B Narayan Associates Vs CIT (ITAT Mumbai)
ITAT Mumbai held that addition in case of bogus purchases should be limited to the extent of G.P. rate on purchases. Accordingly, matter remanded with direction to reduce addition only to the extent of profit margin involved in such purchases.
Facts-
The assessee is a partnership firm carrying on the business as civil contractors at Thane. AO noticed that there was a survey carried out in the case of the assessee on 10.03.2021 and statements u/s. 131 of the Income Tax Act, 1961 were recorded from Shri Narayan Das Bhatia, partner and Ms. Isha Majalkar, Accountant of the assessee. Based on the statements, AO held that the amount as stated by the Accountant as profits to be suppressed is coming out of the purchases made from the above parties which are bogus in nature and accordingly made an addition of the entire purchases as income in the hands of the assessee. AO also added 1% of the alleged bogus purchases towards commission which the entry provider usually charge.
CIT(A) upheld the addition. Being aggrieved, the present appeal is filed.
Conclusion-
Hon’ble Bombay High Court in the case of Principal CIT vs Mohammed Haji Adam & Co, while considering a similar issue, has held that the additions should be limited to the extent of the G.P. rate on purchases at the same rate of other genuine purchases. In the facts and circumstances of the case we are of the considered view that the ratio of the above decision is applicable to assessee’s case also. Accordingly we remit the issue to the AO with a direction to examine the profit % on the impugned transactions and the profit % genuine purchase transactions of the assessee and decide by applying the ratio of the Jurisdictional High Court. The assessee is directed to submit the relevant details as may be called for by the Ao. It is ordered accordingly.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal is against the order of the Commissioner of Income Tax (Appeals)-1, Thane [for short ‘the CIT(A)] dated 28.08.2015 for the AY 2010-11. The assessee raised the following grounds of appeal:
“1.1 On the facts and circumstances of the case the learned A.O. has erred in making the addition of Rs. 1,25.62,972/- on account of Bogus purchases.
1.2 On the facts and circumstances of the case the learned A.O. has erred in making the addition of Rs. 1,25,629/- on account of commission @ 1% of the bogus purchase.
1.3 On the facts and circumstances of the case the learned A.O. has erred in relying on statements, affidavits and Inspectors reports etc. gathered by the Sales Tax Department based on which he has confirmed the additions without giving an opportunity to cross examine these witnesses.
1.4 On the facts and circumstances of the case the learned A.O. has also relied on the visit of the Inspector of the particular ward of the Income Tax Department without giving us an opportunity to cross examine him or submit our say on the said visit.
1.5 On the facts and circumstances of the case the learned A.O. has brushed aside all the evidences produced before him during the course of Assessment Proceedings including:
a. The Contracts entered into with the Sub Contractors, the photographs of the constructed toilet blocks.
b. Evidences regarding visits and checking done by the Municipal Corporations offices before releasing the payment.
c. The Tendering process followed by the Municipal Corporations.
d. The severe Competition issues when business has to be procured via the tendering process.
e. The Comparative profitability chart of previous years of the assessee.
f. The Assessment orders of previous scrutiny Assessments & the Hon’ble Tribunals orders submitted to enable the learned A.Ο. to draw a fair conclusion.
g. The procedure followed by the sales tax department in publishing the names in the Hawala list and the disclaimer made by the sales tax department.
1.6 On the facts and circumstances of the case the learned A.O. has erred on relying on the statement of the Accountant, recorded during the course of the Survey conducted on 10/03/2011, and trying to corroborate it with the accounts.”
2. The assessee is a partnership firm carrying on the business as civil contractors at Thane. The assessee is a registered contractor for various Government and Semi-government Agencies. During the year under consideration the assessee has executed contracts for constructing public and community toilet blocks in the slums of Mumbai. The assessee filed a return of income for AY 2010-11 on 14.10.2010 declaring a total income of Rs. 1,51,66,320/- against a total revenue of Rs. 25,22,31,244/-. The case was selected for scrutiny and statutory notices were duly served on the assessee. The AO during the course of hearing called on the assessee to furnish various details with regard to the business carried on by the assessee such as audit report, statement of accounts, bank statements etc. The AO noticed that there was a survey carried out in the case of the assessee on 10.03.2021 and statements under section 131 of the Income Tax Act, 1961 (the Act) were recorded from Shri Narayan Das Bhatia, partner and Ms. Isha Majalkar, Accountant of the assessee. The AO further noticed that the Accountant while answering one of the questions raised with regard to certain noting made by the Accountant had replied stating that the profits of the assessee to the extent of Rs. 1.3 crores was not to be declared in the return of income for the AY 2010-11. The AO also noticed that the assessee had trade creditor outstanding from five parties to the tune of Rs. 1,25,62,972/- and that these creditors during the investigation conducted by Sales Tax Department have given sworn statements that they are entry providers without actual supply of materials. The AO linked these two facts to hold that the amount as stated by the Accountant as profits to be suppressed is coming out of the purchases made from the above parties which are bogus in nature and accordingly made an addition of the entire purchases as income in the hands of the assessee. The AO also added 1% of the alleged bogus purchases towards commission which the entry provider usually charge.
3. Aggrieved the assessee filed further appeal before the CIT(A). Before the CIT(A) the assessee submitted that the purchases from the above parties are genuine and to substantiate the same the assessee filed the below table with the turnover, Net Profit etc. for the last five years including the year under consideration.
