Addition for Bogus Purchase cannot be made merely based on information received from Sales Tax Department

This appeal filed by the revenue is directed against the order of Commissioner (Appeals)-13, Mumbai dated 8-2-2017 and it pertains to assessment year 2009-10. The revenue has raised the following grounds of appeal: —

1. “On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in deleting addition of Rs. 73,96,790 made on account of bogus purchases without appreciating the fact that notices under section 133(6) issued to the purchase parties returned unserved and that the assessee failed to produce these parties for verification even after providing sufficient opportunities thereby failing to prove the identity and genuineness of the purchase transactions.

2. On the facts and in the circumstances of the case and in law, whether the learned Commissioner (Appeals) is right in deleting addition of Rs. 73,96,790 made on account of bogus purchases without appreciating that the purchase transactions are within privileged knowledge of the assessee and thus, onus to prove the purchase were genuine is on the assessee who failed to discharge the onus even I remand proceedings.”

2. The brief facts of the case are that the assessee company is engaged in the business of manufacturing toys filed its return of income for the assessment year 2009-10 on 24-09-2009 declaring total income of Rs. 8,33,416. In this case, the assessment was completed under section 143(3) on 29-12-2011 determining the total income at Rs. 15,82,091. Subsequently, on the basis of information received from the sales tax department & DGIT (Inv), assessment was reopened under section 147 on the ground that income chargeable to tax had been escaped assessment on account of bogus purchases made from certain parties listed by Sales-tax department as hawala operators involved in providing accommodation entries. In response to notice under section 148, assessee vide letter date 16-08-2013 requested to treat the return of income filed on 24-09-2009 as being filed in response to notice issued under section 148 of Income Tax Act, 1961. In response to notices issued under section 143(2) and 142(1), the authorized representative of the assessee appeared from time to time and furnished the details, as called for. During the assessment proceedings, the assessing officer noticed that the assessee is the beneficiary of bogus bills issued by M/as Jupiter Multi trade (P.) Ltd. & Option Mercantile (P.) Ltd for Rs. 73,96,790 as both the parties are categorized as hawala operators indulging in the activity of providing accommodation entries. Therefore, the assessing officer called upon the assessee to furnish necessary evidences to justify purchases from the above two parties and also to produce the parties in person. In response to notices, the assessee, vide letter dated 06-01-2014 and 19-03-2014 submitted purchase bills and payment proof to prove purchases from the above parties as genuine. During the course of assessment proceedings, to ascertain the correctness of purchases, the assessing officer issued notices under section 133(6) to the parties to file necessary evidence. The notices issued under section 133(6) were returned unanswered with remark “no such parties are available at the given address”. The assessing officer, based on the information received from DGIT (Inv), coupled with further inquiries conducted during the course of assessment proceedings, came to the conclusion that purchases from the above two parties are bogus in nature and hence, made addition of R.73,96,70 under section 69C of the Income Tax Act, 1961. Aggrieved by the assessment order, assessee preferred appeal before the Commissioner (Appeals).

3. Before the Commissioner (Appeals), the assessee has reiterated its stand taken before the assessing officer. The assessee also filed certain additional evidence to justify purchases. During the course of appellate proceedings, the assessing officer forwarded additional evidences filed by the assessee to the assessing officer for his comments. The assessing officer, vide his remand report dated 2-11-2016 opposed admission of additional evidence and also reiterated his findings in the assessment order. The Commissioner (Appeals), after considering relevant submissions of the assessee and also relying upon certain judicial precedents observed that the assessing officer had not carried out any inquiries with regard to actual supplies made by the assessee as the assessee has furnished complete details of purchases and sales. The Commissioner (Appeals), further observed that the assessing officer has not made any attempt to locate the alleged hawala parties, leave alone, verified their bank accounts to check if cash withdrawals had followed the deposit of assessee’s cheques. The assessee has filed entire documentation in terms of copies of ledger account, vouchers, production register, registered bills for transport and the bank statement. All these evidences lead to an undoubted inference that the purchases from the above parties are genuine, therefore, there is no reason for the assessing officer to disallow total purchases on the basis of information received from DGIT (Inv). With these observations, the learned Commissioner (Appeals) deleted additions made by the assessing officer towards bogus purchases under section 69C of the Act. Aggrieved by order of Commissioner (Appeals), the revenue is in appeal before us.

4. We have heard the learned Department Representative and perused material available on record. The assessing officer made addition towards purchases on the basis of information received from Maharashtra Sales-tax department which informed that the parties are involved in providing accommodation entries without any business activity. According to the assessing officer, notices issued under section 133(6) were returned unserved with remark “not known” or “unclaimed”. Therefore, the assessing officer opined that though the assessee has furnished certain evidences to justify purchases from above parties, failed to prove the genuineness of purchases in the backdrop of clear findings of Maharashtra Sales-tax department that the parties are involved in providing accommodation entries. It is the contention of the assessee that purchases from above parties are genuine in nature as its purchases are supported by valid purchase bills, delivery challans and payment for such purchases has been made through proper banking channels. The assessee further contended that additions cannot be made towards purchases merely on the basis of third party information ignoring the evidences filed to justify purchases. The assessee further contended before the lower authorities that the assessing officer neither pointed out any error or discrepancy in the books of account nor did make out any case of sales made outside the books of account. In the absence of any finding as to incorrectness of books of account, addition cannot be made towards bogus purchases.

5. Having heard, we find force in the contention of the assessee for the reasons that the assessing officer has made additions only on the basis of information received from Maharashtra Sales-tax department, ignoring the evidences filed by the assessee in the form of purchase bills, delivery challans and payment proof. The assessee, on the other hand, filed certain evidences in the form of purchase bills and payment proof to prove the genuineness of purchases. Therefore, we are of the considered view that addition cannot be made towards alleged bogus purchases only on the basis of information received from Maharashtra Sales Tax department. At the same time, it is also an undisputed fact that the notices issued under section 133(6) were returned unserved with remark, “not known” or “unclaimed”. The assessee has failed to furnish correct addresses of the parties. Under these circumstances, it is very difficult to accept that the purchases from those parties are explained to the satisfaction of the assessing officer. Under these facts and circumstances what needs to be taxed is only the profit element in such purchases but not the total purchases made from alleged bogus parties. This view has been further supported by the decision of Ahmedabad Tribunal in the case of Vijay Protiens Ltd (supra) wherein it was held that only profit element embedded in bogus purchases needs to be taxed. We further notice that the Hon’ble Gujarat High Court in the case of Bholanath Poly Fab (P.) Ltd. 355 ITR 290 (Guj) observed that whether purchases themselves were to be taxed or whether parties from whom such purchases made were bogus is essentially a question of fact and the Tribunal having examined the evidence on record concluded that the assessee did purchase cloth and sold goods, the entire purchase would not be subjected to tax. In yet another case, the Hon’ble Gujarat High Court in the case of Simit P Sheth (supra) has held that no uniform yardstick can be applied for estimation of net profit which is dependent upon facts and circumstances of each case. The co-ordinate bench of ITAT, Mumbai in several cases has taken a view that only the profit element embedded in bogus purchases needs to be taxed. Accordingly, estimated net profit of 12.5% on bogus purchases. Therefore, considering the facts and circumstances of the case and also being consistent with the view taken by the co-ordinate bench, we are of the view that only profit element embedded in purchases needs to be taxed. Hence, we direct the assessing officer to estimate net profit of 12.5% on total purchases made from the above parties.

6. In the result, appeal filed by the assessee is partly allowed.