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TMI Blog2025 (3) TMI 230X X X X Extracts X X X X X X X X Extracts X X X X ..... Income Tax, (2016) 72 taxmann.com 289 since the Special Leave Petition against the said decision was dismissed by the Hon'ble Supreme Court in case of N. K. Protiens Ltd. Vs. Deputy Commissioner of Income Tax, on 16 January 2017, (2017) 84 taxmann.com 195 (SC) ? (ii) On the facts and circumstances of the case and in law, the ITAT has erred in restricting the disallowance to profit margin on unproven purchases without considering the position of law established by the Hon'ble Apex Court in the case of N.K. Protiens Ltd, that 100 % disallowances on bogus purchases is upheld ? Brief facts :- Regular Assessment : 3. The respondent-assessee is a company engaged in the business of trading in Iron and Steel. The respondent-assessee returned income of Rs. 2,84,700/- while filing its returns of income under Section 139 of the Act. The original assessment was completed under Section 143 (3) of the Act on 13 December 2011 determining total income at Rs. 3,86,250/-. Reassessment Proceedings : 4. Subsequently, the case of the respondent-assessee was reopened under Section 147 of the Act on the basis of an intimation received from Director General of Income Tax (Inv.), Mumbai/Sales Tax De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther, the CIT (A) observed that the notice sent by the email did not bounce and also considered various notices served by affixture for rejecting the contention of non-service of the notices. Therefore, the CIT (A) rejected the contention of the respondent-assessee on the issue of validity of the reassessment proceedings by holding that the notice was validly issued and served. 7. Concerning the ground relating to the addition of Rs. 20,06,80,150/- on account of bogus purchases from the parties mentioned in the assessment order, the CIT (A) in paragraph 5.2.1 of his order upheld the reasoning and the approach of the AO in making the additions. The CIT (A) further observed that the activities of the accommodation entries in the trading community are not unheard of and further stated that the investigation by the Sales Tax Department concerning VAT violations cannot be lost sight of more particularly since the names of the bogus sellers supplied by the Sales Tax Department are appearing in the books of respondent-assessee and, therefore, the link of involvement of the respondent-assessee in getting bogus bills is established. However, after giving the findings on the bogus purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cisions have not considered the provisions of Section 69C of the Act, which are squarely applicable to the facts of the present case. He, therefore, submitted that the additions made by the AO be restored to the extent of 100% of the bogus purchases and the orders of the Appellate Authorities be reversed. He relied upon the decision of the Gujarat High Court in the case of N.K. Industries Ltd. Vs. DCIT (2016) 72 taxmann.com 289, and its dismissal of SLP by the Supreme Court (2017) 84 taxmann.com 185. Mr Suresh Kumar also relied upon the decision of the Calcutta High Court in the case of Principal Commissioner of Income Tax vs. Mrs. Premlata Tekriwal (2022) 143 taxmann.com 173 in support of his submissions. Submissions of the respondent-assessee : 12. Mr. Subramaniam, learned counsel for the respondent-assessee admitted that the respondent-assessee did not appear before the AO. However, he submitted that in the statement of facts filed before the CIT (A) challenging the re-assessment order, he has stated that during the course of original assessment proceedings under section 143 (3) of the Act, the respondent-assessee had filed details of sundry debtors and creditors with pan numb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der. Therefore, the purchases are made from someone else, but through Mr. B they get formalised in the books of account so that sales can be made and recorded in the books of account. However, what needs to be examined is how he financed the original purchases. If such financing is out of unaccounted income, then the same has to be brought to tax, and if it is out of accounted income, it cannot be brought to tax. The onus is on Mr A to show the source of financing for the original purchase and to give the correct details from whom he has purchased the goods originally. This is the simplest model of accommodation entry. However, various complex models are adopted to avoid tracing the flow of money. This menace is harmful to the country's economy, and it amounts to routing unaccounted cash into the formal economy without the original unaccounted income being taxed. 16. The genuineness of the purchases would inter alia also include explanation with regard to the source for paying for such purchases. Explaining the source of purchases would be one of the prime considerations for concluding whether the purchases have been made from accounted or unaccounted sources and to test the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eous belief that it was estimating profit. In fact, the issue before the Tribunal was whether the CIT (A) was justified in not confirming entire purchase additions. Therefore, to that extent, the Tribunal too misdirected itself by approaching the issue solely based on estimating profit. 21. In our view, both the Appellate Authorities ought to have appreciated that the issue before them was whether the respondent-assessee had proved the purchases of which the claim for deduction was made. The respondent-assessee, having failed to discharge its onus on this issue before all three authorities, in our view, the additions made in the assessment order by the AO was justified. 22. If the approach of the Appellate Authorities of estimating the profit on such purchases is to be accepted, then, in effect, the consequence would be that even if respondent-assessee has failed to prove its claim of deduction of purchases, still by estimating profit, impliedly deduction of purchases is given. For example, if the purchases by accommodation entries are Rs. 100/- and a profit of 10% is estimated, then to the extent of Rs. 90/- deduction on account of purchases is deemed to have been given by the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 69C of the Act as to whether the addition on account of bogus purchases should have been made of the entire expenses or only a certain percentage of the bogus purchases. The AO disallowed certain percentage of the bogus purchases in the assessment order. This order was revised by the PCIT under Section 263 of the Act and the PCIT held that the entire expenses has to be disallowed as bogus purchases. On an appeal against the order under Section 263 of the Act, the Tribunal stated that only 2% of the bogus purchases may be added to the total income. Being aggrieved by the Tribunal's order, the revenue filed an appeal to the Calcutta High Court. 26. The Calcutta High Court observed that in spite of the AO having allowed the assessee to explain the transaction the assessee did not produce any document but stated that 2% of the bogus purchases may be added to the total income. Based on this, the High Court held that the purport of this admission would be that the assessee had accepted the allegation against them and precisely for that reason, they offered that 2% of the bogus purchases may be added to the total income. The High Court further observed if that was the factual posit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed upon the details of sundry debtors and sundry creditors filed during the original assessment proceedings under Section 143 (3) of the Act to contend that the details of purchases have been furnished. In our view, these details were furnished in the course of the original assessment proceedings under section 143 (3) and not during the re-assessment proceedings. This fact has been admitted by the counsel for the respondent-assessee. After the original assessment order under Section 143 (3), the appellant-revenue, on the basis of the information received from the DGIT (Inv.)/Sales Tax Department, reopened the case on the ground that the purchases made by the respondent-assessee are from hawala operator. Therefore, the details of sundry debtors and creditors filed in the original assessment proceedings do not absolve the respondent-assessee from proving the source of the purchases in the course of the re-assessment proceedings. On the contrary, on account of reasons for which case was reopened, the onus was more to prove purchases which respondent-assessee has totally failed. 29. The re-assessment proceedings were initiated for this very reason that the purchases which were accepte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubstantiating the purchases. In the present case, the respondent-assessee has not discharged the initial onus cast upon them since the respondent-assessee never attended the re-assessment proceedings. Therefore, in our view, the respondent-assessee, having not discharged their initial onus of proving the purchases during the course of re-assessment proceedings and having never joined the re-assessment proceedings, cannot rely upon the said decision which is distinguishable on facts. Similarly, the decision of the Coordinate Bench of this Court in the case of Shapoorji Pallonji and Co. Ltd. (supra) is distinguishable on facts since, in that case also, the assessee had discharged the initial onus cast upon it and had participated in the assessment proceedings which is not the position in the present case before us. 33. Mr. Subramaniam, learned counsel for the respondent-assessee, also relied upon the decision of this Bench in the case of Pravin U. Parmar (supra). This Bench, in the case of Pravin Parmar, did not admit the appeal of the revenue based on the findings of facts of the Tribunal in that case, which are reproduced in paragraph 6 of Pravin Parmar's case. In that case, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel for the respondent-assessee has not made any submissions on the provisions of Section 69C of the Act, although the same were explicitly framed in the admission order and relied upon by the counsel for the appellant-revenue in the course of the hearing. Therefore, the only conclusion that can be arrived at is that the respondent-assessee does not dispute the applicability of the provisions of Section 69C of the Act to its facts. 38. In our view, in the instant case, the respondent-assessee has offered no explanation of the source of the expenditure incurred on account of purchases of Rs. 20,06,80,150/- and, therefore, the AO was justified in making an addition of the said amount and the Appellate Authorities were not justified in estimating the profit rate and thereby impliedly grant deduction of such unexplained expenditure which is contrary to the express provision of Section 69C of the Act. 39. In the instant case before us, the respondent-assessee has not appeared in the re-assessment proceedings to discharge its onus on proving purchase transactions under consideration. Before the CIT (A) for the first time, scanty details of sundry debtors, creditors and stocks were gi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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