ITAT restricts addition for Bogus purchases to 5% of purchase

Shri Sanjay H Shah Vs ITO (ITAT Mumbai)

In our view considering the nature of trade of assessee and the facts of the present case, the disallowance made by AO and sustained by ld. CIT(A) is excessive and unreasonable. In our view the assessee has given sufficient evidences to substantiate its purchases, on which no finding was given by the lower authorities. Moreover, no incriminating material is brought on record except assumption and presumption of AO that assessee has availed accommodation bills. The addition of alleged bogus purchased are based on third party information. We are of the considered opinion that under Income Tax Act only real income can be taxed by the Revenue. We may further note that even in cases where the whole transaction is not verifiable due to various reasons, the only taxable is the taxable income component and not the substantial part of the transaction. Thus, keeping in view the assessee has paid the VAT at the applicable rate on all the purchases. Further, in our view no yardstick formula can be applied while assessing the amount of revenue leakage. Moreover, the revenue has not disputed the consumption of steel. Hence, keeping in view of any possibility of the revenue leakage in the present case, the disallowance of purchases of steel at 5% of the purchases would meet the end of justice. Similar view was taken by Hon’ble Gujarat High Court in CIT Vs Simith P Seth [2013(356 ITR 451)] and by Hon’ble Bombay High Court in Hariram Bhambani ITA No 313 of 2013.

FULL TEXT OF THE ITAT JUDGMENT

1. These are the appeals filed by the assessee against the order of ld. CIT(A)-28, Mumbai dated 4^thApril 2017 for A.Y.2009-10, 2010-11 and 2011-12 in the matter of order passed u/s.143(3) r.w.s. 147 of the IT Act. In all appeals the assessee has raised identical grounds of appeal except variation of figure of additions of 25% of bogus purchases and 1% commission on such purchases. All appeals were heard together and are decided by consolidated order for the sake of convenience. For appreciations of the facts we are referring the facts for Assessment Year 2009-10 in ITA No 5063/M/2017.

2. Facts in brief are that the assessee is carrying his business in the name and style as M/s Hitesh Steel Syndicate. The assessee is in business trading in Iron and steel. The assessee has filed return of income for A.Y.2009-10, on 29.09.2011 declaring total income of Rs, 6,01,930/-. The case was re-opened u/s 147 on account of information received by the Sales Tax Department, State of Maharashtra that certain persons have provided entries of bogus purchase bills to tax payers. The name of the assessee also appeared in the list of beneficiary who have obtained bogus bills. Thus the assessing officer on the basis of such information reopened the assessment. Therefore, notice u/s 148 dated 28.03,2013 was issued. The assessment was completed under section 143(3)/145(3)/147 on 21.03.2014. During the reassessment proceeding, the AO noted that assessee has shown the purchases of Iron & Steel from 11 parties for Rs. 3,53,13,219/-. The assessee was asked to substantiate the genuineness of the purchases. The assessee furnished the detail about the purchases. The assessee also explained that purchases were made through brokers and not directly from the parties. The assessee furnished stock register and corresponding sale of the material. Further, assessee submitted ledger along with tax invoices for purchases, statement of corresponding sales against the purchases, bank statement highlighting proof, details of vendors etc. All the necessary details and evidences required in course of assessment proceedings were submitted. The assessing officer not accepted the submissions of the assessee. The assessing officer concluded that no proof of transportation and lorry receipt was filed. The assessing officer disallowed 25% of the total purchases shown through 11 parties. The assessing officer further observed that the assessee’s purchases are through brokers. The assessee has debited commission payment of Rs.36,638/-. Thus, the assessing officer took his view that the brokerage claim is also pertains to all purchases and thereby further disallowed 1% of total purchases i.e disallowed Rs. 3,52,132/- On appeal before the ld. CIT(A), the action of Assessing Officer in reopening as well as additions were sustained. Thus, further aggrieved by the order of ld. CIT(A), the assessee has filed the present appeal before us.

3. We have heard the learned AR of the assessee and the ld. DR for the Revenue and perused the material available on record. The ld. AR of the assessee submits that all the transactions are genuine and inconsonance with the sales tax Act, Income-tax Act and other laws applicable. The assessee had already brought on record ledger accounts of all the parties, copies of the bills and the bank statements showing payments made to those parties against the consideration, etc. The Assessing Officer has relied solely on the report of the Sales Tax Department and the report of investigation team of revenue. These vendors collected tax from the purchaser (i.e. assessee) but not deposited into the treasury and not co-operated with the VAT department. Hence, list of Suspicious dealer was published and those buyers have taken input tax credit on the purchases effected from those vendors have been disallowed. The Assessing Officer relied upon the same and had ignored the materials and details brought before him. Similarly, the ld. CIT (A) has not given any finding on the various documentary evidences furnished by assessee. It was submitted that the disallowance @ 25% of the purchases is too high. The assessee has declared GP at 1.03% of his business based on such purchases. The VAT applicable on Steel & Iron is only 4%. The disallowance of commission payment is based on assumption and presumptions and without any substance or material in possession of assessing officer. The ld AR for the assessee prayed for deleting the entire disallowances. In support of his submission, the learned AR relied upon the following judgments:

> Geolife Organice v/s ACIT (3699/MUM/2016) dated 05.05.2017

> CIT 5(3)(1) v/s M/s Allied Blender and Distillers P Ltd (ITA No. 2447/Mum/2015) dated 21.02.2017

> ACIT v/s Tarla Shah (ITA No. 5295/MUM/2013) dated 02.02.2016

> ITO – 25(2)(2) v/s Shri Paresh Arvind Gandhi (ITA No. 5706/MUM/2013 dated 13.05.2015)

> Commissioner of Income Tax – 25(2) v/s Shri Ramila Pravin Shah (ITA No.5246/Mum/2013) dated 5.03.2015

> Shri Ganpatraj A Sanghavi v/s ACIT (ITA No2826/MUM/2013)

> ITO vs. Deepak Popatlal Gala (ITAT Mumbai)

> Ramesh Kumar & Co vs. AC1T (ITAT Mumbai)

> DCIT 25(3) v/s Shri Rajeev G. Kalathil (ITA No.6727/MUM/2012 dated 20.08.2014)

> The Commissioner of Income Taxi, Mumbai vs M/s. Nikunj Eximp Enterprises Pvt. Ltd.

4. On the other hand, the ld. DR for the Revenue supported the orders of authorities below. The ld. DR for the Revenue argued that the Investigation Wing of the Income-tax Department made full-fledged enquiry. The parties from whom the assessee has shown the purchases are bogus Hawala dealers. The hawala dealers are indulged in issuing bogus bills without delivery of any material or goods. The assessee obtained accommodation bills only in order to inflate the expenses and to bring down the profitability in order to avoid the tax. The ld. DR for the Revenue prayed for dismissal of the appeal.

5. We have considered the rival submissions of the parties and have gone through the orders of authorities below. During the re- assessment proceeding, the AO noted that the assessee has shown the purchases from the following 11 parties:

6. The assessee was asked to substantiate the genuineness of the purchases. The assessee submitted that the purchases were made through brokers and not directly with the parties. The assessee furnished the copy of bills of corresponding purchases, ledger account of the parties and proof of payment through banking channel. The assessee also furnished the corresponding sale and details of vendors. The submission of assessee was not accepted by AO holding that no lorry receipt, transportation details, weight receipt, excise and gate pass was produced by the assessee. The AO further observed that the assessee failed to produce the supplier. The AO concluded that there was no actual delivery of goods and that assessee obtained accommodation bill. The purchases were made by cash payment. Thus, the AO rejected the books of account of the assessee. The AO disallowed the 25% of the total purchases from 11 parties. The AO worked out the disallowance of Rs. 88,28,305/-. The AO further disallowed 1% on account of brokerage and commission payment and worked out the commission and brokerage of Rs. 3,53,132/-. No inquiry was made from the persons who have made purchases from assessee. The assessing officer has not identified, which were hawala dealers, from whom the assessee has purchased the material. The assessee has not produced the parties and transport challan. We have noted that during the assessment proceeding, the AO has relied upon the information received from Sales Tax Department about the various entry providers. The AO has not made any independent enquiry. The AO has not brought any incriminating evidence against the assessee except relying upon the report/information of Sale Tax Department and Survey action conducted by Income-Tax Department on the alleged hawala dealers. The AO has not specified as to which of the hawala dealers disclosed the name of assessee as beneficiary of accommodation bill. The AO disallowed the 25% of total cost of purchases in absence of proof of delivery. The ld. CIT(A) confirmed the action of AO on his observation that onus to prove was upon the assessee and that assessee failed to discharge his onus. Before ld. CIT(A), the assessee specifically contended that the TMT Bars were purchased and provided to the third parties (purchasers). No investigation against such statement was conducted by ld CIT(A). The submission of assessee was discarded by ld CIT(A) holding as astonishing and highly unique. The lower authorities have not examined the trade practice. The lower authority has not disputed the corresponding sale against the purchases. No evidence was brought on record about the observation of AO about the cash purchases.

7. The ld. AR of the Assessee in his submission claimed that VAT rate is only 4%. The rate of VAT is not disputed by Revenue. In our view considering the nature of trade of assessee and the facts of the present case, the disallowance made by AO and sustained by ld. CIT(A) is excessive and unreasonable. In our view the assessee has given sufficient evidences to substantiate its purchases, on which no finding was given by the lower authorities. Moreover, no incriminating material is brought on record except assumption and presumption of AO that assessee has availed accommodation bills. The addition of alleged bogus purchased are based on third party information. We are of the considered opinion that under Income Tax Act only real income can be taxed by the Revenue. We may further note that even in cases where the whole transaction is not verifiable due to various reasons, the only taxable is the taxable income component and not the substantial part of the transaction. Thus, keeping in view the assessee has paid the VAT at the applicable rate on all the purchases. Further, in our view no yardstick formula can be applied while assessing the amount of revenue leakage. Moreover, the revenue has not disputed the consumption of steel. Hence, keeping in view of any possibility of the revenue leakage in the present case, the disallowance of purchases of steel at 5% of the purchases would meet the end of justice. Similar view was taken by Hon’ble Gujarat High Court in CIT Vs Simith P Seth [2013(356 ITR 451)] and by Hon’ble Bombay High Court in Hariram Bhambani ITA No 313 of 2013.

8. Thus, respectfully following the decision of Hon’ble Gujarat High Court in CIT Vs Simit P Seth supra and by Hon’ble Bombay High Court in Hariram Bhambani (supra), the disallowance of cost of purchases of steel is restricted to 5% of the purchases. The assessing officer is directed accordingly. In the result the ground No.1 of the appeal is partly allowed.

9. Ground No.2 relates to disallowance/addition on account of commission. We have noted that the disallowance of commission is based on assumption and presumptions of assessing officer. The assessing officer has not brought any material on record to substantiate his action. Thus, the addition on account of 1% of total purchases added by AO is deleted.

10. Ground No.3 relates to levy of interest. This ground of appeal is consequential and need not adjudication.

11. Ground No. 4 relates to rejection of books of account. We have partly sustained the addition. Thus, in our view, the discussions on this ground of appeal have become academic.

12. In the result, appeal of the assessee is partly allowed. ITA No. 5064/Mum/2017 for AY 2010-11

13. The assessee has raised identical grounds of appeal as raised in appeal for AY 2009-10, the facts of the appeal under consideration is almost identical except variation of figures of additions. Since we have partly allowed the appeal for earlier year. Thus, following the principle of consistency, the appeal for this year is also partly allowed with similar observations.

ITA No. 5065/Mum/2017 for AY 2011-12

14. The assessee has raised identical grounds of appeal as raised in appeal for AY 2009-10 & 2011-12, the facts of the appeal under consideration is almost identical except variation of figures of additions. Since we have partly allowed the appeal for earlier years. Thus, following the principle of consistency, the appeal for this year is also partly allowed with similar observations.

15. In the result, all appeals are partly allowed.

Order pronounced in the open court on this 16/02/2018