Case Law Details

Case Name : Dy. CIT Vs. Fagioli India (P) Ltd. (ITAT Mumbai)
Appeal Number : ITA Nos. 4557 & 4558/Mum/2015
Date of Judgement/Order : 28/07/2017
Related Assessment Year : 2009- 10 & 2010- 11
Courts : All ITAT (4421) ITAT Mumbai (1458)

Dy. CIT Vs. Fagioli India (P) Ltd. (ITAT Mumbai)

In this case assessing officers main allegation is that  two parties from whom appellant made purchases are involved in providing accommodation entries as per the list published by Maharashtra Sales Tax Department. On the other hand, assessee has furnished certain evidences in the form of purchase order, purchase bill, delivery challan, consignment note and payment details to prove the purchases. The assessee also furnished complete details of quantitative stock statement and argued that there is no difference in stock details. Though the assessee has produced certain details to prove the purchases from the said parties, in view of the fact that the assessee could not prove the existence of the parties and also could not rebut the finding of Maharashtra State Sales-tax department that the parties were hawala operators, involved in providing accommodation entries, the purchases from the said parties cannot be accepted as genuine. But keeping in view the fact that the assessing officer had not doubted sales declared by the assessee, a reasonable inference can be drawn that the assessee has purchased goods from the grey market and obtained bills from these parties to cover up the purchases. Therefore, under these facts and circumstances, what needs to be taxed is only the profit element embedded in such purchases, but not the entire purchases from these parties.

Various Courts and Tribunals upheld estimation of net profit ranging from 12.5% to 25% depending upon facts and circumstances of each case. The Hon’ble Gujarat High Court in the case of Vijay Proteins Ltd. v. ACIT (1996) 58 ITD 428 (Guj), under similar set of facts, has upheld estimation of net profit of 15% on bogus purchases. No uniform yardsticks could be applied to estimate net profit because various of various nature of risk involved in various types of business. In this case, the assessee is involved in specialized business of providing lifting solutions of heavy equipment from the ground level to the critical point of its final placement which requires specialized skills and knowledge. The assessee also declared a gross profit of 37% on its gross receipts. Keeping in view overall facts and circumstances of the case, we are of the considered view that a reasonable net profit of 12.5% on total bogus purchases would be sufficient to meet the ends of justice. Hence, we direct the assessing officer to estimate net profit of 12.5% on total purchases made from the above two parties.

Full Text of the ITAT Order is as follows:-

These are two appeals filed by the revenue directed against separate, but identical order of Commissioner (Appeals)-22, Mumbai dated 26-5-2015 for the assessment years 2009-10 & 2010-11. Since facts are identical and issues are common, for the sake of convenience, these appeals were heard together and are disposed of by this common order.

2. The brief facts of the case extracted from ITA No. 4557/Mum/2015 for the assessment year 2009-10 are that the assessee company engaged in the business of providing lifting solutions for heavy and odd sized equipment right from designing to execution of lifting job, filed its return of income for the assessment year 2009-10 on 30-9-2009 declaring total income at Rs. 3,0970,753. The return was processed under sections 143(1) of the Income Tax Act, 1961. Subsequently, the assessing officer received information from the Investigation Wing of the Income Tax Department, Mumbai, which has forwarded details and statements of hawala operators, who have confirmed to have given bogus bills to certain companies, prepared by the Maharashtra Sales-tax Department and it was informed that the assessee is one of the beneficiaries of such bogus purchase bills. Therefore, the assessing officer had reason to believe that income chargeable to tax has escaped assessment within the meaning of section 147 of the Act and hence reopened the assessment by issuing notice under sections 148 of the Act. Subsequently, the case has been converted into scrutiny assessment and accordingly, notices under sections 143(2) and 142(1) of the Act were issued. In response to notices, the authorized representative of the assessee appeared from time to time and furnished relevant details, as called for.

3. During the course of assessment proceedings, the assessing officer observed that the assessee has purchased materials from M/s. Rushabh Enterprises for Rs. 37,79,072 and M/s. Swatisk Enterprises for Rs. 15,53,156 and both the parties were listed in the list prepared by the Maharashtra Sales-tax Department as hawala operators involved in providing bogus purchase bills without actual delivery of goods. Therefore, the assessing officer asked the assessee to furnish necessary evidences in support of purchases made from the above parties. In response to show cause notice, the assessee preliminarily raised objections for reopening of the assessment on the ground that the reopening of assessment on the basis of information received by the department from the external source is not tenable in law. As regards purchases from the alleged hawala operators, it was submitted that it has purchased MS plate, MS channel and MS angle from M/s. Rushabh Enterprises and M/s. Swastik Enterprises, which are the materials required to carry out business activity of providing lifting solutions of heavy equipment from the ground level to the critical point of its final placement. These raw materials were sent to different places of work. In this regard, the assessee has furnished details of purchase order, invoices, delivery challans, consignment note and bank statement showing payment details against the purchase bills through proper banking channel. The assessing officer, after considering the relevant submissions of the assessee and also relying upon certain judicial precedents observed that in view of the detailed investigation carried out by the Sales-tax Department, Mumbai and their findings coupled with statement of the parties admitting the fact of issuance of bogus bills and non furnishing of documentary evidences to establish genuineness of such purchases, the purchases made from the alleged parties were treated as bogus purchases. The assessee has failed to furnish any evidence to rebut the findings. And that these transactions have resulted into reducing the profits of the assessee by inflating the purchases and hence, the total purchases made from the above two parties amounting to Rs. 53,32,228 was treated as unexplained expenditure under sections 69C of the Income Tax Act, 1961 and added back to the total income. Aggrieved by the assessment order, the assessee preferred appeal before Commissioner (Appeals).

4. Before the Commissioner (Appeals), the assessee reiterated its submissions made before the assessing officer. The assessee further submitted that it has purchased raw materials from M/s. Rushabh Enterprises and M/s. Swastik Enterprises and the raw materials were used in execution of works contract at various places and necessary evidence has been filed before the assessing officer. The assessee further submitted that its purchases are supported by proper purchase invoices, delivery challans, consignment note and bank statement for having remitted the payment for purchases through proper banking channels. The assessing officer ignoring all evidences, filed to justify the purchases, made additions solely on the basis of information received from the Investigation Wing which stated that the above two parties were hawala operators indulging in providing accommodation entries without actual delivery of goods. The assessee further submitted that the assessing officer neither pointed out any irregularities in books of account nor has disputed sales declared by the assessee. The assessee has maintained proper books of account and its books of account are audited by the CA where the auditors have given an inclusive report about the books of account and its affairs. The assessee further submitted that it has reported gross profit of more than 37% which is quite high in this line of business when compared to industrial average. Therefore, the assessing officer was completely erred in doubting the purchases which are supported by valid documents.

5. The Commissioner (Appeals), after considering the relevant submissions of the assessee dismissed the ground raised by the assessee challenging the validity of reopening assessment. Insofar as additions towards alleged bogus purchases, the Commissioner (Appeals), by following the decision of ITAT, Mumbai Benches in the case of Ramesh Kumar & Co v. ACIT in ITA No. 2959/Mum/2014, held that in the case of contractor, if he declares a net profit of 8%, then it is reasonable. In the absence of any finding as to receiving cash back from the suppliers towards purchases made from alleged bogus suppliers, additions cannot be made, based on the information received from sales-tax department. The Commissioner (Appeals) further observed that the assessee has declared a gross profit of 37.13% which is above the normal profit declared in this line of business. The assessing officer has not brought on record any evidence to show that the assessee has received cash back from the suppliers. With these observations, the Commissioner (Appeals) deleted the addition made by the assessing officer towards bogus purchases. Aggrieved by the order of Commissioner (Appeals), the revenue is in appeal before us.

6. The learned Departmental Representative submitted that the learned Commissioner (Appeals) erred in not appreciating the fact that the supplier has admitted before sales-tax authorities that they were involved in providing accommodation entries without actual delivery of goods. Though the assessee has filed certain evidences in the form of purchase bills and payment proof, but failed to rebut the allegations made by the assessing officer in the backdrop of findings of the Maharashtra Sales Tax Department, which confirmed that the said parties were involved in providing accommodation entries. The assessee failed to produce the parties in person and also when the assessing officer has issued notices to the above parties, the notices were returned unserved with the remark, “no such parties are available”. The learned Departmental Representative further referring to the decision of Hon’ble Supreme Court in the case of NK Proteins Ltd. in SLP 759 of 2017, dt. 16-1-2017 submitted that once it is proved that the purchases are bogus, then addition should be made for entire purchases and not for profit element embedded in such purchases. The Commissioner (Appeals), without appreciating the facts simply deleted addition made by the assessing officer. Therefore, the learned Departmental Representative requested to uphold the addition made by the assessing officer.

7. On the other hand, the learned Authorized Representative for the assessee strongly supporting the order of Commissioner (Appeals) submitted that the assessee has produced all the details in support of purchases made from above two parties right from purchase order to payment details which, undoubtedly proves that the purchases are genuine in nature. The assessing officer, without conducting any further inquiries, simply made addition on the basis of information received from Investigation Wing without allowing the assessee to cross examine the parties. On the other hand, assessee has furnished all the evidences to prove the purchases. The assessing officer never doubted the sales declared by the assessee nor pointed out any inconsistency in the books of account or stock details maintained by the assesee. The assessee has furnished complete details of analysis of stock and there is no difference in quantitative details filed by the assessee. In the absence of any observation as to incorrectness of books of account and stock details and also the fact that sales are accepted, the assessing officer was incorrect in rejecting purchases solely on the basis of third party information.

8. The learned Authorized Representative referring to the decision of Hon’ble Supreme Court in the case of NK Proteins Ltd. v. DCIT (supra), submitted that the facts of the case before the Hon’ble Supreme Court, are altogether different from the facts of the assessee’s case. In the case before the Hon’ble Supreme Court, there was search in the premises of the assessee and during the course of search certain unsigned cheque books and blank bills and vouchers of concerns from whom the purchases were made, were found and seized. Under these facts and circumstances, the Court held that purchases made from those parties were bogus and hence addition needs to be made at 100% of purchases. The learned Authorised Representative referring to another decision relied upon by the learned Departmental Representative in the case of CIT v. M/s. Corporate Mahal IT Appeal No. 170 of 2009 submitted that the facts of this case are distinguishable from assessee’s case, therefore, cannot be applied to the assessee’s case. The Commissioner (Appeals) has considered relevant facts and also relied upon the decision of ITAT while deleting the addition made by the assessing officer and his order should be upheld.

9. We have heard both the parties and perused materials available on record and also gone through the orders of authorities below. The assessing officer disallowed purchases from two parties, viz. M/s. Rushabh Enterprises and M/s. Swastik Enterprises, on the basis of list of hawala operators published by Maharashtra Sales Tax Department which contained the name of above parties. The notices sent to these parties were returned unserved by postal authorities with remark, “no such parties are existed at the given address”. Under these circumstances, the assessing officer was of the opinion that the assessee failed to discharge onus cast upon it to prove the purchases with necessary evidence. The assessing officer further was of the opinion that although assessee has furnished certain evidence in the form of purchase bills and payment details failed to rebut the allegations made in the backdrop of observations of Sales-tax department which found that the said parties were involved in providing accommodation entries without actual delivery of goods. Therefore, he opined that purchases from above parties are bogus in nature and hence, made addition under sections 69C of the Act. The contention of the assessee is that merely because parties have not responded to the notice, addition cannot be made towards purchases, which are supported by various documents. The assessee further contended that the assessing officer has not pointed out any irregularities in the books of account or stock details and in the absence of any finding as to the incorrectness of books of account, addition cannot be made solely on the basis of third party information, that too, without providing an opportunity of cross examination.

10. Having heard both the sides and considered material on record, we find that the assessing officers main allegation is that above two parties are involved in providing accommodation entries as per the list published by Maharashtra Sales Tax Department. On the other hand, assessee has furnished certain evidences in the form of purchase order, purchase bill, delivery challan, consignment note and payment details to prove the purchases. The assessee also furnished complete details of quantitative stock statement and argued that there is no difference in stock details. Though the assessee has produced certain details to prove the purchases from the said parties, in view of the fact that the assessee could not prove the existence of the parties and also could not rebut the finding of Maharashtra State Sales-tax department that the parties were hawala operators, involved in providing accommodation entries, the purchases from the said parties cannot be accepted as genuine. But keeping in view the fact that the assessing officer had not doubted sales declared by the assessee, a reasonable inference can be drawn that the assessee has purchased goods from the grey market and obtained bills from these parties to cover up the purchases. Therefore, under these facts and circumstances, what needs to be taxed is only the profit element embedded in such purchases, but not the entire purchases from these parties.

11. Having said so, let us examine what is reasonable profit in case of these transactions. Various Courts and Tribunals upheld estimation of net profit ranging from 12.5% to 25% depending upon facts and circumstances of each case. The Hon’ble Gujarat High Court in the case of Vijay Proteins Ltd. v. ACIT (1996) 58 ITD 428 (Guj), under similar set of facts, has upheld estimation of net profit of 15% on bogus purchases. No uniform yardsticks could be applied to estimate net profit because various of various nature of risk involved in various types of business. In this case, the assessee is involved in specialized business of providing lifting solutions of heavy equipment from the ground level to the critical point of its final placement which requires specialized skills and knowledge. The assessee also declared a gross profit of 37% on its gross receipts. Keeping in view overall facts and circumstances of the case, we are of the considered view that a reasonable net profit of 12.5% on total bogus purchases would be sufficient to meet the ends of justice. Hence, we direct the assessing officer to estimate net profit of 12.5% on total purchases made from the above two parties.

12. In the result, appeal filed by the revenue for assessment year 2009-10 is partly allowed.

13. With regard to the other appeal in ITA No. 4558/Mum/2015 for assessment year 2010- 11, also filed by the revenue, we find that the facts and circumstances of the addition are akin to assessment year 2009-10 except for the figures, which we have already decided in foregoing paragraphs. Therefore, consistent with the decision already arrived at for assessment year 2008-09, we direct the assessing officer to estimate net profit of 12.5% on total purchases made from the above two parties.

14. In the result, appeal for assessment year 2010-11 is also partly allowed.

15. In the result, both the appeals filed by the revenue are partly allowed.

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Category : Income Tax (25488)
Type : Judiciary (10239)
Tags : Bogus purchases (67) ITAT Judgments (4601) Section 69C (23)

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