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TMI Blog2019 (9) TMI 367X X X X Extracts X X X X X X X X Extracts X X X X ..... m these entry providers. No infirmity in the appellate order passed by Ld. CIT(A) estimating profits @12.5% of the alleged bogus purchases being profits embedded in these purchases, as additional income to be brought to tax in the hands of the assessee, as some guess work is required in estimating profits embedded in these alleged bogus purchases but the said guess work has to be reasonable , fair and honest guess work . There is not perversity in estimation made by learned CIT(A) nor it is unconscionable estimation and we are not inclined to interfere with appellate order passed by learned CIT(A), more-so the assessee has duly reconciled quantitative stocks reflected by these alleged purchases with sales made. The sales are not doubted by Revenue. The ratio of decision in the case of Kachwala Gems v. JCIT [ 2006 (12) TMI 83 - SUPREME COURT ] supports our decision. Revenue fails in its appeal. X X X X Extracts X X X X X X X X Extracts X X X X ..... in law, the learned Commissioner of Income-tax(Appeals) has erred in not appreciating that purchases were made from some other parties which were not recorded in the books of accounts and only accommodation bills were obtained from Hawala parties and there by attracting provisions of section 40A(3). 8. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating the fact that applicability of provisions of 40A(3) attracts 100 % bogus purchases to be held as profit. 9. The appellant prays that the order of the CIT(A) on the grounds be set aside and that of assessing officer be restored. 10. The appellant craves leave to amend or to alter any ground or add a new ground, which may be necessary." 3. This appeal filed by Revenue was earlier dismissed by tribunal vide orders dated 03.08.2018 owing to low tax effect as Revenue appeal was held by tribunal to be covered by CBDT circular no. 03/2018 dated 11.07.2018. Later, Revenue came up with Miscellaneous Application('M.A.') citing that this appeal was not covered by the aforesaid CBDT circular as exception to the said CBDT Circular is applicable , wherein the information was received from ext ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s. 148 was issued by AO within four years from the end of the assessment year and also originally no assessment was framed by the AO u/s. 143(3) of the Act and return of income was only processed originally u/s 143(1) of the 1961 Act. In order to verify genuineness of these purchases, the AO issued notices u/s. 133(6) of the 1961 Act to these aforesaid seven parties at the addresses furnished by the assessee. However, the said notices were returned un-served by the postal authorities with remarks 'left' and 'not known'. Thus , genuineness of these purchases could not be verified by the AO owing to non service of notices u/s 133(6) of the 1961 Act. The AO asked assessee to produce these parties but the assessee failed to produce these hawala parties before the AO , from whom the assessee had claimed to have made purchases to the tune of ₹ 51,56,867/- . The AO asked assessee to produce books of accounts, bank statements, bills/vouchers to prove that these purchases are genuine . It was also observed by AO that these hawala parties have admitted before the Sales Tax Department, Mumbai that they were engaged in providing hawala accommodation entries without supplying any mater ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... copies of Sales Bills for corresponding supplies to Railways and documentary evidences regarding transportation. The assessee submitted that all payments were made for purchases through account payee cheques. The assessee submitted that materials were purchased from these parties which was later sold and payments were made to these parties through account payee cheques. The assessee submitted that the AO merely relied upon the findings given by Sales Tax Department. The assessee submitted that the AO relied upon the statements of these parties but the copies of the said statements were not given by the AO to the assessee for rebuttal. The assessee placed reliance on following case laws to support its contentions: a) CIT v. Nikhunj Eximp Enterprises Private Limited ITA No. 5604 of 2010(Bom.HC),dated 17.12.2012 b) Rajesh P. Sonivs v. ACIT, (2006) 100 TTJ 892(Ahd.) c) CIT v. M.K. Brothers (1987) 163 ITR 249(Guj.) d) CIT v. Bholanath Poly Fab Private Limited (2013) 40 taxmann.com 494(Guj.) 5.2 The assessee also submitted that these purchases are reflected in its books of accounts. It was also submitted by assessee before learned CIT(A) that the assessee has duly reflected thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . There were no adverse remark by Tax Auditor. 5.3 It is clear that when the Assessing Officer does not accept the assessee's method of accounting then he has to resort to the provision of sec. 145(3) for computation of income. The Karnataka High Court in the case of Karnataka State Forest Industries Corpn. Ltd. Vs. CIT (1993) 201 ITR 674 has held that the assessing officer's power under section are not arbitrary and he must exercise his discretion and judgment judicially. A clear finding is necessary before invoking the provision sec.145(3) of the I T Act. The Assessing officer has not been able to point out any defect or mistake or error in the books of accounts. He has accepted the sales receipts. The Assessing officer has to bring on record the material on the basis of which he has arrived at the conclusion with regard to correctness or completeness of the accounts of the assesse or the method of accounting employed by it. The Assessing officer has simply rejected on the basis of non compliance with the 133(6) and failure to produce the suppliers before Assessing officer after 3 years from the date of purchase. The Assessing officer in appellant's own case has acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Steel Traders v. ITO (ITA No. 2801/Ahd/2008 dated 20.05.2008) and also made reference to the decision in the case of Vijaya Protein v. CIT 58 ITD 428 (Ahd.). On appeal by the department the Hon'ble HC of Gujarat, dismissed he appeal. The head note is as under: "Income from undisclosed sources - Assessment - Assessee trading in finished fabrics -Whether purchases themselves bogus -Whether parties from whom such purchases were made bogus-questions of fact - Tribunal finding assessee did purchase cloth and sell finished fabrics - Not entire purchase price but profit element embedded in purchases liable to tax-Income tax Act, 1961. The assessee for the assessment year 2005-06 was engaged in the business of trading in finished fabrics. The assessing officer held that purchases worth ₹ 40,69,546/- were unexplained and disallowed the expenditure claimed by the assessee and computed the total income of ₹ 41,10,187/-. In so far as the question of bogus purchases was concerned the Tribunal concurred with the Revenue's views that such purchases were allegedly made. Such notices were returned unserved by the postal authorities with the remark that the addresses wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of the Commissioner (Appeals.) The assessee sought modification of the order on the ground that the tribunal had failed to consider various pieces of evidence enumerated by it in the application. The Tribunal rejected the application holding that there was no apparent error or record which would permit the Tribunal to undertake review of its own order. On a reference to the High Court : Held that the finding of the Assessing Officer had been accepted by the Commissioner (Appeals ) an the Tribunal that the apparent sellers who had issued sale bills were not traceable. The goods were received from the parties other than the persons who had issued bills for such goods. Though the purchases were shown to have been made by making payment therefore by account payee cheques and the cheques had been deposited in bank accounts ostensibly in the name of the apparent sellers, thereafter the entire amounts had been withdrawn by bearer cheques and there was no trace or identity of the person withdrawing the amount from the bank accounts. Both the Commissioner (Appeals) and the Tribunal had come to the conclusion that in such circumstances the likelihood of the purchase price being inflat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was of the opinion that twelve and half percent of the disputed purchases should be retained in the hands of the assessee as business profits. On appeal to the High Court: Held dismissing the appeal that the Commissioner (Appeals) believed that the purchases were not bogus but were made from the parties other than those mentioned in the books of account. That being the position, not the entire purchase price but only the profit element embedded in such purchases could be added to the income of the assessee. In essence the Tribunal only estimated the possible profit out of purchases made through non genuine parties. The estimation of rate of profit return must necessarily vary with the nature of business and no uniform yardstick could be adopted. 5.8 On consideration of the facts available on record it is seen that information uploaded by the State Sales Tax authorities wherein the said Department put up lists of parties found to be engaged in issuing false bills without actual sale of goods, was the point of genesis for enquiry related to possible bogus purchases in a number of cases. In case of a manufacturer, if the purchases are bogus, it must be possible to produce the goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is, therefore, the AO cannot deny that purchases were not made by the appellant and the material was not used for its contract work. What is under dispute is the purchases from the parties from whom bills have been taken and cheques have been issued to them. Purchases are not in dispute but the parties from whom purchase are shown to have been made are disputed and suspicious. 5.10 The A.O. had made the addition as some of the suppliers were declared hawala dealers by the VAT Department. This may be a good reason for making further investigation but the AO did not make any further investigation and merely completed the assessment on suspicion. Once the assessee has brought on record the details of payments by account payee cheque, it was incumbent on the AO to have verified the payment details from the bank of the assessee and also from the bank of the suppliers to verify whether there was any immediate cash withdrawal from their account. No such exercise has been done or findings recorded. There was no detailed investigation made by the AO himself. It is also found that the payments have been made by account payee cheque which are duly reflected in the bank statement of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed bogus purchases. The Ld. DR submitted before the Bench that the AO has made additions to the tune of 100% of the alleged bogus purchases , wherein the Ld. CIT(A) has restricted the said additions to the tune of 12.5% of the alleged bogus purchases. He relied upon the decision of Hon'ble Supreme Court in the case of N.K Proteins Limited v. DCIT in Special Leave to Appeal(C) CC No(s) 769 of 2017 vide orders dated 16-01-2017, reported in 2017-TIOL-23-SC-IT and prayed that additions to the tune of 100% of the alleged bogus purchases be upheld. The learned counsel for the assessee submitted that the AO made additions to the tune of 100% of alleged bogus purchases, while Ld. CIT(A) restricted the same to 12.5% of alleged bogus purchases. It was submitted by learned counsel for the assessee that the assessee has accepted the appellate order passed by learned CIT(A) and no appeal has been filed by the assessee with the tribunal against the decision of learned CIT(A) so as to end litigation. It was submitted by learned counsel for the assessee that assessee is trader in hardware and quantitative reconciliation of stock was duly submitted. The learned counsel for the assessee claimed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erein bogus purchases bills are obtained by the assessee without supplying of material and the assessee is beneficiary of these alleged bogus purchases. The said information is also reported on Maharashtra Sales Tax web-site , the details of such alleged bogus purchases as were made by the assessee for year under consideration, are as under: SI. NO. Name of the party VAT No. Transaction amount (In Rs.) 1 Alok Trading Co.. 27440561142V 1,17,524 2. Anlket Industries 27960621869V 8,09,923 3. Mico Steels 27930713987V 8,75,477 4. R.K. Matel 27340354975V 10,77,652 5. Ujwal Enterprises 27940626827V 12,83,842 6. Bohra Metal Industries 27190660365V 2,23,142 7. Bhagyalaxml Steel Industries 27810631797V 7,69,307 Total 51,56,867 The AO reopened the concluded assessment by invoking provisions of section 147 of 1961 Act, after recording reasons for reopening of the concluded assessment . Notice dated 25.02.2015 u/s. 148 was issued by the AO to the assessee , which was duly served on the assessee on 07.03.2015. Thus it can be seen that notice u/s. 148 was issued by AO within four years from the end of the assessment year and als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthorities below and moreover these parties admitted before Sales Tax authorities that they were indulging in providing bogus bills without supplying material . The assessee could not discharge onus as cast by the provisions of the 1961 Act. The assessee has duly accepted the additions as were sustained by Ld. CIT(A) to the tune of 12.5% of alleged bogus purchases to end litigation as no appeal/Co was filed by the assessee challenging the additions as were confirmed/sustained by learned CIT(A). In such cases, profits embedded in these purchases are to be computed and such estimate has to be honest, fairs and reasonable because purchases are made from some other suppliers operating in grey market without bills while to complete books of accounts, the bills are obtained from the accommodation entry providers without taking physical delivery of material from these entry providers.The assessee in this process saves on taxes and costs which infact is profits embedded in these purchases which need to be brought to tax , which requires some guess work which should be honest, fair and reasonable guess work. We find that learned CIT(A) estimated profits embedded in these purchases to be 12. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as these parties were not traceable at the given addresses. The assessee did not furnish new addresses of these parties nor produced these parties before the AO. The assessee however had submitted details concerning these purchases before the AO. The assessee, however could not prove the movement of material purchased from these parties. The AO added 100% of the said purchases to the income of the assessee, while the Ld. CIT(A) considered the three years gross profit to determine the disallowance, wherein gross profit of the assessee was computed at ₹ 35,11,220/- as against declared gross profit of ₹ 33,31,662/-. The matter reached tribunal at the behest of Revenue also as the Revenue was also aggrieved by the appellate order passed by learned CIT(A) granting partial relief. We have observed that the tribunal in ITA no. 3578, 3659 & 3579/Mum/2015, AY 2009-10, 2010-11 & 2011-12 in Revenue's appeal for all these three years, vide common orders dated 11th July, 2017 has passed a well reasoned order , wherein the disallowance was restricted to 12.5% of such bogus purchases , wherein tribunal vide orders dated 11.07.2017 held as under:- "These appeal have been filed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned D.R. submitted before that in the case of NK Proteins Ltd. vs. DCIT the Hon'ble Supreme Court has confirmed the addition on account of bogus purchases at 100% and similar view has been taken by the Hon'ble Gujarat High Court and applied GP @6%. 6. Having heard the learned D.R. we find that it is the case of Revenue that the assessee failed to discharge the onus of proving the purchases and could not produce evidence to show the actual delivery of material and could not produce confirmation letters from the alleged suppliers. However, we find that the assessee is in possession of purchase invoices and payments are through banking channels. Therefore, if at all the purchases are found to be bogus we note that the sales turnover has not been disputed by the Revenue. Therefore, in such a case the addition can be made only on the profit element embedded in these purchase transactions to factorise the profit earned by the assessee against the purchase of material in gray market. We find that there are divergent views of various High Courts on what amount of GP should be applied in such bogus purchases. We find that in the case of Smith and Sheth the Hon'ble Gujarat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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