No GP Addition Without Discrepancy in Purchases & Sales: ITAT Mumbai

Nickunj Eximp Enterprises Pvt. Ltd. Vs ACIT Cen. Cir (ITAT Mumbai)

This order from the Income Tax Appellate Tribunal (ITAT) Mumbai addresses cross-appeals filed by Nickunj Eximp Enterprises Pvt. Ltd. (the assessee) and the Additional Commissioner of Income Tax (ACIT) concerning the assessment year 2017-18. The core disputes revolve around the validity of additions made by the Assessing Officer (AO) regarding alleged bogus purchases and cash deposits during the demonetization period. The revenue contested the Commissioner of Income Tax (Appeals) [CIT(A)]’s decision to partially allow the assessee’s claims regarding the purchases and the cash deposits. The assessee, in turn, challenged the remaining additions made by the CIT(A) and the overall assessment process.

The revenue’s appeal centered on the CIT(A)’s partial allowance of alleged bogus purchases amounting to Rs. 112,45,79,754, arguing that the entire amount should have been disallowed as unexplained expenditure. They also disputed the CIT(A)’s acceptance of the assessee’s explanation for cash deposits of Rs. 4,29,77,547 during demonetization, asserting that these deposits should have been treated as unexplained cash credits. The revenue further argued that the CIT(A) failed to adequately consider judicial precedents, including rulings from the Delhi High Court and the Supreme Court, which emphasize the need for thorough scrutiny of transactions, especially those involving accommodation entries. The revenue claimed that mere submission of documents like PAN, ITR, and bank statements is insufficient to discharge the assessee’s burden of proof.

The assessee’s appeal primarily focused on the addition of Rs. 12,49,53,305 related to alleged bogus purchases, contending that the assessment was invalid due to the lack of incriminating material found during the search. They argued that the AO exceeded the scope of the search by relying on external information and that the CIT(A) erred in upholding any portion of the addition. The assessee also raised concerns about the interest levied under section 234A of the Income Tax Act, arguing that the delay in filing the return was not attributable to them. The ITAT examined the evidence presented by both parties, including purchase and sales records, cash books, and bank statements. They noted that the assessee had provided detailed documentation showing a direct correlation between purchases and sales, both in terms of quantity and value. The ITAT also considered the assessee’s explanation for the cash deposits during demonetization, which was supported by evidence of consistent cash balances and sales records. The ITAT dismissed the revenue’s appeal regarding the cash deposits, accepting the assessee’s explanation. The ITAT allowed the assessee’s appeal regarding the bogus purchases, concluding that the purchases were genuine, and deleted the 10% gross profit addition sustained by the CIT(A). The tribunal found that the assessee adequately explained the source of the cash deposits and that the AO’s observations were not supported by the evidence. The tribunal also noted the assessee’s consistent maintenance of cash balances and the correlation between cash sales and deposits.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The aforesaid cross appeals have been filed by the assessee as well as by the revenue against the separate impugned order dated 20.07.2021 for AY 2017-18 passed by Ld. PCIT (A)-48 Mumbai for the quantum of assessment passed u/s 153C r.w.s. 143(3).

2. Since the issues involved in both the appeals are common arising out of identical set of facts, therefore the same were heard together and is being disposed of by way of this consolidated order.

3. The revenue has raised the following grounds:-

1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in Partly allowing the Bogus purchase of Rs. 112,45,79,754/- which was rightly disallowed by Assessing Officer as unexplained expenditure u/s. 69C of the Act.

2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the cash deposited in bank account during demonetization of Rs. 4,29,77,547/- as unexplained cash credit u/s. 68 r.w.s 115BBE of the Act.

3. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating the decision in Nova Promoters and Finlease 342 ITR 169 (2012) wherein the Hon’ble Delhi High Court held that mere filing of PAN, ITRS, account confirmations and bank statements of the creditors is not sufficient enough to discharge the onus cast upon the assessee u/s 68 of the Income Tax Act, 1961 when there are sufficient evidences of accommodation entry.

4. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in not upholding the additions made by AO in view of the judgment of the Supreme Court in Principal Commissioner of Income Tax (Central)-! Vs. NRA Iron & Steel Put. Ltd (arising out oj SLP (Civil) No. 29855 of 2018) wherein the Apex court held that the practice of conversion of un-accounted money must be subjected to careful scrutiny.

5. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in restricting the addition made by the AO on account of bogus purchases to 10% instead of 100% in view of decision of Hon’ble Supreme Court in the case of NK Proteins Ltd. in SLP 759 of 2017, dated 16 01-2017, wherein it was held that once it is proved that the purchases are bogus, then the addition should be made for the entire purchases and not for profit element embedded in such purchases.

4. Whereas the assessee has raised the following grounds:-

1. Whether on the facts and circumstances of the case and in law, CIT (A) erred in making addition of Rs.12,49,53,305/- in absence of any incriminating materials found in the course of search, hence the entire assessment proceedings are vitiated and bad in law based on settled judicial pronouncements.

2. Whether on the facts and circumstances of the case and in law, Assessing Officer ought to have proceeded only on the basis of seized material and evidence found during the course of search, travelling beyond that would make proceedings bad in law based on decision of Kabul Chawla’s judgement (61 com 412) and other settled case laws.

3. Whether on the facts and circumstances of the case and in law, CIT (A) erred in making addition of Rs. 12,49,53,305/- on account of bogus purchases.

4.1 Whether on the facts and circumstances of the case and in law, Assessing Officer erred in levying interest u/s. 234A of Rs. 6,98,79,018/-, when in fact there is no delay and that the return was filed as soon as the notice u/s. 153A was received and the delay is not attributable to the cause of the appellants.

4.2 The Notice was on the portal in January 2019, when e-assessment was existing, however the rules exempted search and seizure returns as soon as appellants were aware, the returns were filed in August, 2019. Thus, there is no delay attributable to the appellants, hence section 234A is not attracted.

5. Assessee has not pressed Ground no. 1, 2 & 4; therefore, the same are dismissed as not pressed. In so far as Ground no. 3 which relates to addition of Rs. 12,49,53,305/- on account of bogus purchases, it has been admitted by both the parties that this issue is decided in Appeal for AY 2014-15 to 2016-17 in I.T.A. Nos.1823, 1819 & 1821/Mum/2021, as heard by the Tribunal on 13.09.2022. We have already decided this issue by order of even date, where we have given our findings on issue of purchases after considering all the facts and evidences, which reads as under:-

“13. We have heard the rival submissions, perused the relevant finding given in the impugned orders as discussed above and the material referred to before us. Before us Ld. Counsel for the assessee submitted that, one of the strong reasons given by the AO is the statement of Shri Manohar Balkrishna Pai, Executive Vice President of the assessee. However, from the perusal of the said statement it can be seen that, nowhere he has stated in his statement that purchases are bogus. He has mentioned only about the SOP followed for purchases. Before us, Ld. Counsel has submitted that nothing incriminating has been found during the course of search which show that these purchases are bogus. AO has mainly relied on outside information and which cannot be treated as incriminating material found during the course of search and AY 2014-15 being the non-abated year. He further submitted that here in this case there is one to one nexus between the purchase and sale of goods. The copy of which has also been placed before us vide covering letter dated 13th September 2022, where assessee has given bill wise, date wise purchases which shows the exact quantity and amount and also corresponding sales of the same quantity and same amount which are duly recorded in the books of account. This fact has also been noted by Ld. CIT (A) also. This detail has been filed in response to query raised by us during the course of hearing by us to furnish the date wise detail of trading account showing the gross profit percentage in respect of alleged bogus purchases and other purchases and apart from that, details of bill wise sales against such alleged bogus purchases for the above captioned assessment years.

14. From the perusal of the same, we find that there is one to one co-relation of exact quantity of purchases as well as sales and also the corresponding GP on such sales. Apart from that, details of purchase order, invoice, delivery challan, material receipt stamp, confirmation, ledger accounts of the bank statements have been submitted before us which has also been filed before the lower authorities and which fact we find that, Ld. CIT (A) has also noted and in the assessment order also which are mentioned from pages 6-8 of the assessment order. Ld. Counsel before us filed item wise registers showing purchases and sales of goods which have also placed in the paper book. Once the source of purchases are from the books of accounts and the payment have been made through banking channel and there is a corresponding sales which matches with the quantitative bill and purchases recorded in the books of account, then it cannot be said that purchases have been made outside books which could lead to any inference that all purchases have been made outside the books or are bogus.

15. With regard to inference drawn in respect of one party, i.e., Ramka Silk House, Ld. Counsel submitted that assessee has provided new address of the party and AO has issued summon u/s 131 on ITBA portal on 16.12.2019 and the assessment order has been passed on 18.12.2019. Thus, the time given was only 2 days and no adverse inference could be drawn that party could not be produced. There is no information from any outside agency that this party is non-genuine or engaged in any accommodation entries. Thus, we agree with the prima facie observation of Ld. CIT(A) that the purchases cannot be held to be bogus.

16. Ld. DR submitted before us that Ld. AO has analyzed each and every party based on conclusion drawn by Investigation Wing during the course of search in the case of Nickunj Group. The details which were filed by the assessee have been found lacking which facts have been brought on record by the AO. Thus, it cannot be held that purchases were genuine.

17. The contention of Ld. DR cannot be accepted in the light of the evidences which itself have been noted by Ld. CIT (A). In support of purchases, we have discussed in the foregoing paragraphs. One of the most vital and important factor going in favour of the assessee that there is one to one co-relation of purchases and sales not only quantity wise but also bill wise details. All these purchases and sales are duly recorded in the books of account and AO has not distributed the sales at all. Once the sale of the same quantity has been accepted, then it cannot be said that the entire purchases are bogus. Accordingly, we are of the opinion that the entire purchases cannot be added.

18. With regard to assessee’s appeal that Ld. CIT(A) has not justified in importing gross profit of 10% on such alleged bogus purchases. Before us, Ld. Counsel has demonstrated that the assessee before placing the purchase order had buyers and based on the demand of buyer assessee use to place the order. Thus, after getting the sales order, assessee has made the purchases on credit and immediately after the purchases received, assessee makes the corresponding sales on the same day or next day, which fact has been noted by Ld. CIT(A) and has also been demonstrated and filed before us. Thus, there was no working capital or investment which has been blocked for alleged bogus purchases. From the details furnished before us and also before Ld. CIT(A), it is seen that assessee has received sale consideration and immediately from such sale assessee had made purchases and this fact has been noted by Ld. CIT(A) in para 6.27 as noted above. In any case assessee is trading in fabrics which items are exempt from VAT, Octroi etc, therefore, it cannot be presume that assessee has taken accommodation entries of purchases to save VAT of 10% or 12%. Assessee has filed justification for GP rate on these items which is ranging 1.36% to 2.34% and looking into the fact that there is minimum movement of the stock right from the moment purchase to sales and it is in consistent with its gross profit margins showed by the assessee in the earlier and in subsequent years, therefore it cannot be held that assessee’s GP rate on these items are low. It is brought on record that overall assessee’s GP in trading of all items are ranging between 26.14% to 36.14% and overall GP shown in the trading account is far higher and therefore, no adverse inference should be drawn. Thus, we do not have any justification of such adhoc estimation of GP of 10% for each and every purchases made from these parties and estimate corresponding GP, when overall GP and the trading account has been accepted. Accordingly, the addition sustained by Ld. CIT (A) by applying adhoc GP rate 10% is also deleted. Resultantly, the appeal of the assessee is allowed on merits.

19. In the cross appeals for AY 2015-16 and 2016-17 exactly the similar grounds have been raised, therefore our findings in the cross appeals for AY 2014-15 is apply mutatis mutandis in the said appeals.

6. Since similar reasons have been given AO and Ld. CIT (A) and similar facts are permeating, therefore, our findings given therein will apply mutatis mutandis. Accordingly, the purchases are held to be genuine and consequentially, Ground no. 3 raised by assessee is allowed and the revenue’s ground is dismissed in this regard.

7. In Ground No. 2, revenue has challenged the deletion of addition of Rs. 4,29,77,547/- on account of cash deposit during demonetization which has been added u/s 68 r.w.s. 115BBE of the Act.

8. The facts in brief are that, during the course of search, it was noticed that assessee has deposited cash of Rs. 4,29,77,547/- in the bank account during demonetization. In the statement recorded of Shri Manohar Balakrishna Pai, Director of the assessee company stated that cash deposit in the bank account remain out of available cash in hand and cash sales made by the assessee. These deposits were made during the period 08.11.2016 to 13.12.2016. The assessee reply before the AO vide letter dated 09.12.2019 was as under:-

With regard to Cash deposits of Rs.4,29,77,547/-, we have vide letter dated 9.11.2019 submitted following documents –

a. Sample Cash Sale Invoices.

b. Online replies filed against query raised in relation to demonetization period.

c. Cash Book from 1.10.2016 to 31.12.2016.

d. Bank Statement for 1.11.2016 to 31.12.2016.

e. Ledger of Stock items where cash sales were affected.

f. Cash Deposit details in the prescribed format.

Further, we are enclosing following documents –

a. Please find enclosed statement showing Cash deposits in Bank accounts from A.Y. 2012-13 till A.Y. 2017-18 and also Cash on hand as on yearend of respective years. Annexure-1

b. Cash Books from the period from 17.11.2017 i.e. date of search to 31.3.2018. Annexure-2

It is submitted that, as can be seen from the chart of cash deposits, that for A.Y. 2016-17, Cash deposits in bank accounts for the year works out to Rs. 21,15,52,910/-, whereas for A.Y. 2017-18, including demonetization period, Cash deposits in bank accounts for the year works out to Rs. 17,01, 98,64 //-, which is lesser than cash deposits for A.Y.2016-17.

Further, as can be seen that, Cash balances as on 1.4.2016 was Rs. 2,92,27,136/- as per books of account, which was mainly utilized for cash deposits during the demonetization period i.e. 9.11.2016 to 31.12.2016, apart from cash sales during the period from 1.4.2016 till 8.11.2016.”

9. However, Ld. AO rejected the contention of the assessee and added the same in the following manner:-

• Assessee has mentioned that opening cash in hand as on 1-4­2016 was Rs.2,92,27,134/-. Assessee has further given opening cash balance at the beginning of every month. As per assessee cash in hand from 1-11-2016 to 8-11-2016 was Rs. 2,04,35,755/-. Assessee has completely ignored the part where cash expenses are done to run a business. It is very strange and unacceptable explanation that from 1-11-2016 to 8-11-2016 assessee’s cash in hand balance has not changed at all. Furthermore assessee’s cash in hand as on 1-11-2015 is just Rs.82,19,4887-. It shows that assessee has rigged the numbers to explain the/ amount of cash deposits made during demonetisation period.
• Further assessee has made the cash expense of Rs.4,71,80,866/- from 1-4-2015 to 8-11-2015. Whereas cash expenses shown by assessee from 1-4-2016 to 8-11-2016 is Rs.l,97,58,411. This once again demonstrate that assessee is showing reduced amount of cash expenses so that it can explain the source of cash deposit as opening cash balance shown by the assessee on 1-4-2016.
• Assessee has shown total cash sale of Rs.14,86,55,992/-during the year. But it has shown/ cash sale of Rs. 11,48,23,686/- from 1-4-2016 to 8-11-2016. Whereas for remaining 4 months of the year cash sale shown is not proportionate to cash sale made in earlier period. This is beyond human probability. And it shows adjustment made by the assessee to explain the huge cash deposit out of its unaccounted money.
• When ratio of cash deposit made in the bank from 9-11-2015 to 31-12-2015 to total cash deposit made in FY 2015-16 comes at 21.64%. Whereas ratio of cash deposit made in the bank from 9­11-2016 to 31-12-2016 to total cash deposit made in FY 2016-17 is taken it comes at 38.91%. There has been increase of 79% in this ratio. This is unprecedented increase in cash deposit made by the assessee and explanation given by the assessee is not tenable.
• Further assessee has submitted sample invoices of cash sale. Only few invoices contains complete details of the purchaser like name, PAN and addresses. Assessee has failed to provide whereabouts of all purchasers who have made purchase in cash.
• Still based on the available data on the record 2 notices were sent on test check basis to the parties to whom cash sale is made. Assessee has made the claim that it has made cash sale to these parties. However as mentioned earlier one notice returned unserved and no response has been received in this office for second notice.
• Assessee has not mentioned details of specified notes deposited in bank during the year its audit report despite being necessary.
• In view of the above, I am of the considerate view that explanation given by the assessee for huge cash deposit during demonetisation period is not accepted.
• Further assessee vide show cause notice dated 5-12-2019 was asked to show cause why the cash deposit made during demonetisation period should not be treated as unexplained cash credit u/s 68, to which assessee has once again given the same response which it submitted earlier.

10. Before Ld. CIT(A), assessee produced cash book for the period 01.10.16 to 31.02.16 and was brought on record that as on 01.04.2016, cash-in-hand was Rs. 2,92,27,136/- while on 01.10.2016, the cash-in-hand was Rs. 1,88,49,164 and on 31.12.2016, the cash-in-hand was Rs. 7,50,82,930/-. Apart from that, it was also stated that the cash sales between 01.04.16 to 08.11.16 was Rs. 11,48,23,686/-. Thus, the assessee had sufficient cash-in-hand as per the books of account as on date of deposit. It was further demonstrated that assessee has been consistently maintaining cash balance and cash deposit in the bank. The assessee’s submissions have been incorporated in the impugned order at pages 66-70. Ld. CIT(A) has deleted the said addition after observing as under:-

7.3 I have considered the facts of the case, submissions of the assessee and material on record. The AO has made an addition of Rs. 4,29,77,547/- as unexplained cash credits in the bank account during the year under consideration and added to the income of the assessee u/s. 68 of the Act. Undisputed facts are that assessee had cash balance as on 01.04.2016 of Rs.2,92,27,136/- and as on 01.10.2016 cash in hand was Rs.1,88,49,164/-and as on 31.12.2016 cash in hand was Rs.7,50,82,930/-. It is quite clear that assessee was consistently maintaining a very high cash balance in hand. Also cash sales was of the order of Rs.11,48,23,686/- for the period 01.04.2016 to 08.11.2016. Thus, put together the assessee company had sufficient cash in hand to make cash deposits. The AO has also mentioned these facts in his assessment order. The assessee had produced cash book before the AO during the assessment proceedings vide letter dated 09.11.2019 as also further details were submitted vide letter dated 09.12.2019. The AO did not found any infirmity in such cash balance or cash book. The AO has been referring to the relative cash deposits made earlier year and this year but I do not find anything wrong in the same. In any case the same could not form the basis of making addition under these circumstances. The assessee has also clarified that the currency deposited was only Rs.3,73,20,000/-and not Rs.4,29,77,547/-Therefore, considering overall facts of the case, I am of the view that assessee had sufficient cash balance as on the date of deposit which was as per its cash book. Therefore cash deposits could not be treated as unexplained.

7.4. In view of this, the addition made by the AO of cash deposited in the bank of Rs. 4,29,77,547/- u/s 68 of the Act is directed to be deleted.

11. We have heard the rival submissions and also perused the relevant findings given in the impugned order as well as material placed on record before us. Undisputed fact emerging from the records are that assessee had opening cash balance of Rs. 2,92,27,136/- as on 01.04.2016 and as on 01.10.2016 cash in hand was Rs.1,88,49,164/- and as on 31.12.2016 cash in hand was Rs.7,50,82,930/-. Till the period 01.04.2016 to 08.11.2016, that is, the date when government had announced the demonetization, the assessee had cash sales of more than Rs. 11.69 crores. Apart from that, it has been stated from records that for A.Y. 2016-17, cash deposits in bank accounts for the year works out to Rs. 21,15,52,910/-, whereas for the A.Y. 2017-18, including demonetization period, cash deposits in bank accounts for the year works out to Rs. 17,01, 98,64 /-, which is lesser than cash deposits for A.Y.2016-17. Once the details of cash is borne out from the audited accounts and regular books of account maintained by the assessee, which has been verified by AO and Ld. CIT (A), then nothing remained unexplained. Apart from that, the observation of the AO have been found to be not correct in view of the explanation and documents furnished before the Ld. CIT(A) and it is a matter of fact that cash sales have been declared for the relevant previous year and accordingly, the cash payment and cash expenditure has also been reduced. Therefore, inference drawn by the AO to this extent is incorrect. Thus, we do not find any infirmity in the order of Ld. CIT(A) as incorporated above which is based on facts on records and also the source is out of cash balance shown in the books of account before the date of demonetization, therefore, we hold that the source of cash deposit stands explained. Accordingly, this ground raised by the revenue is dismissed.

12. In the result, the appeal filed by the assessee is partly allowed and the appeal filed by the revenue is dismissed.

Orders pronounced in the open court on 31st October, 2022