Case Law Details
ITO Vs Balajay Infrastructure Pvt. Ltd. (ITAT Ahmedabad)
ITAT Ahmedabad held that in case of bogus purchases, if the sale is not in doubt, then only the profit element embedded in such purchases should be subject to tax in the hands the assessee. Accordingly, CIT(A) restricting disallowance to 25% of the addition justified.
Facts- AO had received the information from the Investigation Wing that it had conducted a search in the case of M/s. Tricon Construction on 5.12.2012. M/s. Tricon Construction had obtained bogus bills for material and labour. The Investigation Wing had identified bogus billers and these bogus billers had admitted under oath that they had not rendered any actual service or supply of goods against the payment received. The bogus billers had also admitted that they had withdrawn the cash and returned the same to the payers after deducting their commission.
The appellant is one of the potential beneficiaries. Based on the information received from the Investigation Wing, AO in order to find out the genuineness and whereabouts of these bogus billers had issued summons u/s. 131 of the Act. However, the bogus billers and appellant did not attend.
However, on failure of the appellant as well as the four persons as bogus billers to attend as well as non-verification of their address, AO concluded that the appellant was not able to discharge its onus and genuineness of purchase of goods from the bogus billers was done with a view to regularise the purchase made from the unregistered dealers in the open market.
Further, AO has also observed that even though the actual receipt of goods is not in doubt, the fact remains that the actual purchases were made in cash from these unregistered dealers. Thereby invoking the provisions of Section 40A(3), the AO held that purchases in cash were liable for 100% disallowance.
CIT(A) restricted to disallowance to 25% of the additions made by AO. Being aggrieved, revenue has preferred the present appeal.
Conclusion- Hon’ble Gujarat High Court in Pr. CIT v. Jagdish H Patel [2017] 84 taxmann.com 259, on the basis of fact that if entire bogus purchases are added to the profit, then gross profit margin would be worked out to 100.18 per cent. Therefore, entire lot of purchases could not be treated as bogus.
In CIT v. Bholanath Poly Fab (P.) Ltd. it was held on facts that the Tribunal found that, though purchases were made from bogus parties, but purchases themselves were not bogus as entire quantity of stock was sold by assessee, therefore, that only profit margin embedded in such purchases would be subjected to tax and not entire purchases.
Held that in case of bogus purchases, if the sale is not in doubt, then only the profit element embedded in such purchases may be subject to tax in the hands the assessee. In the result, looking into the facts of the instant case, we find no infirmity in the order of Ld. CIT(Appeals) so as to call for any interference.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This appeal has been filed by the Revenue against the order passed by the Ld. Commissioner of Income Tax (Appeals)-9, (in short “Ld. CIT(A)”), Ahmedabad vide order dated 20.12.2016 passed for the Assessment Year 2013-14.
2. The Revenue has raised the following grounds of appeal:-
“1. The CIT(A) has erred in law and on facts in granting the relief of Rs.1,70,08,446/- out of addition of Rs. 2,26,77,928/- made by the A.O. for bogus purchases without appreciating the findings as recorded by the A.O. and relying on the decision of M/s. N. K. Proteins Ltd. of the Hon ’ble Tribunal, Ahmedabad.
2. The CIT(A) has erred in law and on facts in not obtaining the remand report from the A. O. for ascertaining the actual acquisition of the material used out of purchases from other sellers without obtaining the bills and making of consequent payments and granted relief of 75% of bogus purchases proved by the A. O.
3. On the facts and circumstances of the case, the Ld. Commissioner of Income tax (A) ought to have upheld the order of the Assessing Officer.
4. It is, therefore, prayed that the order of the Ld. Commissioner of Income tax (A) may be set-aside and that of the Assessing Officer be restored.”
3. The facts of the case are that the A.O. had received the information from Investigation Wing that it had conducted a search in the case of M/s. Tricon Construction on 5.12.2012. M/s. Tricon Construction had obtained bogus bills for material and labour. The Investigation Wing had identified bogus billers and these bogus billers had admitted under the oath that they had not rendered any actual service or supply of goods against the payment received. The bogus billers had also admitted that they had withdrawn the cash and returned the same to the payers after deducting their commission. The appellant is one of the potential beneficiaries of the following two bogus billers namely (a) Riya Enterprise, Prop. Shri A. A. Patel and (b) Arasuri Enterprises, Prop. Shri Jivanlal H. Patel. Based on the information received from the Investigation Wing, the A.O. in order to find out the genuineness and whereabouts of these bogus billers and had issued summons under Section 131 of the Act to them. A copy of the summons was also given to the appellant for cross examination of the bogus billers on the date of their attendance. However, both of them i.e. the bogus billers and the appellant did not attend. Another round of summons was issued to bogus billers and the appellant. However, in the second round also both of them i.e. bogus billers and appellant did not attend. Apart from the above referred two bogus billers the A.O. further identified two more persons likely to be bogus billers because of design of bills issued by them to the assessee. They were namely Bhavi Enterprise and Harsh Enterprise. An enquiry was conducted by the A.O. through the Inspector which resulted into the finding that no such parties were available at the given address or were existing. Based on the above referred information as well as the information in AIR/CIB transactions available with the A.O., the A.O. issued a show cause wherein the A.O. had referred to the findings of search on Tricon Construction as well as the enquiries made through Inspector of this office. The quantum of bills from these four parties totalled at Rs. 2,26,77,928/-. As per the AIR/CIB information available the A.O. informed the appellant that in the HDFC Bank, Ghatlodiya and IDBI Bank Prahladnagar Branch, more than Rs. 4.60 crores each were deposited in cash. The A.O. asked the appellant to reconcile the bank balance and the debit credit entries in the bank account. In response the assessee submitted that it had undertaken the work and the payments have been made only through account payee cheques. However, on failure of the appellant as well as the four persons mentioned above as bogus billers to attend as well as non-verification of their address the A.O. concluded that the appellant was not able to discharge its onus and genuineness of purchase of goods from the bogus billers was done with a view to regularize the purchase made from the unregistered dealers in the open market. Further, the A.O. has also observed that even though the actual receipt of goods is not in doubt, the fact remains that the actual purchases were made in cash from these unregistered dealers. Thereby invoking the provisions of Section 40A(3), the AO held that purchases in cash were liable for 100% disallowance. In case of Riya Enterprise, the A.O. has given specific example where the payments made by the appellant of more than Rs. 80 lacs were withdrawn on the same day by cash. Therefore, the amount of Rs. 2,26,77,928/- i.e. quantum of billing done by these four persons were added back to the income of the appellant by the A. O.
4. In appeal, Ld. CIT(Appeals) partly allowed the appeal of the assessee by observing that it is a matter of fact that the assessee has undertaken the work. Accordingly, Ld. CIT(Appeals) was of the view that keeping in mind the fact that the assessee has received the goods, although from the open market i.e. through unregistered dealers, it would not be fair to tax the entire amount as unexplained income of the assessee, and only the element of profit embedded therein or a certain percentage of purchases may be disallowed, keeping in view the assessee’s set of facts. Accordingly, Ld. CIT(Appeals) restricted to disallowance to 25% of the additions made by the Assessing Officer with the following observations:
“4.5 During the appellant proceedings the appellant relied upon the submissions made before the A. O and further confirmed that the work was given to these four persons based on their competitive quotations received from the market. It is also a matter of fact that the appellant ahs undertaken the work. It has relied upon various judgments such as Rameshkumar & Co. Vs ACIT ITA No.2959/Mum/2014, CIT vs Nan galia Fabrics Pvt. Ltd. ITA No. 689 of 2010 etc.
…
4.7 It can be seen from the above referred judgment in the case of N.K. Proteins Hon’ble Tribunal has dealt with the issue of bogus billing as well as application of sec.40A(3) of the Act. The Hon’ble Tribunal has also dealt with the issue of receipt of goods although the billing has been made through the bogus billers. The Tribunal has given its findings that use of such bogus billers leads to subscription of income by inflating the purchase price of raw material. Further, it has stated that the material received by the assessee from un-known suppliers or from undisclosed sources also enable the assessee to utilise the black money/unaccounted funds for making purchases of such raw material in cash from open market. In the instant case the A.O has resorted to disallowance of the entire bogus purchases. However, keeping in mind the fact that the appellant has also received the goods and the tax can be levied only on real income only. Way out is to estimate the income of the appellant through such bogus billing. It is difficult to estimate the income earned by the appellant through the process of bogus billing. The appellant has also not come forward to work out the estimates. The A.O in its assessment order has proved beyond doubt that the four persons namely Riya Enterprise, Arasuri Enterprise, Harsh Enterprise and Bhavi Enterprise have given bogus bills the appellant amounting to Rs. 2,26,77,928/-. It is also a matter of fact that the appellant has received goods not from the above referred four persons but from unregistered dealers and the appellant has undertaken the work also. Keeping all these facts in mind, I hereby disallow 25% of Rs. 2,26,77,928/- i.e. Rs. 56,69,482/- on account of inflated purchases through the process of bogus billing. The amount of Rs. 1,70,08,446/- is therefore directed to be deleted. Thus, this ground of appeals is partly allowed.
5. In the result, the appeal is partly allowed.”
5. The Department is in appeal before us against the aforesaid order passed by Ld. CIT(Appeals) restricting the disallowance was made by the Assessing Officer to 25% of the bogus purchases. The Ld. DR argued that Ld. CIT(Appeals) proceeded to give relief to the assessee to the extent of 25% of such bogus purchases without even obtaining the remand report from the Assessing Officer concerned. In response, the Counsel for the assessee relied on the observations made by Ld. CIT(Appeals) in the appellate order.
6. We have heard the rival contentions and perused the material on We shall first discuss the objection is raised by the Ld. DR to the effect that the order passed by Ld. CIT(Appeals) is erroneous insofar as he proceeded to give relief to the extent of 75% of the disallowances made by the Assessing Officer, without calling for the remand report. We observe that while passing the order, Ld. CIT(Appeals) has not taken any additional evidence on record, which formed the basis of granting part relief to the assessee. Ld. CIT(Appeals) while affording part relief to the assessee, passed the order on the presumption that the purchase were in fact bogus, a fact which was already highlighted in the assessment order. While we are of the view that in case the appellate order passed by Ld. CIT(Appeals), which takes into account additional evidences filed by the assessee as the basis of affording relief to the assessee, the same is liable to be set aside if remand report is not sought from the concerned Assessing Officer. However, in the instant facts, we note that the Ld. CIT(Appeals) while allowing part relief to the assessee did not take on record any further additional evidences which formed the basis of affording relief to the assessee. Accordingly, looking into the instant facts, we are of the considered view that the order passed by Ld. CIT(Appeals) is not liable to be set aside on this ground.
7. The next issue for consideration is that the Ld. DR placed reliance on the case of N.K. Industries Ltd. v. Dy. CIT [2016] 72 taxmann.com289, wherein the Gujarat High Court found that as entire purchases of Rs.2,92,93,288/- shown on the basis of fictitious invoices had been debited in the trading account and Tribunal had once come to a categorical finding that the amount of Rs.2,92,93,288/- represented alleged purchases from bogus suppliers, it was not incumbent on it to restrict the disallowance to only Rs.73,23,322/-, being 25% of such bogus purchases. However, we are of the considered view that the aforesaid case was rendered order on its own set of facts, and it cannot be made the basis of disallowing all the purchases made through unregistered dealers, when the sale corresponding has not been doubted by the Department. In the instant case, it would be useful to reproduce the relevant extracts of the observations made by the Assessing Officer on this issue:
“However, since the goods have been obtained and also sold, it is only logical to conclude that the bogus bills have been obtained only to regularise purchases from unregistered dealers in the open market. Even if the actual receipt of goods is not in doubt, as the assessee has made sales against these purchases, the fact remains that the actual purchases were made in cash from unregistered dealers.”
8. Accordingly, we observe that even the Assessing Officer has not doubted that assessee has obtained bogus bills only to regularise purchases from unregistered dealers in the open market and further, assessee has also made sales against these purchases. Accordingly, given the above facts, in our considered view, it would be unfair to tax the entire bogus purchases as income in the hands of the assessee, when the sales against such purchases has not been doubted by the Assessing Officer. In the case of Clarity Gold (P.) Ltd. v. Pr. CIT [2019] 102 taxmann.com421 (Raj.), where during the course of the search it was admitted by the owners, who were doing business in semi-precious stones, that turnover was bogus and was enhanced for obtaining higher bank finance, during post-search investigation no cooperation was extended, the assessee failed to reconcile the differences in the value of stock found at the time of search and the stock as per books, the finding of the AO that either fake purchase bills were introduced so as to increase stock or the sales were reduced, and on that basis books were rejected, application of higher GP rate was held justified. In the case of Synbiotics Ltd. 106 taxmann.com 316 (Gujarat), the High Court held that where Assessing Officer made addition on account of bogus purchase of raw material by assessee company, since Commissioner (Appeals) and Tribunal concurrently found that assessee had yielded huge profits during year from sales which would not be possible without utilising huge raw material, Tribunal was wholly justified in restricting impugned additions on account of bogus purchased to 25 per cent. In the case of Pooja Paper Trading Co (P.) Ltd. 104 taxmann.com 95 (Bombay), the assessee, trading in paper and paper products, found indulging in hawala business without actual transaction. The AO disallowed entire purchases of Rs.4.17 Crores under Section 69C. The CIT(A) applied GP rate of 3.67% on bogus purchases, whereas the Tribunal enhanced the disallowance to 12.5% of bogus purchases. It was held that no substantial question of law arose. The Mumbai Tribunal in the case of Deputy Commissioner of Income-tax v. Rajeev G. Kalathil [2014] 51 taxmann.com 514/[2015] 67 SOT 0052 (Mumbai) observed that the Assessing Officer disallowed the entire expenditure incurred by the assessee on purchases as it was one of the beneficiaries of bogus hawala bills, as per information available with the Assessing Officer. The CIT (Appeals) held that when sales were accepted, then corresponding purchases could not be disallowed. He held that profit element embedded in the purchases only could be added and not the entire purchase amount and upheld the addition up to 2% of the purchase amount as profit element embedded in purchases and deleted the balance addition. The ITAT, on revenue appeal, in the above case held that the assessee had been declaring gross profit between 5% to 8% and since purchases were made from grey market the corresponding profit element would be higher and estimated further 3% of the purchases amount on traded profit embedded in the purchase amount. The High Court in revenue’s appeal declined to interfere in the order of the ITAT and upheld the attribution of 5% profit on such alleged bogus purchase. In the case of Smt. Kiran Navin Doshi v. Income-tax Officer [IT Appeal No. 2601 (Mum) 2016, dated 18-1-2017, the Tribunal upheld the CIT (Appeals) order wherein instead of disallowance of total purchase amount expenditure under Section 69C of the Act, an estimated 12.5% of such bogus purchase amount being the profit element embedded in such purchase was held justified. The CIT (Appeals) in this case held that the goods purchased were recorded in books of account of the assessee and were also sold and the profit earned on sale thereof was offered to tax in view of which the total amount of purchase cannot be disallowed. The Tribunal upheld the order of the CIT (Appeals). In the judgment of Delhi Tribunal in the case of Belmarks Metal Works v. ITO [IT Appeal No. 5198 (Delhi) of 2018, dated 5-3-2020], the Tribunal upheld the addition to the extent of profit element embedded in bogus purchases and deleted the balance addition. The Tribunal held that the source of purchases made was not outside the books of account and corresponding sales were not disputed. The Assessing Officer has not rejected books of account. Therefore, there was suppression of gross profit on purchases.
9. In the case of Madhukant B. Gandhi v. ITO [IT Appeal No. 1950 (Mum.) of 2009, dated 23-2-2010], where on the basis of statements of alleged suppliers it was found that no supplies were made to the assessee, it was held that purchases were bogus but on the presentation of quantitative tally of the opening stock, purchases, sales and closing stock, it was further held that “unless some purchases are made there cannot be corresponding sale” and, therefore, application of higher net profit rate of 5%, in a manner similar to Section 44AF, could be justified. In CIT v. Premkumar B. Rathi [2015] 59 taxmann.com203/232 Taxman 638/377 ITR 447 (Guj.), the assessee, who was dealing in edible oils, on semi-whole sale basis, failed to prove the genuineness of purchases of Rs.2 crores (approx..) made from five parties. The AO made addition of 25% of such unexplained purchases which was reduced to 10% by the Tribunal. Even though, the High Court did not approve non-speaking order passed by the Tribunal, it confirmed the Tribunal’s order on net profit rate on the ground that GP rate declared that year was better than earlier years. It may be noted that in this case the AO himself did not make addition of entire bogus purchases but restricted himself to a percentage thereof. The Hon’ble Gujarat High Court followed its own decision in CIT v. Simit P. Sheth [2013] 38 taxmann.com385/219 Taxman 85 (Mag.)/356 ITR 451, where purchases were not found to be bogus but were made from parties other than those mentioned in books of account, it was held that not entire purchase price but only profit element embedded in such purchases could be added to income of assessee. Similar view was taken by Hon’ble Gujarat High Court in Pr. CIT v. Jagdish H Patel [2017] 84 taxmann.com 259, on the basis of fact that if entire bogus purchases are added to the profit, then gross profit margin would be worked out to 100.18 per cent. Therefore, entire lot of purchases could not be treated as bogus. In Vijay Trading Co. v. ITO [2016] 76 taxmann.com 366/388 ITR 377 (Guj.), assessee was not able to prove the genuineness of certain purchases to the satisfaction of the AO, entire amount of such purchases was added as income. The Tribunal confirmed the order of the AO. It was held by the Hon’ble High Court that not the entire amount covered under such purchases, but the profit element embedded therein would be subject to tax. Hence, 25% of the cost of such purchases was held as income. Similarly, in CIT v. Bholanath Poly Fab (P.) Ltd. [2013] 40 taxmann.com 494 / [2014] 220 Taxman 82 (Mag.)/355 ITR 290 (Guj.) it was held on facts that the Tribunal found that, though purchases were made from bogus parties, but purchases themselves were not bogus as entire quantity of stock was sold by assessee, therefore, that only profit margin embedded in such purchases would be subjected to tax and not entire purchases.
10. Accordingly, looking into the facts of the instant case and judicial precedents on the subject, which have held that in case of bogus purchases, if the sale is not in doubt, then only the profit element embedded in such purchases may be subject to tax in the hands the assessee. In the result, looking into the facts of the instant case, we find no infirmity in the order of Ld. CIT(Appeals) so as to call for any interference.
11. In the result, the appeal of the Department is dismissed.
This Order pronounced in Open Court on 18/10/2023
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