Bogus Purchase: Reassessment based on info that assessee involved in the same is valid

Mr. Girish Narapatchand Kanungo Vs ITO (ITAT Mumbai)

Conclusion: Reassessment was rightly opened under section 147 by AO as he had received fresh and tangible material being incriminating information from DGIT(Inv.) which in turn was based on incriminating information received from VAT authorities that assessee to be beneficiary of alleged bogus purchases and it was sufficient to reopen  concluded assessment within the parameters of section 147.

Held: Information was received by AO from DGIT(Inv) Wing, Mumbai which in turn was based on information received by Investigation wing from Maharashtra VAT authorities that there was a scam unearthed by the Maharashtra Sales Tax Department regarding alleged issue of hawala bills or accommodation entries by several parties from Mumbai who have issued bogus bills without supplying any material. The name of assessee also appeared in the list prepared by the Maharashtra Sale Tax Department as beneficiary of these alleged bogus purchases. This aforesaid material and tangible incriminating information which was received by the AO from DGIT(Inv.), Mumbai which incriminating information in turn was based on information furnished by Maharashtra VAT authorities to Investigation wing led to formation of belief by the AO that income of the assessee had escaped assessment which led to the reopening of the assessment u/s. 147 by AO wherein notice u/s. 148 was issued by AO to assessee. Assessee challenged the validity of reopening of assessment which was not correct as originally return of income was processed u/s 143(1) and no assessment was framed u/s 143(3). The notice u/s 148 of the 1961 Act was issued within four years from the end of assessment and first proviso to Section 147 of the 1961 Act was not applicable. Further, fresh and new tangible and material incriminating information was received by AO as detailed above from DGIT(Inv.), Mumbai which was sufficient to reopen the concluded assessment within parameters of Section 147.

FULL TEXT OF THE ITAT JUDGEMENT

This appeal, filed by assessee, being ITA No. 1587/Mum/2017, is directed against appellate order dated 22.12.2016 passed by learned Commissioner of Income Tax (Appeals)-30, Mumbai (hereinafter called “the CIT(A)”), for assessment year 2009-10, the appellate proceedings had arisen before learned CIT(A) from assessment order dated 10.03.2015 passed by learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) r.w.s. 147 of the Income-tax Act, 1961 (hereinafter called “the Act”) for AY 2009-10.

2. The grounds of appeal raised by the assessee in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called “the tribunal”) read as under:-

“1. On the facts and in the circumstances of the case and in law the learned Commissioner of Income Tax (Appeal)-30, Mumbai erred in confirming addition of Rs. 47,91,826/- on estimated profit element on treating the genuine purchases of Rs. 3,83,34,602/- as non-genuine purchases considering the purchases as bogus from the 11 parties of which information has been received from Sales Tax Department and the said information has been, forwarded by the DCIT (Inv.),Wing, Mumbai to the Assessing Officer.

Provisions of the Act ought to have been properly construed and regard being had to facts of the case no such additions to be made. Reasons assigned by him are wrong and insufficient to justify the additions.

2. The order made under section u/s 143(3) r.w.s. 147 of the Act by the learned Assessing Officer is bad-in-law, ultra virus and without appreciating the facts and law in their proper perspective and is liable to be annulled.

3. The appellant crave leave to add, amend, alter and / or vary any of the grounds of appeal before or at the time of hearing.

The appellant disputes all the additions and variations made to the total income of the appellant. The appellant pray that additions made to the total income may kindly be deleted.”

3. The brief facts of the case are that the assesse is reseller in ferrous and non-ferrous metals. The original return of income was filed by the assessee on 17-09-2009 declaring income of Rs. 5,47,160/- which return of income was processed by Revenue u/s 143(1) of the 1961 Act accepting the returned income. The information was received by AO from DGIT(Inv) Wing, Mumbai that there is a scam unearthed by the Maharashtra Sales Tax Department regarding alleged issue of hawala bills or accommodation entries by several parties from Mumbai who have issued bogus bills without supplying any material. It was revealed in the scam so unearthed that these parties who have issued alleged bogus bills are non existent parties and they have not deposited VAT/Sales tax with Maharashtra VAT Authorities while beneficiaries of these bogus bills have taken VAT/Sales tax credits in their VAT returns causing loss to exchequer The name of the assessee also appeared in the list prepared by the Maharashtra Sale Tax Department as one of the beneficiary of these alleged bogus purchases to the tune of Rs. 3,83,34,603/- from following bogus parties:-

The AO also got information from Maharashtra VAT authorities that these alleged bogus dealers are either not traceable or in case these parties are found, it was found by Maharashtra VAT department that these parties were not doing any business. This material incriminating information so received by the AO led to formation of a belief that income of the assessee has escaped assessment which led to the reopening of the assessment u/s. 147 of the Act wherein notice u/s. 148 was issued by the AO to the assessee on 25.02.2014 which was stated by the AO in its assessment order to have been duly served on the assessee . It is undisputed that originally the return of income was processed u/s 143(1) and no assessment u/s 143(3) was framed by Revenue . It is also undisputed that notice u/s 148 was issued within 4 years from the end of the assessment year. The assessee was called upon by the AO to explain the same . The assessee could not link the purchases with the corresponding sales . The assessee could not produce books of accounts before the AO . The assessee also could not produce these parties before the AO. The assessee vide order sheet entry dated 05.03.2015 requested the AO during the course of re-assessment proceedings to make reasonable additions with respect to the alleged bogus purchases. The AO , thus , quantified the profit element in these alleged bogus purchases by bringing 12.5% of the alleged bogus purchases of Rs. 3,83,34,602/- as profit element embedded in these alleged bogus purchases to be a reasonable etimation by adding the same to business income of the assessee which led to the additions to the tune of Rs. 47,91,826/- to the returned income in the hands of the assessee, vide assessment order dated 10-03-2015 passed u/s 143(3) r.w.s. 147 of the 1961 Act.

4. Aggrieved by the assessment order dated 10-03-2015 passed by the AO u/s 143(3) r.w.s. 147 of the 1961 Act, the assessee filed first appeal before Ld. CIT(A) and made its submissions. The Ld. CIT(A) dismissed the appeal of the assessee and confirmed the additions as were made by the AO both as to the challenge to reopening of the concluded assessment u/s 147 of the 1961 Act on legal grounds as well additions were challenged on merits vide appellate orders dated 22-12-2016 passed by learned CIT(A) , by holding as under:-

“5.3 I have carefully considered the rival contentions on the issue on hand. On perusal of the assessment order, it is noticed that, in the appellant’s case, Id. AO has made independent verifications, apart from the information received from the Sales Tax Department. Notice was issued u/s 142(1) of the Act, calling for several details with regard to the purchases and sales supported by bills and vouchers reflecting the same in the stock register of its entry and exit with detailed description of the items, for which the appellant failed to furnish the full details. The appellant failed to furnish ail the details and requested the AO to complete the assessment after making a reasonable addition. In the present case, there is overwhelming evidence in the form of statement of supplier given before the Sales tax authorities that it was engaged only in issuing hawala bills and no goods were ever supplied by them.

5.4 After weighing the evidence pros and cons; I find that the appellant has not reconciled the purchases with the items sold and failed to reconcile 1:1 of the items purchased and sold, despite giving an opportunity to do so, by the AO during the assessment proceedings. Onus is always on the appellant to prove as to how the material purchased was firstly obtained. I record a finding of fact here that the appellant failed to furnish crucial evidences like proof of delivery of purchases, transport challans and goods inward register at godown etc., before the Ld. AO. The AR was also specifically asked to furnish the evidences/ parties before the AO even at the present proceedings and in response, AR expressed his ‘inability to do so. Thus, it can be safety presumed that either they are non-existent or even if they did exist, they were not backed by sufficient evidence to undergo the test of scrutiny.

5.5 The supplier was in fact the appellant’s witness and the Ld. AO was not required to force their attendance. It was for the appellant to produce them as per Civil Procedure Code, which applies on all fours to the income-tax proceedings. It is trite that once a transaction is shown to be of the nature of income, the onus shifts to the assessee to show that the same is not taxable. It can thus be safely assumed that the appellant has grossly failed in its duty to mitigate the burden cast upon, it in so far as proving the genuineness of the transaction from the said party is concerned.

5.6 AR in the written submissions also stated that the AO not obtained the details of KYC from the bank, not summoned the parties etc., to verify the genuineness of the purchases. In this regard it is pertinent to mention that while dealing with the concept of burden of proof, onus of proving is always on the person who makes the .claim and not on the Revenue. While dealing with the issue of deciding the burden of proof, Hon’ble Supreme Court in the cases of CIT Vs. Durgaprasad More 82 TTR 540 and Sumati Dayal Vs. CIT 214 ITR 801 has held that the apparent must be considered real until it is shown that there are reasons to believe that the apparent is not real and that Taxing Authorities are entitled to look into surrounding circumstances to find out the reality and the matter has to be considered by applying the test of human probabilities. The Hon’ble court also held that, it is no doubt, true that in all cases in which a receipt is sought to be taxed as income, the burden lies on the department to prove that it is within the taxing provision and if a receipt is in the nature of income, the burden to prove that It is not taxable because it falls within exemption provided by the Act , lies upon the assessee. In the case of Durgaprasad More (Supra), the Hon’ble Court went on to add that a party who relies on a recital in a Deed has to establish the truth of this recital, otherwise it will be very easy to make self serving statements in documents either executed or taken by a party who relied on those recitals. If all that an assessee who wants to evade tax has to have some recitals made in a document either executed by him or executed in his favour then the door will be left wide open to evade tax. The Hon’ble Court further held that the Taxing Authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look in to the surrounding circumstances to find out the reality of the recitals made in those documents.

5.7 The onus to prove that apparent, Is not the real one, is on the party who claims it to be so, as held by the Hon’ble Supreme Court in the case of CIT v. Daulat Ram Rawatmull [1973] 87 ITR 349 and CIT v. Durga Prasad More (supra). It is also a settled legal proposition that if no evidence is given by the party on whom the burden is cast, the issue must be found against him. Therefore; onus is always on a person who asserts a proposition or fact, which is not self-evident. The onus, as a determining factor of the whole case can only arise if the Tribunal, which is vested with the authority to determine, finally all questions of fact finds the evidence pro & contention, so evenly balanced that it can come to no conclusion, then, the onus will determine the matter. There cannot be any doubt that onus as a determining factor comes into play where, either there is no evidence on either side, or where it is equally worthless or where It is equally balanced. It is imperative to mention here that where such is not the case and all available evidence is considered, without reference to the onus and without relying on the circumstances that onus lies on a particular party, the issue is determined on facts and the onus cannot be said to have influenced the decisions. However, in the instant case, the appellant has miserably failed ta lead evidence.

5.8 With regard to the claim of the appellant that the parties are not offered for cross-examination by the appellant, it is to be noted that the right of cross-examination is not automatic, but it would be incumbent only in a situation where the appellant is able to prlma facie demonstrate that the onus cast on him to establish his version of affairs is based on primary evidence. In this case, the appellant had failed to lead any primary evidence, viz. GRNs, octroi receipts, delivery challans, etc. which would show that the supplies were indeed made. In such a situation, the AO is justified in drawing the inference that the purchases aggregating to Rs. 3,83,34,602/- are not genuine. As regards the issue of the denial of the cross examination, in the case of GTC Industries Ltd. vs. Assistant Commissioner of Income-tax [1998] 65 ITD 380 (BOM), it was held as under:

“105. In our opinion right to cross-examine the witness who made adverse report, is not an invariable attribute of the requirement of the dictum, ‘audi alteram partem’. The principles of natural justice do not require formal cross-examination, Forma! cross-examination is a part of procedural justice. It is governed by the rules of evidence, and is the creation of Court. It is part of legal and statutory justice, and not a part of natural justice, therefore, it cannot be laid down as a general proposition of law that the revenue cannot rely on any evidence which has not been subjected to cross-examination.”

5.9 Coming to the issue of estimated addition on the said bogus purchases, it is pertinent to mention the decision of the Hon’ble Gujarat High Court in the case of CIT vs. Simit Sheth (2013) 38 Taxmann.com 385 (Guj). In the case, Hon’ble Gujarat High Court was seized with a similar issue where the AO had found that some of the alleged suppliers of steel to the assessee had not supplied any goods but had only provided sale bills and hence, purchases from the said parties were held’ to be bogus. The AO, in that case added the entire amount of purchases to gross profit of the assesses. Ld. CIT(A) having found that the assesses had indeed purchased though not from named parties but other parties from grey market, partially sustained the addition as probable profit of the assessee. The Tribunal however, sustained the addition to the extent of 12.5%. Taking into account the above facts, the Hon’bie Gujarat High Court held that since the purchases were not bogus, but were made from parties other than those mentioned in books of accounts, only the profit element embedded In such purchases could be added to the assessee’s income and as such no question of law arose in such estimation. While arriving at the above conclusion, the Hon’bie Court also relied on the decision in the case of Vijay M. Mistry Construction Ltd. 355 1TR 498 (Guj) and further approved the decision of Ahmedabad Bench, ITAT in the case of Vijay Proteins 58 ITD 428.

5.10 In the present case, AO concluded that the assessee indulged in non-genuine transaction and intention of indulging in such activity is to suppress the true profits and to reduce the tax liability. Therefore, in such circumstances, addition on account of a higher margin of profit would be fair and equitable which is supported by the above decision of Hon’bie Gujarat High Court in the case of CIT vs. Simit Sheth 356 UR 451 {Guj).The facts of the present case are exactly similar to the cited case. The appellant made purchases from eleven parties who are said to be hawala operators, who are indulged in providing bogus bills without supply of any material. Independent inquiries conducted revealed that no parties existed In the given addresses. When asked to produce the parties during the assessment proceedings by the AO as well as in the present proceedings by the undersigned, appellant expressed his inability to do so. Moreover, AR, vide order sheet noting dated 05-03-2015 requested the AO to complete the assessment after making a reasonable addition. Under these circumstances, as the appellant could not prove the genuineness of the claim of purchases debited to the profit & loss account, there is no other way to the AO, but to estimate the profit element embedded on such purchases. As stated earlier, the facts of the case are exactly similar to the cited case, therefore respectfully following the above cited decision in the case of Simlth P. Sheth, the action of the AO in estimating the addition @12.5% on the total non-genuine purchases from the eleven parties is confirmed. Ground No. 4 of the appeal is treated as Dismissed’.

5.11 The appellant in the written submissions pleads for deleting the entire addition based on certain case laws of Hon’ble High Court/ Tribunal, including in the case of Nikunj Eximp Enterprises (P) Ltd vs. CIT 216 Taxman 171 (Bombay High Court)to suggest that no addition could be made on account of disallowance of bogus purchases. Having gone through the case laws , It is seen that In none of those cases so much of investigation was done including those by another Government authority, viz., Maharashtra Sales Tax authority before whom affidavits was filed stating that only bogus bills were supplied without delivery of goods. In the case before the Hon’ble Bombay High Court in Nikunj Eximp (supra), the suppliers had not appeared before the Assessing Officer and from the judgment it appears that it was not a case of the suppliers being non-existent. However, in the present case in appeal, the alleged supplier has been found to be non-existent. This is not merely a case where the supplier has failed to appear before the Assessing Officer. Hence, the judgment of the Hon’ble Bombay High Court relied upon by the appellant would be of no help. In fact in a later decision In Nikunj Eximp (2014) 48 Taxmann.com 20 (Bom), Hon’ble Bombay High Court on the very same issue of obtaining bogus bills dismissed the assessee’s Writ Petition filed against notice u/s. 148. The other cases cited in the submissions were also not applicable to the facts of the present case, in view of the fact that the appellant miserably failed to prove the genuineness of such purchases with conclusive evidences and through the AR requested to complete the assessment after making a reasonable addition in view of his failure to prove the genuineness of the purchases claimed to have been made from those eleven parties, the facts cited in the case laws are distinguishable and are not applicable to the facts of the present case. In view of the same, the appellant’s request for deleting the entire addition is not considered.”

The learned CIT(A) also dismissed the challenge made by the assessee for declaring the said reassessment order passed u/s 147 r.w.s. 143(3) bad in law liable to be quashed as no pleadings were made by the assessee before the learned CIT(A) in this regard which led to dismissal of the aforesaid legal ground also. Thus, in nut-shell learned CIT(A) dismissed the appeal of the assessee.

5. Aggrieved by the dismissal of appeal by learned CIT(A), the assessee has come in an appeal before the tribunal. None appeared on behalf of the assessee when the appeal was called for hearing before the Bench on 19-09-2018. It is observed from order sheet entries in the file that even on earlier occasions when the appeal was fixed for hearing before the Bench, the assessee chose not to appear before the Bench. As per record available on file , it could be seen that notice sent by RPAD was duly served on assessee but despite service of notice for hearing , none attended on 19-09-2018 on behalf of the assessee before the Bench when the appeal was called for hearing before the Bench. The Ld. DR on the other hand relied upon orders of the authorities below and prayed that the order of learned CIT(A) is well reasoned detailed order which should be confirmed and appeal of the assessee be dismissed.

6. We have heard contentions of learned DR as well as perused the material on record including orders of the authorities below. We have observed that the assessee is reseller in ferrous and non-ferrous metals . The original return of income was filed by the assessee on 17-09-2009 declaring income of Rs. 5,47,160/- which return of income was processed by Revenue u/s 143(1) of the 1961 Act accepting the returned income. Thus, the Revenue did not frame assessment u/s 143(3) r.w.s. 143(2) while dealing with original return of income filed by the assessee u/s 139(1) of the 1961 Act. The information was received by AO from DGIT(Inv) Wing, Mumbai which in turn was based on information received by Investigation wing from Maharashtra VAT authorities that there is a scam unearthed by the Maharashtra Sales Tax Department regarding alleged issue of hawala bills or accommodation entries by several parties from Mumbai who have issued bogus bills without supplying any material. It was revealed in the scam so unearthed by Maharashtra VAT authorities that these alleged bogus hawala parties have issued alleged bogus bills without supplying any material physically and these parties are infact non-existent parties and they have not deposited VAT/Sales tax with Maharashtra VAT Authorities while beneficiaries of these bogus bills have taken VAT/Sales tax credits in their VAT returns filed with Maharashtra VAT authorities causing loss to exchequer . The name of the assessee also appeared in the list prepared by the Maharashtra Sale Tax Department as beneficiary of these alleged bogus purchases to the tune of Rs. 3,83,34,603/- from the following alleged bogus parties:-

The AO also got information from Maharashtra VAT authorities that these alleged bogus dealers are either not traceable or in case these parties are found, it was found by Maharashtra VAT department that these parties were not doing any business. This aforesaid material and tangible incriminating information which was received by the AO from DGIT(Inv.), Mumbai which incriminating information in turn was based on information furnished by Maharashtra VAT authorities to Investigation wing led to formation of belief by the AO that income of the assessee has escaped assessment which led to the reopening of the assessment u/s. 147 of the Act by the AO wherein notice u/s. 148 was issued by the AO to the assessee on 25.02.2014 which was stated by the AO to have been duly served on the assessee . Thus, it was a fresh material and tangible incriminating material which was the basis of having reasons to belief by the AO to reopen the concluded assessment within provisions of Section 147 of the 1961 Act. It is undisputed that originally the return of income was processed u/s 143(1) and no assessment u/s 143(3) was framed as well notices u/s 148 was issued within 4 years from the end of the assessment year. The first proviso to Section 147 is , thus, not applicable. The assessee was confronted with this incriminating information by the AO wherein assessee was called upon by the AO to explain the same . The assessee could not link the purchases with the corresponding sales . The assessee also could not produce books of accounts before the AO . The assessee could not produce these parties before the AO. The assessee vide order sheet entry dated 05.03.2015 requested the AO during the course of re-assessment proceedings to make reasonable additions with respect to the alleged bogus purchases which led AO to quantify additions of the profits embedded in these alleged bogus purchases which was quantified @ 12.5% of the alleged bogus purchases of Rs. 3,83,34,602/- which led to the additions to the tune of Rs. 47,91,826/- to the returned income in the hands of the assessee which was later confirmed by learned CIT(A) as the assessee still could not reconcile purchases with sales as also the assessee could not prove physical movement of material nor proof of delivery of material, transport challans , octroi receipts, GRN’s and goods inward register was also not produced before learned CIT(A). The learned CIT(A) also noted that it is the assessee who has conceded before the AO to estimate reasonable profits embedded in these alleged bogus purchases and the assessee cannot be allowed to resile from the concession offered during the course of assessment proceedings. The assessee did not submitted any arguments in support of challenge raised by the assessee before learned CIT(A) on legal grounds seeking quashment of assessment order which led to dismissal of assessee’s appeal by learned CIT(A) both on merits as well on legal grounds. We have carefully gone through orders of authorities below and material on record, we are of the view that well reasoned orders are passed by both the authorities below in context of factual matrix of the case. The decision of learned CIT(A) is reproduced above in preceding para’s of this order and is not repeated again. The estimation of reasonable profits in such cases is supported by decision of Hon’ble Supreme Court in the case of Kachwala Gems v. JCIT (2007) 288 ITR 10(SC) as some amount of guess work is always involved in estimation of reasonable profits in such matters. We also uphold the validity of the reopening of assessment u/s 147 of the 1961 Act as originally return of income was processed u/s 143(1) and no assessment was framed u/s 143(3) of the 1961 Act. The notice u/s 148 of the 1961 Act was issued within four years from the end of assessment and first proviso to Section 147 of the 1961 Act is not applicable. Further, fresh and new tangible and material incriminating information was received by the AO as detailed above from DGIT(Inv.), Mumbai which in turn was based on incriminating information received from Maharashtra VAT authorities incriminating assessee to be beneficiary of alleged bogus purchases and accommodation entries which in our considered view keeping in view factual matrix of the case was sufficient to reopen the concluded assessment within parameters of Section 147 of the 1961 Act. Thus, based on our detailed reasoning as set out above, we affirm the appellate order passed by learned CIT(A) and dismiss the appeal of the assessee. We order accordingly.

7. In the result, the appeal of the assessee in ITA no. 1587/Mum/2017 for AY 2009-10 stands dismissed. We order accordingly.

Order pronounced in the open court on 26.09.2018.