ITAT Delhi Restricts Bogus Purchase Addition to Profit Element Only

ACIT Vs Jotindra Steels & Tubes Limited (ITAT Delhi)

In the case of ACIT Vs Jotindra Steels & Tubes Limited, the Income Tax Appellate Tribunal (ITAT), Delhi, decided two Revenue appeals relating to Assessment Years 2011-12 and 2012-13. The primary dispute concerned additions made by the Assessing Officer (AO) on account of alleged bogus purchases.

The case arose from a search and seizure operation conducted under Section 132 of the Income Tax Act in the case of Mauria Udyog Ltd. and its group concerns. During scrutiny assessment proceedings, the AO examined purchases made by the assessee from four parties, namely M/s Ganesh Steel Syndicate, M/s Pacific Sales Corporation, M/s G.P. Trading Company, and M/s Nayak Sales Corporation.

The AO relied on seized documents containing assessment orders passed by the Deputy Commissioner, Commercial Tax, Ghaziabad, wherein purchases from these parties had been treated as bogus by the Commercial Tax Department. Further, field enquiries conducted by the Income Tax Department revealed that these parties were allegedly non-existent at their given addresses.

The assessee was asked to justify the purchases with supporting evidence. In response, the assessee stated that the Additional Commissioner (Appeals), Ghaziabad had remanded the commercial tax matter back to the Assessing Officer for reconsideration. The assessee also contended that the sales had already been accepted and corresponding demands had been created by the commercial tax authorities, indicating that the sales transactions were genuine.

The AO, however, rejected the explanation. Relying on the report of the Income Tax Inspector and the findings of the Commercial Tax Department, the AO concluded that the purchases were bogus and added the entire purchase amounts to the assessee’s income.

Before the Commissioner of Income Tax (Appeals) [CIT(A)], the assessee argued that the sales corresponding to the purchases had been accepted by the AO and no defects had been pointed out in the books of account. The assessee further demonstrated that payments to the suppliers had been made through account payee cheques and that confirmations and affidavits from the suppliers had been furnished.

The CIT(A) also noted that since VAT authorities had denied input tax credit, the assessee had not claimed such input credit as expenses. It was further observed that the sales arising out of the impugned purchases were properly recorded in the regular books of account and matched with VAT returns and supporting invoices. On these facts, the CIT(A) accepted the genuineness of the purchases and deleted the additions.

Before the Tribunal, the Revenue relied heavily on the findings of the AO and the judgment of the Punjab and Haryana High Court in the case of Shree Krishana Kripa Feeds. On the other hand, the assessee supported the order of the CIT(A) and relied upon various judicial precedents.

The Tribunal observed that the AO’s conclusions were substantially based on findings of the Commercial Tax Department, while the CIT(A)’s findings relied on the appellate order of the Commercial Tax authorities. The Tribunal also acknowledged that field enquiries indicated that the suppliers were non-existent at the recorded addresses.

However, the Tribunal held that in such situations, it is possible that goods were actually purchased from the grey market at lower prices and accommodation bills were later arranged to regularize the transactions in the books of account. The Tribunal concluded that purchases had indeed taken place, though accommodation invoices may have been obtained.

The Tribunal further noted that the CIT(A) himself had observed that even if purchases were treated as bogus, only the gross profit element embedded in such purchases could be brought to tax rather than the entire purchase amount. The Tribunal examined the assessee’s financial statements for Financial Years 2009-10, 2010-11, and 2011-12 and found the average net profit rate to be 0.673%.

Applying this average profit rate to the disputed purchases, the Tribunal restricted the additions to Rs.9,48,468 for AY 2011-12 and Rs.1,86,217 for AY 2012-13. The Tribunal relied on the Delhi High Court judgment in Bhawani Portfolio Pvt Ltd decision, which recognized that the Tribunal, as the final fact-finding authority, may make reasonable estimations.

The Revenue had also challenged deletion of an addition of Rs.35.80 lakh made on account of unexplained cash in AY 2012-13. The assessee pointed out that the issue had already been decided in its favour by the Tribunal in earlier proceedings. The Revenue did not dispute this position.

The Tribunal followed its earlier decision and upheld the deletion of the addition. It noted that the earlier coordinate bench had already held that Section 69A could not apply where the assessee was not found in possession of actual money and the addition was based merely on notings extracted from computer files. The earlier order had also noted that the alleged amount was returned on the same day and that the assessee’s name did not even appear in the relevant document. The Tribunal reiterated that additions cannot be sustained merely on presumptions and surmises.

Accordingly, the Revenue’s appeals were partly allowed only to the extent of sustaining estimated profit additions instead of the entire bogus purchase additions, while the deletion of the unexplained cash addition was upheld.

FULL TEXT OF THE ORDER OF ITAT DELHI

These two separate appeals by the Revenue are preferred against two separate orders of the CIT(A) – 23, New Delhi dated 30.11.2016 & 30.12.2016 pertaining to Assessment Years 2011-12 and 2012-13 respectively.

2. Since common grievance is involved in both the appeals, they were heard together and are disposed of by this common order for the sake convenience and brevity.

3. The common grievance in both the appeals relates to the addition made by the Assessing Officer on account of bogus purchases though the quantum may differ in each year.

4. Briefly stated, the facts of the case are that search and seizure proceedings u/s 132 of the Income-tax Act, 1961 [hereinafter referred to as ‘The Act’] were conducted in the case of Mauria Udyog Ltd and its group concerns.

5. During the course of scrutiny assessment proceedings, the assessee was asked to explain the purchases made from M/s Ganesh Steel Syndicate, M/s Pacific Sales Corporation, M/s G.P. Trading Company and M/s Nayak Sales Corporation. The Assessing Officer found that as per the seized documents which contain the assessment order passed by the Deputy Commissioner Commercial Tax, Ghaziabad, purchases made from the aforesaid parties were found bogus and, accordingly, disallowed by the Commercial Tax Authority.

6. Further post search enquiry and also during the course of assessment proceedings, on the spot verification was done by the department and the Income tax Inspector reported that the aforesaid parties were found non-existent at the given addresses. Accordingly, the assessee was asked to explain the transaction with supporting documentary evidences.

7. In its reply, the assessee stated that the Additional Commissioner Appeal (2), Ghaziabad has remanded back to the Assessing Officer with a direction to look into the facts based on the assessee and the remand proceedings are yet to be initiated.

8. The assessee further replied that the assessment proceedings have been finalized and customers, whose sales were not accepted, have been found in order and additional demand has been created. Therefore, there is every probability that sales of parties mentioned will also be accepted as genuine sale.

9. This reply of the assessee was not accepted by the Assessing Officer who placed strong reliance on the report of the Income-tax Inspector which is exhibited in the assessment order and drawing support from the decision of the Deputy Commissioner, Commercial Taxes, Ghaziabad, the Assessing Officer concluded that the purchases made from parties mentioned elsewhere were bogus and added the same to the returned income of the assessee.

10. The assessee strongly agitated the matter before the ld. CIT(A) and contended that sales have been accepted by the Assessing Officer and no defect has been pointed out. Therefore, the Assessing Officer ought to have accepted the purchases also.

11. After considering the facts and submissions and after verifying the purchases/invoices raised, the ld. CIT(A) opined that payments have been made to the aforesaid parties through Account Payee cheques for which confirmations have been filed by the parties duly supported with affidavits.

12. The ld. CIT(A) further observed that since the impugned credit was denied by VAT authorities, the assessee has not claimed input credit as expenses and all the sales made out of impugned purchases are duly accounted for in the regular books of account and are matching with VAT returns and books of account are supported by purchases and sales invoices.

13. The ld. CIT(A) was convinced with the genuineness of the purchases and deleted the impugned addition.

14. Before us, ld. DR strongly placed reliance on the findings of the Assessing Officer and heavily relied on the decision of the Hon’ble Punjab and Haryana High Court in the case of Shree Krishana Kripa Feeds 410 ITR 533.

15. Per contra, the ld. counsel for the assessee supporting the decision of the ld. CIT(A) also filed written synopsis and relied upon several judicial decisions mentioned therein.

16. We have carefully considered the orders of the authorities below and written synopsis alongwith judicial decisions mentioned duly considered. There is no dispute that the findings of the Assessing Officer are based upon the findings given by the Commercial Taxes Officer and the findings of the first appellate authority are based on the appellate order of the commercial Taxes Department.

17. It is also not in dispute that on field enquiry made by the Assessing Officer, the parties were found to be non-existent at the given addresses though the assessee/ld. counsel for the assessee has be consistently harping upon the fact that purchases are supported by invoices/bills and corresponding sales have been accepted by the Assessing Officer, therefore, no adverse inference should be drawn.

18. In such transactions, we are of the opinion that goods are purchased from grey market at very nominal rates and to enter the purchases in the regular books of account, the assessee arranges accommodation bills from accommodation entry providers. Keeping this in mind, we are of the considered opinion that the assessee did make purchases and, thereafter, arranged accommodation bills/ invoices and entered the same in its regular books of account.

19. We find that while deleting the impugned additions, the ld. CIT(A) observed that even if the purchases could have been proved to be bogus, only the gross profit related to the quantity purchased and sold could have been considered as income. Though the ld. CIT(A) fairly made the observations, but did not do anything.

20. A perusal of the profit and loss account for F.Ys. 2009-10, 2010­11 and 2011-12 is as under:

21. The average profit comes to 0.673% and if the same is applied on the impugned bogus purchases for Assessment Year 2011-12, addition would come to Rs. 9,48,468/- and in Assessment Year 2012-13 it would be Rs. 1,86,217/-

22. Our estimation is supported by the findings of the Hon’ble High Court of Delhi in the case of Bhawani Portfolio Pvt Ltd 158/2020 and 163/2020 order dated 12.07.2021 wherein the Hon’ble High Court has observed:

“This court is also of the view that the Tribunal being the last fact finding authority, was entitled to guess work and arrive at the ball park commission”

23. Considering the peculiar facts of the case in hand in totality, we direct the Assessing Officer to restrict the disallowance to Rs. 9,48,468/- in Assessment Year 2011-12 and Rs. 1,86,217/- for Assessment Year 2012-13. Thus, this common ground in both the appeals is partly allowed.

24. In ITA No. 1158/DEL/2017, the other ground taken by the Revenue relates to the deletion of addition of Rs. 35.80 lakhs made by the Assessing Officer on account of unexplained cash.

25. At the very outset, the ld. counsel for the assessee stated that the impugned issue has been decided by this Tribunal in favour of the assessee and against the Revenue in earlier Assessment Year in ITA No. 4401/DEL/2017 order dated 18.01.2022.

26. The ld. DR fairly conceded to this and raised no objection.

27. We have given thoughtful consideration to the orders of the authorities below qua the issue. We find that the ld. CIT(A), while deleting the impugned addition has followed his own order given in the case Bihariji Ispat Udyog Ltd and Maurya Udyog Ltd. As mentioned elsewhere, this issue was considered by the Tribunal in ITA No. 4401/DEL/2017. The relevant findings of the co-ordinate bench read as under:

“21. We have heard the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find, the AO, in para 6.7 of the assessment order, observed that cash payment of Rs.4,50,00,000/- from Amrapali Group are related to M/s Mauria Udyog Ltd., M/s Bihariji Ispat Udyog Ltd and M/s Jotindra Steel & Tubes Ltd. and, accordingly, made the addition in the hands of these three companies on the basis of their ITA No.4401/Del/2017 turnover with Amrapali group of companies the details of which are already reproduced in para 4 above. We find, the ld.CIT(A) deleted the addition the reasons of which have already been reproduced in the preceding paragraph. We do not find any infirmity in the order of the CIT(A) on this issue. We find, the addition made by the AO in the case of Maurya Udyog Ltd. was deleted by the CIT(A) relying upon the order passed by him in the case of Bijariji Ispat Udyog Ltd. We find, the appeal filed by the Revenue was dismissed by the Tribunal vide ITA No.6660/Del/2016, order dated 29.11.2018 by observing as under:-

“10. A plain reading of the aforesaid section clearly shows that it is applicable in a case where the assessee is found to be owner of any money, bullion, jewellery or other valuable article. The facts of the case in hand show that the assessee was never found to be in possession of any real money. The addition having been made only on the strength of some notings found in some file extracted from the computer of Shri Rohtash, clearly establish that the provisions of section 69A of the Act do not apply. We agree with the contention of the ld. AR that the foundation itself is weak and the addition should not survive. However, the Assessing Officer made the addition on the strength of the statement of Shri Rohtash wherein he has admitted that Rs. 1 crore has been received. Exhibit 85 of the paper books reveals that on the date of receipt of the impugned amount, the same was returned back to Amrapali Group by M/s Bihariji group. The entries of Rs. 50 lakhs each on 11.12.2012 and 01.02.2013 can be seen from the said Exhibit 85 of the paper book. This means that the date on which the alleged Rs. 1 crore was received, on the very same day the same was returned back.

11. More importantly, there is no mention of the assessee’s name in the impugned document. The Assessing Officer has simply assumed that the reference to the impugned amount is in relation to the assessee. In our understanding, no addition can be made on the basis of presumptions and surmises. Assuming, yet not accepting that the amounts were received by the assessee, the same were returned back on the very same date as per Exhibit 85 of the paper book. Even on this count, addition is uncalled for.

12. In the result, the appeal filed by the Revenue is dismissed.” ITA No.4401/Del/2017

22. Since the facts of the instant case are identical to the facts of the case decided by the Tribunal in the case of Maurya Udyog Ltd. (supra), therefore, respectfully following the decision of the Tribunal, we do not find any infirmity in the order of the CIT(A). Accordingly, the same is upheld and the ground raised by the Revenue is dismissed.”

28. Respectfully following the findings of the co-ordinate bench [supra], this ground in Assessment Year 2012-13 is dismissed.

29. In the result, the appeals of the Revenue in ITA Nos. 501/DEL/2017 and 1158/DEL/2018 are partly allowed.

The order is pronounced in the open court on 06.10.2022.