Brief of the Case: ITAT Delhi Has held In the case of Piyush Developers Pvt. Ltd. & Others vs. ACIT, that despite search and seizure no adverse material was found to substantiate the disallowance made by the A.O. The purchases which are disallowed relate to cement and steel which are essential for the purpose of construction. No enquiries are made with the banks, other statutory authorities on the identity of the parties. All the parties are registered with sale tax department and have charged VAT in the each bill. All these parties have bank accounts and payment have been made through account payee cheques. Mere non production of parties can not be a ground for disallowance of the purchases.
Facts of the Case: The assessee is engaged in Real Estate development and construction activity. It does not own land. It carries out construction activity and development activity, in the capacity of a contractor, on the land owned by its clients. The assessee neither purchased land nor sells the same. A search and seizure was conducted and a notice u/s 142(1) was issued to the assessee. In response, the assesses filed a return of income declaring income of Rs.61, 79,070/-. AO completed assessment u/s 143(3) r.w.s. 153A determining the total taxable income at Rs. 3,51,14,490/-. He made addition of Rs.2, 89, 34,711 as the purchases from three parties were found bogus and non genuine on account of non furnishing of any confirmed copy of account, income tax particulars, correct address and also failed to produce the parties during the assessment.
Contention of the Assessee: The Ld.Counsel for the assessee submitted that the identity of the parties from whom purchases were made was beyond doubt because they were registered with the sales tax department and had paid VAT. He also stated that payments were made through banking channels and the evidences such as copies of bills, purchase invoices, material weighment proofs, material receipt notes along with bill numbers and truck numbers, were produced as well as entries in stock registers and the consumption of material to prove the genuineness of the transaction. He relied on number of case laws and submitted that there is a violation of principle of natural justice as the record of spot enquiries was not put to the assessee.
Further he submitted that mere non filing of confirmations from the parties and none producing of parties cannot be reasons for rejection of books of account. He also submitted that rejection of books cannot be made on the basis of the fact that the gross profit rate is less than that of other concerns.
Contention of the Revenue: The ld counsel of the revenue submitted that the assessee could not produce these three parties before the A.O. and enquiries made by the A.O. demonstrate that these particular firms were not existing at the addresses given for the last six to seven years. He argued that the assessee had not furnished confirmation copies of accounts, income tax return etc. of these firms and under those circumstances purchases made by them were rightly held as non genuine. He submitted that mere payment through cheques does not demonstrate genuineness of the transactions.
Further he submitted that the assessee has disclosed very low net profit and hence the books are not reliable, specifically when the purchases are not proved genuine.
Held by CIT (A): The CIT (Appeals) deleted the addition by holding that the assessee has furnished copies of bills, purchase vouchers, material receipt notes, copies of GRs along with evidence of weighment of goods from dharmkanta and as all the payments made to the parties by account payee cheques. He also held that if these purchases are disallowed, the gross profit margin would jump to 68% which is abnormal in this line of business. He also pointed out that the A.O. has not given a finding that the consumption of material has not taken place and that 41.44% of the purchases were disallowed, while sales were not doubted. He held that the parties are registered with Sales Tax dept. and VAT has been charged.
On the other hand CIT (A) rejected the books of the assessee on the ground that the assessee had failed to file confirmation from the parties and the gross profit rate disclosed by the assessee is less than the gross profit disclosed by the other concerns of the group. Accordingly he estimates the gross profit of the assessee at 27% as against 16% declared by the assessee.
Held by ITAT: The assessee in this case has furnished all possible evidences in support of the purchases from these three parties. The evidences include, copies of the bills wherein detailed notings had been made in respect of the material which had been purchased by the appellant, purchase vouchers prepared by the assessee in the normal course of business, evidences by way of the material weighment proofs, copies of the GRs or material receipt notes showing the delivery of the goods to the assessee where the bill number and truck number has been mentioned. Evidence of payments having been made by account payee cheques had also been filed. These evidences in our view cannot be ignored unless contrary material is found by the revenue. No such material is available with the revenue even after search.
No defects have been found in the stock register nor any defects have been pointed out by the A.O. in the audited books of accounts. Despite search and seizure no adverse material was found to substantiate the disallowance made by the A.O. The purchases which are disallowed relate to cement and steel which are essential for the purpose of construction. No enquiries are made with the banks, other statutory authorities on the identity of the parties. Under the circumstances we have to uphold the contentions of the assessee that the finding of the AO, that the assessee has not furnished full details, is factually in correct.
As regards the fact that the assessee was not able to produce the parties, we agree with the contentions of the assessee that non production of the parties cannot be a ground of disallowance of all the purchases for the following reasons:
(i) The parties could not always be in the control of the assessee, specifically when they are unrelated parties. (ii) The volume and quality of evidence produced by the assessee is such that non production of the party cannot lead to a conclusion that the purchases are not genuine, (iii) The value of work certified, the value of closing stock have been accepted by the A.O. Both these cannot be independent of the value of purchases. When both these are accepted and not disturbed, the question of disallowing the purchases debited in the profit and loss account does not arise, (iv) The CIT(A) has rightly analysed that if this disallowance of purchases is upheld then the G.P. rate of the assessee would be abnormal at 67% and (v) The Hon’ble Calcutta High Court in Diagnostics vs. CIT (2012) reported in 20 taxmann.com 692 (Cal.) held that if purchases have been made by account payee cheques, then after three years if the said parties not appear before AO, it cannot be challenged on the ground that the parties are not in existence.
The First Appellate Authority has taken a contradictory stand. The.CIT (A) held that the non production of parties etc. on the facts and circumstances of the case, does not justify disallowance of the claim of expenditure on account of purchases. On the other hand he cites the same reason for holding that the books of accounts are not reliable and have to be rejected. Such a contradictory view cannot be acceptable.
In the case of CIT vs. Paradise Holidays reported in 325 ITR 13 (Del), it was held that where the AO has not pointed out any specific defect or discrepancy in the account books maintained by the assessee which are duly audited by an independent chartered accountant, there was no justification in rejecting the books of accounts and making the addition to the declared income. Also in the case of CIT vs. Poonam Rani in ITA 406/Del/2009 dated 7.5.2010 has held that the fall in gross profit ration, in the absence of any cogent reasons could not a ground to reject the accounts. The direction given to the AO to recompute the assessee’s gross profit @ 27% instead of at 16% is hereby vacated and this ground of the assessee is allowed.
Accordingly, appeal of the revenue dismissed and appeal of the assessee allowed.