2017 (8) TMI 1296 - AT - Income Tax

Bogus purchases - disallowance on account of transaction with the parties, which were involved in hawala transaction - purchases made from the open market without insisting genuine bills - Held that - The assessee was a trader and on asking by the Assessing Officer, furnished the necessary details like bills, vouchers, payment through banking channel and the bank statements, therefore, the facts are distinguished, however, by taking a broader view, and considering the overall facts and circumstances, to plug the leakage of revenue, we are of the view that it will meet the end of justice if the addition is enhanced to 20% of the disallowance in place of 15% restricted by the Ld. Commissioner of Income Tax (Appeal), consequently, the appeals of the Revenue are partly allowed.

Summary

Issues Involved:
1. Disallowance on account of transactions with parties involved in hawala transactions.
2. Genuineness of purchases from bogus parties.
3. Estimation of profit element in purchases from bogus parties.
4. Admissibility of evidence and documentation provided by the assessee.
5. Legal precedents and their applicability to the case.

Detailed Analysis:

1. Disallowance on Account of Transactions with Parties Involved in Hawala Transactions:
The Revenue appealed against the First Appellate Authority's decision, which restricted the disallowance related to transactions with hawala parties. The Revenue argued that the purchases were made from bogus parties, as indicated by the Sales Tax Department of Maharashtra. The assessee contended that the disallowance was unjustified, as the purchases were genuine and supported by delivery challans and payment details.

2. Genuineness of Purchases from Bogus Parties:
The Assessing Officer (AO) held that the assessee was a beneficiary of accommodation entries from hawala dealers and treated the purchases as bogus. The assessee provided details such as ledger accounts, purchase bills, delivery challans, and bank statements to substantiate the genuineness of the transactions. The AO, however, found that the parties were not traceable at the given addresses, leading to the conclusion that the purchases were from bogus parties.

3. Estimation of Profit Element in Purchases from Bogus Parties:
The First Appellate Authority restricted the disallowance to 15% of the total purchases, relying on the Gujarat High Court's decision in CIT vs Simit P. Sheth, which held that the profit element embedded in such purchases should be taxed. The Tribunal noted that without purchases, there could be no sales, and even if the purchases were from unknown parties, tax could be recovered on the presumptive profit. The Tribunal enhanced the disallowance to 20% to plug the revenue leakage.

4. Admissibility of Evidence and Documentation Provided by the Assessee:
The assessee argued that the necessary details, such as bills, vouchers, transport details, and bank statements, were provided, and the transactions were made through banking channels. The Tribunal observed that the AO did not reject the assessee's books of account and did not point out any defects during scrutiny proceedings. The Tribunal emphasized that suspicion alone could not replace evidence and that the AO should have conducted a thorough investigation.

5. Legal Precedents and Their Applicability to the Case:
The Tribunal referred to various legal precedents, including:
- CIT vs Simit P. Sheth: The Gujarat High Court held that only the profit element in purchases from bogus parties should be taxed.
- Sanjay Oilcakes Industries vs CIT: The Gujarat High Court accepted that purchases were made from parties other than those issuing bills and upheld the disallowance of a percentage of the purchase price.
- CIT vs Vijay M. Mistry Construction Ltd.: The Gujarat High Court held that the disallowance based on inflated purchases should be based on an estimate.
- CIT vs Nikunj Exim Enterprises Pvt. Ltd.: The Bombay High Court held that merely because suppliers did not appear before tax authorities, it could not be concluded that purchases were bogus.
- CIT vs M.K. Brothers: The Gujarat High Court held that the evidence was insufficient to conclude that purchases were bogus.

The Tribunal also considered the Supreme Court's dismissal of the SLP in the case of N.K. Industries Ltd. vs DCIT, where the entire income on account of bogus purchases was added. However, the Tribunal distinguished the facts of the present case, noting that the assessee provided necessary details and the transactions were through banking channels.

Conclusion:
The Tribunal partially allowed the Revenue's appeal by enhancing the disallowance to 20% of the total purchases, instead of the 15% restricted by the First Appellate Authority. The Tribunal's decision was based on a broader view of the facts and circumstances to prevent revenue leakage. The order was pronounced in the open court on 30/06/2017.