in comparison to GP rate of the previous assessment order i.e. 16.87%, which was negligible fall in the GP rate, having regard to the increase in the turnover.
On the aforesaid grounds, ld. AR has urged for the deletion of the addition on account of disallowance of 25% of the purchases.
7. On the other hand, ld. DR for the department has stood by the reasons and findings recorded by ld. CIT(A), while referring to the three decisions which were cited on behalf of the Revenue-appellant before the Hon’ble High Court, and which led to remand of the matter to the Assessing Officer, and contended that in view of the ratio that where invoices are obtained from bogus parties, and goods are deemed to have been procured from some other unknown parties, 25% purchases are to be disallowed on account of inflation of purchase, saving of tax, decision, compliance costs etc., and as such, this appeal deserves to be dismissed.
8. As noticed above, while disposing of DB ITA No. 249/2011, Hon’ble High Court remitted the matter to the Assessing Officer for decision afresh on the factual matrix, and that is how, the Assessing Officer was once again seized of the matter.
9. While passing the assessment order under challenge, the Assessing Officer recorded the findings that on 10.09.2018 i.e. during the assessment proceedings, neither anyone on behalf of the assessee appeared before him nor furnished any reply to substantiate the genuineness of the purchase made from Abhay International & Girish Diam.
He further observed in para 2 of the assessment order that once again, the assessee was provided opportunity vide notice dated 25.10.2018 to furnish reply and to justify the transactions of purchase, but, no reply was submitted.
As observed by the Assessing Officer, he issued a show cause notice to the assessee to explain as to how the three decisions, referred to above, were distinguishable on facts. It was only then that the assessee-appellant submitted reply dated 30.11.2018.
10. In the assessment order, Assessing Officer came to the conclusion that the assessee having failed to produce record in proof of genuineness of the purchases from M/s Abhay International and Girish Diam and also to to produce them for examination, said parties remained unverified.
The Assessing Officer went on to observe that there was no change from factual position as it was in the previous proceedings which led to passing of assessment order dated 24.12.2007.
11. We find that in this situation, the Assessing Officer was right in recording that the assessee had failed to discharge onus to prove the genuineness of the subject- purchases.
12. The Assessing Officer extracted in the assessment order, relevant portion from the above said three decisions and ultimately disallowed 25% of the purchases, while observing that said purchases were shown by the assessee in order to inflate expenditure and lower its Gross profit, the assessee debited purchase account with purchase invoices in the garb of two fictitious parties, which were not verifiable.
13. In the course of arguments, we specifically inquired from ld. AR for the appellant if any step was taken by the assessee-appellant before the Assessing Officer to seek help of the Assessing Officer for summoning of their representative/officials of the two parties i.e. Abhay Interntional & Girish Diam, in order to secure their presence.
Ld. AR for the assessee-appellant candidly admitted that no such step was taken by the assessee before Assessing Officer.
The fact remains that presence of said two parties/representative/employees could not be secured before Assessing Officer to prove genuineness of the purchases to the extent found by the Assessing Officer.
14. As regards the rate of GP, as noticed above, in the written submissions, assessee has submitted that it had gross profit rate of 17.10% in the A.Y 2003-04, when the export sales were to the tune of Rs. 7,02,64,225/-; that the gross profit rate was 16.87% in the A.Y 2004-05, while exports sales were tune of Rs. 8,46,70,623/-.
15. In Vijay Proteins Ltd vs Commissioner Of Income Tax, decided by Hon’ble Gujarat High Court, on 9 December, 2014, the question that arose for consideration was:
“whether the entire amount of the said bogus purchases and freight payments made in relation thereto should have been disallowed or the assessee should have been held to be eligible for grant of deduction of a reasonable amount of purchase price of the oil cakes in question in view of the fact that receipts of the materials in question by the assessee were supported by various registers and books of accounts maintained by the assessee, which the Revenue had not disputed.?“
Therein, Revenue had also not disputed the genuineness of abovesaid documents.
Hon’ble High Court observed that on the basis of the entries recorded in the books of accounts of the assessee, the provisions of Section 40A(3) of the Act were not applicable as said payments were shown to have been made by “crossed cheques”.
It was further observed that if the entries were ignored, the books of accounts stood rejected u/s.145(2) and then the income was to be estimated on the basis of best judgment.
Therein, as a matter of fact the goods were not received from the parties from whom same were shown to have been purchased but, such material was received from a different source which was exclusively within the knowledge of the assessee and none else. Therefore, as further observed, it was evident that the assessee had inflated the expenditure in question by showing higher amount of purchase price through the fictitious invoices in the names of 33 bogus suppliers.
Considering the overall factual scenario, Hon’ble Gujarat High Court held that the Tribunal was justified in disallowing 25% of the purchase price.
Herein, as rightly held by the authorities below, the two suppliers named above, were not produced or examined by the assessee before the Assessing Officer to substantiate the claim of subject-purchases, despite opportunities, and even no material was produced before Learned CIT(A) to substantiate said claim.
The reasons given by the Assessing Officer to arrive at the conclusion that the subject-purchases were bogus purchases, have been rightly upheld by the CIT(A) vide reasoned order. We do not find any merit in the contention raised on behalf of the appellant that the authorities below erred in arriving at the conclusion that the subject-purchases were bogus purchases.
When the assessee failed to establish that the goods were
received from the parties from whom same were stated to have been purchased but, purchases are found to have been made from a different source exclusively within the knowledge of the assessee, we do not find any reason to discard the conclusion arrived at by the authorities below that that the assessee had inflated the expenditure in question by showing higher amount of purchase price utilizing fictitious invoices of 2 bogus suppliers.
As regards findings regarding G.P. rate, admittedly, the Assessing Officer rejected the books of accounts under section 145(2) of the Act.
16. While relying on decision in N.K. Industries Ltd.’s case (supra), by Hon’ble Gujarat High Court, learned DR for the Revenue has contended that therein the findings of the Tribunal that the amount of Rs.2,92,93,288/-represented alleged purchases from bogus suppliers, and as such, it was not incumbent on the Assessing Officer to restrict the disallowance to only Rs.73,23,322/-was upheld.
With regard to said decision, Learned DR does not dispute that this is not a case where the entire purchases were bogus, and as such not a case calling for 100% disallowance.
Submission of Learned DR is that this is a case where invoices were obtained from two bogus billers and goods are deemed to have been procured from some unknown party, and as such, 25% of the purchases have been rightly disallowed and upheld by Learned CIT(A).
17. In Sanjay Oilcake Industries’s case (supra), Hon’ble Gujarat High Court upheld trading addition of 25% of the value of the purchases, finding that the parties had become conduit pipes between the assessee firm and the sellers of the raw materials, when the parties were not traceable and that even though they had opened bank accounts, in which the cheques were credited, but soon thereafter the amounts were withdrawn by bearer cheques, which led to the conclusion that the parties were perhaps creation of the assessee itself for the purpose of banking purchases into books of account as purchases with bills were not feasible.
18. Here, learned AR for the appellant has submitted that facts of case in hand are different from the facts of the three decisions cited on behalf of the Revenue before Hon’ble High Court of Rajasthan in the first round of litigation. In this regard, he has pointed out that herein the parties are traceable and there is no finding that purchases declared by the assessee were not on prevalent market price and or that the cheques were being withdrawn by some unknown person whose address or whereabouts could not be known.
19. Herein, reports were received from ADIT, Surat with regard to non existence of the two entities at the given address of Surat. At no stage, any step was taken by the assessee to itself secure presence of the representataives fo the two entities.
As observed by the authorities below, purchases from the abovenamed two entities were shown to have been made in cash, but no record was maintained .
20. It may be mentioned here that on behalf of the appellant reliance was sought to be placed on the findings recorded by this Appellate Tribunal in the first round of litigation, which decided the appeals in its favour. But having regard to the fact that the order passed by the Appellate Tribunal was set aside, no reliance can be placed on the observations made therein.
21. Learned AR for the appellant has sought to place reliance on decision in Principal Commissioner of Income-tax v. Anil Jagannath Tiwari, (2023) 153 com 540, whereby Hon’ble Apex Court has dismissed special leave petitions filed by the Revenue against judgment passed by the Hon’ble High Court, but said decision by Hon’ble Apex Court is of no help to the appellant, same having been given having regard to the low tax effect and in terms of circular No.17/2019 dated 8.8.2019 issued by CBDT.
22. qIn Vijay Proteins’ case (supra), it was observed by Hon’ble High Court that if the entries were ignored, the books of accounts stood rejected u/s.145(2) of the Act, in such a case the income was to be estimated on the basis of best judgment.
23. In the written submissions presented before us on behalf of the assessee, it has been claimed that export turnover of the assessee increased by 33%; that increase of turnover can be achieved by reducing margin of Gross Profit, to say in competition; that the price of US Dollar decreased in terms of rupees which affected G.P. rate of the year under assessment.
It is significant to note that the above claim has been put forth on behalf of the appellant for the first time. No explanation has been put forth as to why such claim was not put forth before the authorities below. Even otherwise, no material has been submitted in proof of the fact that in order to stay in the market in competition with other traders, the assessee had to reduce margin of Gross Profit to get increase in the turnover.
It is true that in the case of the assessee, its books of accounts were also rejected under section 145(3) relating to the AY 2004-05 on account of purchases made from such bogus concerns and gross profit rate of 17.5% was applied on declared turn over of Rs.8,46,70,623/-. Prior thereto, as regards AY 2003-04, books of accounts of the assessee were rejected on similar grounds and gross profit rate of 20% was applied on declared turnover of Rs.7,03,66,617/-, but those assessments making additions taking into consideration said rates were set aside by learned CIT(A) and the deletion of the additions was upheld by this Appellate Tribunal.
But, herein, nothing has been placed on record to prove that there was decrease in the price of US Dollar as against Rupee or that said fact affected the G.P. rate. Even no such plea was put forth on behalf of the assessee before the authorities below. Therefore, no reliance can be placed on said unsubstantiated claim put forth before this Appellate Tribunal for the first time. Even the setting aside of the additions made earlier as regards AY 2003-04 and AY 2004-05 does not come to the aid of the appellant.
24. However, in the given facts and circumstances of the case i.e. the subject purchases and the persons represented as sellers, remained unverified, we find that the Assessing Officer was justified in rejecting the books of accounts under section 145(3) of the Act.
25. Having regard to the factum of rejection of the books of accounts, for the third time, and the appellant having failed to prove the claim put forth before this Appellate Tribunal in the written submission about decrease in US dollar or its any effect on the G.P.rate, the turnovers and GP rates of previous 2 years as well, and that the assessee has debited purchase account with fictitious invoices in order to inflate expenditure and lower the taxable profits, we deem it a fit case to apply Gross Profit at the rate of 20% for the AY 2005-6, as regards the bogus purchases.
Accordingly, the impugned order passed by Learned CIT(A) upholding application of G.P. rate of 25%, applied by Assessing Officer, as regards the bogus purchases during the AY 2005-06 is set aside, and instead GP rate of 20% for the said AY 2005-6 is allowed to be applied in relation to the bogus purchases.
26. No other argument has been advanced or point agitated or decision cited before us.
Result
27. As a result, the appeal is partly allowed, and addition of 20% of bogus or purchases from unverifiable persons or entities is upheld as regards AY 2005-06.
28. Assessing Officer to do the needful to give effect to this decision accordingly.
29. It may be mentioned here that while making calculations, the Assessing Officer shall also take into consideration the amount of tax already deposited by the assessee, so as to avoid double taxation on the same cause of action.
Order pronounced in the open court on 01/08/2024.
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