When total sale was accepted by the AO, then, the entire purchases could not be added to the total income of the assessee. If there was case of bogus purchases then only profit element embedded in such purchases was to be added, not the total purchases made from those parties. Hence, the addition made by the CIT (A) regarding adopting the profit element at 8% on garden item trading segment and 12.5% on garden maintenance segment in estimating the profit element on the purchases made by the assessee was sustained.
FULL TEXT OF THE ITAT JUDGMENT
1. These appeals are filed by the Revenue and cross objections by assessee against the orders of the Ld. Commissioner of Income Tax (Appeals)- 21, Mumbai dated 16.06.2016 for the Assessment Years 2009-10 and 2012-13.
2. The only issue in both the appeals of Revenue as well as the cross objections of the assessee is in respect of certain purchases treated as non-genuine by the Assessing Officer and the Ld.CIT(A) estimated the profit element out of such purchases at 8% made in Garden Item Trading segment and 12.5% in Garden Maintenance Contract segment as against the entire purchases treated as non-genuine by the Assessing Officer. The assessee is in appeal against the order of the Ld.CIT(A) in estimating the profit element out of such purchases and the Revenue is in appeal in not sustaining the entire purchases disallowed by the Assessing Officer.
3. The Learned Counsel for the assessee submitted that identical issue came up before the Tribunal for the Assessment Year 2011-12 in ITA. No. 3835/Mum/2016 and CO. No. 312/Mum/2017 and the Coordinate Bench by order dated 24.01.2018 sustained the order of the Ld.CIT(A) in estimating the profit from such purchases in respect of Garden Item Trading segment at 8% and 12.5% on Garden Maintenance Contract segment. Learned Counsel for the assessee submitted that copy of the order is placed on record at Page Nos. 96 to 110 of the Paper Book.
4. DR fairly submitted that identical issue came up before the Tribunal and the Tribunal sustained the order of the Ld.CIT(A) in estimating the profit from such purchases. However, he strongly supported the orders of the Assessing Officer.
5. We have heard the rival submissions, perused the orders of the authorities below and the decision of the Coordinate Bench in assessee’s own case for the Assessment Year 2011-12. We find that the Assessing Officer in the course of the Assessment Proceedings noticed that assessee is a beneficiary of bogus purchase bills issued by suspicious dealers listed by the Maharashtra Sales Tax Department. The Assessing Officer required the assessee to prove the purchase transactions with the parties as genuine as has extracted in the Assessment Order in both the Assessment Years. Assessee filed copy of ledger account, confirmations of all the parties along with the sample copies of invoices issued and delivery challans, copy of work orders issued by the Municipal Corporation of Greater Mumbai [in short “MCGM”] along with the payment certificates and certificates issued by vigilance Department. Assessee also filed proof of payment by account payee cheques, quantitative details of items used in Garden development along with other details of purchases from the alleged bogus parties were furnished. It was also submitted that that quantitative tally of these are confirmed by the vigilance Department of MCGM. It is also submitted that sales are not doubted and therefore no addition can be made toward bogus purchases as all the purchases were genuine. However, Assessing Officer rejected the submissions of the assessee. Assessing Officer brought entire purchases made from the parties as mentioned in the Assessment Order as bogus and non-genuine.
6. On appeal the Ld.CIT(A) on examination of the submissions, evidences furnished before the Assessing Officer as well as before him and guided by the ratio of Hon’ble Gujarat High Court in the case of CIT v. Simit P. Seth [356 ITR 451] held that when the total sales are accepted by the Assessing Officer then the entire purchases cannot be added to the income of the assessee. Therefore, in view of the decision of the Hon’ble Gujarat High Court he held that only the fair profit ratio would be added back to the income of the assessee. Further Ld.CIT(A) also stated that similar basis was adopted in the case of Shri Kishore Kumar Agarwal for A.Y. 2011-12 and Shri Bimal Agarwal for A.Y. 2010-11 on identical and similar facts as that of the present case as both of them are the persons concerned or connected to the assessee’s group. He also observed that similar basis was also adopted in assessee’s own case for the Assessment Years 2010-11 and 2011-12 on identical facts, wherein he computed the profit element on trading sales segments at 8% as the assessee earning Gross Profit slightly less than 8% from this segment and no addition was made in respect of Garden maintenance contract for the reason that the Gross Profit declared by the assessee was more than the estimated Gross Profit from such segment at 12.5% for the Assessment Year 2012-13. Similarly, the Ld.CIT(A) for the Assessment Year 2009-10 estimated the profit element from trading sales segment at 8% and no addition was made from Garden Maintenance contract segment for the reason that the Gross Profit declared by the assessee is more than the estimated Gross Profit at 12.5% for the Assessment Year 2009-10.
7. We find that on identical facts and circumstances where some of the parties from whom the assessee purchased material are also common, the Tribunal for the Assessment Year 2011-12 sustained the order of the Ld.CIT(A) in adopting the profit element at 8% on Garden Item Trading segment and 12.5% on Garden Maintenance Contract segment to determine the total addition to be sustained on alleged bogus purchases from the parties and confirmed the addition made by the Ld.CIT(A) observing as under:
“11. Having heard both the sides and considered material on record we find merits in the arguments of the assessee for the reason that the Assessing Officer has not made out any case of sales outside the books of account nor pointed out any discrepancy in the books of account and stock details furnished by the assessee. The Assessing Officer is only on the point that the assessee is not able to justify the purchases in the backdrop of allegations made by the Sales Tax Department that the parties from whom the assessee purchased a goods were listed as suspicious dealers/hawala operators indulging in providing accommodation entries. On the other hand, the assessee has submitted complete details of purchases including purchase bills and payment proof. The assessee has also filed complete details of consumption of material purchases from those parties and the execution of works contract for agencies from whom it has undertaken works contract. We further notice that the Assessing Officer has not made out any case of sales outside the books of account nor pointed out any discrepancy in the Books of Accounts of the assessee. Therefore, we are of the considered view that merely on the basis of third party statement and also on the basis of notices issue u/s. 133(6), an adverse inference cannot be drawn about the purchases and the assessee has filed complete details of purchases. When however, the fact remains that the parties are appearing in the list prepared by the Sales Tax Department as suspicious/hawala operators indulging in providing accommodation entries has not been controverted by the assessee with necessary evidence. Though the assessee has filed purchase bills and payment proof for such purchases, in the backdrop of clear cut finding of the Sales Tax Department the purchases from the above parties cannot be considered as genuine in total. In these circumstances, one has to see what needs to be considered, whether it is the entire purchases from the above parties to be added because they are bogus in nature or only the profit element embedded in such purchases could be added. The issue is no longer res integra. The Hon’ble Gujarat High Court in the case of CIT Vs. Simit P. Sheth (supra) has considered similar case wherein the Hon’ble court held that when the total sales is accepted by the AO, then the entire purchases cannot be added to the total income of the assessee. The court further held that in the case of bogus purchases only profit element embedded in such purchases needs to be added but not total purchases made from those parties. The Hon’ble Gujarat High Court in the case of CIT vs. Vijay Proteins Ltd (2015) 58 Taxmann.com 44 (Guj) held that addition cannot be made towards total purchases and what need to be taxed in only the profit element. The ITAT Mumbai Benches in a number of cases has taken a consistent view and directed the Assessing Officer to estimate net Profit of 12.5% to 15% on total bogus purchases. The ITAT in the case of Kishore Kumar Aggarwal Vs. DCIT in ITA.No. 870 and 871/Mum/2015 dated 25.01.2017 where the facts are identical and also part of assessee’s group has taken a similar view and upheld estimation of Gross Profit at 10%. The sum and substances of ratios laid down by the courts and Tribunals is that in the case of bogus purchases only profit element embedded in such purchases is to be taxed but not total bogus purchases. In this case the CIT(A) after considering relevant facts has adopted net profit of 8% on total sales achieved by the assessee in garden items segment and 12.5% on garden maintenance contracts to determine the total addition to be sustained on alleged bogus purchases from the above parties and confirmed the addition to the extent of ₹.28,78,748/- as against addition made by the Assessing Officer of ₹.8,64,00,351/-. Therefore, we are of the considered view that the CIT(A) was right in restricting the addition to the extent of Gross Profit embedded in such bogus purchases. We do not find any error in the order of the CIT(A). Hence, we are inclined to uphold the findings of the CIT(A) and dismiss the appeal filed by the Revenue.”
8. Facts being identical, following the order of the Tribunal for the Assessment Year 2011-12, we sustain the order of the Ld.CIT(A) for the Assessment Years 2009-10 and 2012-13 in adopting the profit element at 8% on Garden Item Trading segment and 12.5% on Garden Maintenance Contract segment in estimating the profit element on the purchases made by the assessee. Thus the addition as estimated by the Ld.CIT(A) is confirmed. Grounds raised by the Revenue are rejected.
9. As we have sustained the order of the Ld.CIT(A) the contention of the assessee in the cross objections that there should not have been any addition is rejected and the grounds raised in the cross objection are dismissed.
10. In the result, appeals of the Revenue and cross objections of the assessee are dismissed.
Order pronounced in the open court on the 17th April, 2018.