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TMI Blog2020 (2) TMI 662X X X X Extracts X X X X X X X X Extracts X X X X ..... ing actual supplies from the said parties?" 4. To appreciate the question proposed, it may be apposite to advert to the orders passed by the authorities below. 5. Respondent is an assessee under the Act. It is a company which is engaged in the business of manufacturing and dealership of all kinds of industrial power controlling instrument cables and related items. For the assessment year 2010-11 assessee filed e-return of income declaring income of Rs. 1,35,31,757.00. In addition, assessee also declared income of Rs. 3,64,15,007.00 under Section 115JB of the Act. The case was selected for scrutiny and in scrutiny proceedings Assessing Officer noticed that Sales Tax Department, Government of Maharashtra had provided a list of persons who had indulged in the unscrupulous act of providing bogus hawala entries and purchase bills. Names of beneficiaries were also provided. Assessing Officer noticed that assessee was one of the beneficiaries of such bogus hawala bills. Assessing Officer referred to purchases allegedly made by the assessee through four hawala entries for the assessment year under consideration, the details of which are as under :- Name of the Party providing Bogus Bill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee with the Sales Tax Department. Thereafter, CIT(A) enhanced the quantum of purchases from Rs. 24,18,06,385.00 to Rs. 65,65,30,470.00. Having enhanced the quantum of purchases as above, CIT(A) posed a question as to whether the entire purchases being bogus purchases were to be added back to the taxable income of the assessee or only the profit margin or the difference in gross profit/net profit should be added. 10. For the grounds and reasons given in the appellate order dated 14th October, 2014, CIT(A) found as a matter of fact that assessee had made circular purchases and sales from 12 parties as declared in the sales tax return. Though the genuineness of purchases and sales were not proved before the Assessing Officer and also during the appellate proceedings, CIT (A) noted that while Assessing Officer had treated the purchases as bogus but had accepted the sales and gross profit declared in the return of income. CIT(A) held that there can be no sales without purchases. When the sales were accepted, then the corresponding purchases could not be disallowed. Therefore, CIT(A) held that only the profit element embedded in the purchases would be subject to tax and not the entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o various case laws on the subject, CIT(A) returned a finding of fact that assessee had made circular purchases and sales with 12 parties as disclosed in the sales tax return. Though genuineness of the purchases and sales were not proved, yet it was noted that the Assessing Officer had accepted the sales and gross profit declared in the return of income. CIT(A) held that there can be no sales without purchases. When the sales were accepted, then the entire purchases could not be disallowed. Referring to a decision of the Gujarat High Court in the case of CIT Vs. Bholanath Polyfab Limited, 355 ITR 290 (Guj) CIT(A) held that only the profit element embedded in purchases would be subjected to tax and not the entire amount. Having said so, CIT(A) noted that the gross profit rate of the assessee showed a decreasing trend over the years. In such circumstances, CIT(A) took the view that 2% of the purchases of Rs. 65,65,30,470.00 would be a fair and reasonable profit percentage which should be added to the income of the assessee, deleting the balance amount. 16. While doing so, CIT (A) observed that only reasonable profit on the purchases made from the hawala party should be added back to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oticed that in earlier years, the main business of the assessee was manufacturing and dealership of all kinds of industrial power control instruments and related items but in the year under consideration it has shown trading of Rs. 65,65,30,470/- out of the total purchases at Rs. 67,34,02,306/-. The gross profit shown in the year under consideration was at 5.71 % as against 8.77% in the preceding year. From the perusal of the submissions made by the AR of the appellant, it is noticed that the contention of the appellant was correct that in the earlier years the main business of the assessee was manufacturing and in the year under consideration the major activity is of trading. The gross profit rate was also decreasing every year and in the year under consideration it has decreased to 3%. It is also an established fact that the gross profit of trading activity is lower than the manufacturing activity. The AR of the appellant has also offered that additional gross profit @ ½% of the turnover can be added back. But there is no reasonableness in adopting this ½% G.P. Keeping in view the principles of natural justice and the decision of the Hon'ble Courts on this issue, on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y were corresponding purchases. Having noted the above, Tribunal examined the books of accounts of the assessee wherefrom it was found that the assessee had made payments on account of the purchases through account payee cheques and the purchases were entered in its books of account. Thus, assessee was able to prove that the purchases were made only in the alternative way. If that be so, then Revenue was only required to estimate the profit at a particular rate. Referring to the figure of 2% arrived by the CIT(A), Tribunal observed that assessee's gross profit varied from 5% to 8.77%. Since the purchases were made from the grey market, the corresponding profit element would be little higher. Therefore, Tribunal directed the Assessing Officer to make further addition of 3% on the bogus purchases and to estimate the income on such basis. 19. On thorough consideration of the matter, we do not find any error or infirmity in the view taken by the Tribunal. The lower appellate authorities had enhanced the quantum of purchases much beyond that of the Assessing Officer i.e., from Rs. 24,18,06,385.00 to Rs. 65,65,30,470.00 but having found that the purchases corresponded to sales which ..... X X X X Extracts X X X X X X X X Extracts X X X X
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