ITO Vs Vipul K Sheth (ITAT Mumbai)
In the present case the AO has not doubted the sales. The assessee could not establish the genuineness of the transaction to the satisfaction of the AO during assessment proceedings. Hence, from the facts of the case it can be concluded that assessee had made purchases from grey market. Under these circumstances, the AO had no option but to make addition on estimate basis. However, since the AO has not rejected the sales, 100% addition is not sustainable. As mentioned by the Ld. CIT(A) in its order, the Hon’ble Gujarat High Court in the case of CIT vs. Simit P. Sheth (supra) has upheld the addition of 12.5% of the total amount of bogus purchases sustained by the ITAT, holding that, only profit element embedded in such purchases could be added to the income of the assessee. Since, the Ld. CIT (A) has restricted the addition to 12.5% by following the ratio laid down by the Hon’ble Gujarat High Court, we do not find any reason to interfere with the findings of the Ld. CIT (A). Hence, in our considered view, the addition of 12.5% is reasonable to meet the ends of justice. We therefore, uphold the findings of the Ld. CIT (A) and the dismissed the revenue’s appeal
FULL TEXT OF THE ITAT JUDGEMENT
This appeal has been filed by the revenue against the order dated 20.02.2019 passed by the Commissioner of Income Tax (Appeals)-45 (for short ‘the CIT(A), Mumbai, for the assessment year 2010-11, whereby the Ld. CIT(A) has partly allowed the appeal filed by the assessee against the assessment order passed u/s 143 (3) of the Income Tax Act, 1961 (for short the ‘Act’).
- In this case, assessment order was passed u/s 143(3) of the Act determining the total income of Rs. 26,25,140/- as against the returned income of Rs. 14,71,770/-, inter alia making addition of 11,02,806/-, as unexplained expenditure u/s 69C, holding that the assessee had obtained bogus purchase bills from two bogus parties. The assessee challenged the assessment order before the Ld. CIT (A). The Ld. CIT (A) after hearing the assessee restricted the addition to 12.5% of the alleged bogus purchases.
Aggrieved by the impugned order passed by the Ld. CIT (A), the revenue is in appeal before this Tribunal.
- The revenue has challenged the impugned order passed by the Ld. CIT (A) on the following effective grounds:-
“1. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in restricting the disallowance to 12.5% of alleged bogus purchases as against the 100% disallowance held by Assessing officer without appreciating the fact that AO has held that purchases remained unverified as identify of the purchase party and the genuineness of the transaction could not be established after carrying out proper independent investigation.
- On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in restricting the disallowance to 12.5% of alleged bogus purchases as against the 100% disallowance held by Assessing Officer without appreciating the fact that assessee has failed to produce the delivery challan, transport receipt, stock register and quantitative stock statement whereby corresponding purchase could be linked with sales.”
- This case was fixed for hearing on 20.10.2020. On the said date, when the case was called for hearing, none appeared on behalf of the assessee. Since, the assessee did not appear despite service of notice, we decided to dispose of this appeal on the basis of material on record after hearing the Departmental Representative (DR). Accordingly, we asked the Ld. DR to argue the department’s appeal.
- The Ld. DR submitted before us that the Ld. CIT (A) has wrongly restricted the addition to 12.5% without appreciating the fact that the assessee could not establish the genuineness of the purchases. The Ld. DR further pointed out that the Ld. CIT (A) has restricted the addition ignoring the fact that as per the enquiry conducted by Maharashtra Sales Tax Authorities the said bogus entities did not sell any material to anybody. The Ld. DR further submitted that since the decision of the Ld. CIT (A) are contrary to the settled principles of law, the same is liable to be set aside.
- We have heard the Ld. DR and perused the material on record including the cases relied upon by the parties and the authorities below. The Ld. CIT (A) has restricted the addition to 12.5% of the alleged bogus purchases by following the ratio laid down by the Hon’ble Gujarat High Court in the case of CIT vs. Simit P. Sheth 356 ITR 451 (Guj. The concluding para of the Ld. CIT (A) reads as under:-
“3. Ground nos.1 to 5 relate to the addition of entire purchases of Rs.11,02,806 as unexplained expenditures. The AO has mentioned in the order that as per the information from the Sales tax department purchases were made by the assessee from suspicious parties. During the course of assessment proceedings, the AO issued a show-cause to the assessee asking as to why purchases of Rs.11,02,806 should not be treated as unexplained expenditure u/s 69C of the Act. In response, the assessee submitted detailed explanation along with the purchase invoices, ledger account. The said explanation furnished by the assessee was rejected by the AO because the assessee did no furnish any delivery challan and lorry receipts to prove the genuineness of purchases and Before the sales tax dept., the parties already admitted that they have not done any business as well as there was no actual delivery of goods to the assessee and concluded that entire purchase of Rs.11,02,806 as non-genuine purchases and added the same to the total income of the assessee.
3.1 During the appellate proceedings, the appellant made submissions through the AR to drive a point that purchases were genuine and same cannot be treated as bogus merely on the basis of the list of suspicious dealers put up by the Sales tax department. The statements given by vendors cannot be relied upon without cross- examination of the parties, as the said statement was self-centered to reduce their tax incidence. Appellant argued that the appellant filed copies of purchase invoices, ledger and copies of bank statements highlighting the payments for the purchases which establish genuineness of the purchases. Assessee Company placed reliance on number of case laws in its submissions.
3.2 I have considered the assessment order and the submissions of the appellant including the case laws cited. The AO held in the assessment order that the appellant produced the details of purchases, ledger accounts of suppliers and copy of bank statement indicating the payment made to the seller parties. It is noticed that on account of non-production of delivery challan and lorry receipts etc. the AO added 100% of suspicious purchases mentioned in the information without bringing any additional information on record. It is seen that many Benches of ITAT and Hon’ble High Courts have held that when purchases are supported by sufficient documentary evidences, then merely because of non-appearance before the AO, one cannot conclude that the purchases were not made by the assessee. In the case of Nangalia Fabrics 40 taxmann.com 206, Gujarat High Court has held that where purchases were supported by the bills, entries were made in the books of accounts and payment was made by cheque, the said purchases could to be held as bogus. I agree with the contentions of the Ld. AR. that there are many decisions wherein the ITAT, Mumbai, has upheld addition of a certain percentage of alleged bogus purchases under similar facts.
3.3 Further, this is also not case in which the signed blank cheque books are found with the buyer to hold that the purchases of material were not at all made but entered in the stock to inflate the raw material. Therefore the decision of the Supreme Court in the case of N K Proteins Ltd 250 taxman 0022(SC) would not apply to the case. Therefore, the saving on account of VAT and other incidental charges made by the appellant on the said bogus purchases can be brought to tax as additional profit. In the case of CIT vs. Simit P Sheth, 356 ITR 451, Hon’ble Gujarat High Court has upheld estimation @ 12.5% of alleged bogus purchases by holding as under:
“If the payments to the abovementioned parties are made through cheque and the subsequent sales made have been accepted in total by the assessing officer, then it can be concluded that purchases have been made from persons in the open market. That being the position, not the entire purchase price but only profit element embedded in such purchases can be added to the income of the assessee.”
3.4 Keeping in view the totality of facts and circumstances of the case and respectfully following the decisions, the addition made by AO is restricted to 12.5% of such purchases of Rs.11,02,806, which comes to Rs.1,37,851. The AO is directed to modify the addition accordingly and the appellant gets part relief. These grounds are partly allowed.”
- In the present case the AO has not doubted the sales. The assessee could not establish the genuineness of the transaction to the satisfaction of the AO during assessment proceedings. Hence, from the facts of the case it can be concluded that assessee had made purchases from grey market. Under these circumstances, the AO had no option but to make addition on estimate basis. However, since the AO has not rejected the sales, 100% addition is not sustainable. As mentioned by the Ld. CIT(A) in its order, the Hon’ble Gujarat High Court in the case of CIT vs. Simit P. Sheth (supra) has upheld the addition of 12.5% of the total amount of bogus purchases sustained by the ITAT, holding that, only profit element embedded in such purchases could be added to the income of the assessee. Since, the Ld. CIT (A) has restricted the addition to 12.5% by following the ratio laid down by the Hon’ble Gujarat High Court, we do not find any reason to interfere with the findings of the Ld. CIT (A). Hence, in our considered view, the addition of 12.5% is reasonable to meet the ends of justice. We therefore, uphold the findings of the Ld. CIT (A) and the dismissed the revenue’s appeal.
In the result, appeal filed by the revenue for assessment year 20102011 is dismissed.
Order pronounced on 29th October, 2020 under rule 34 (4) of the Income Tax Appellate Tribunal Rules, 1963.