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Additions on account of bogus purchases are to be restricted to the profit element embedded & undue benefit obtained from evading VAT payment: ITAT

2019-TIOL-1606-ITAT-MUM

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘G’ MUMBAI

ITA No.6242/Mum/2017
Assessment Year: 2011-12

INCOME TAX OFFICER-11(2)(2)
ROOM NO 349, AAYKAR BHAVAN
M K MARG, MUMBAI – 400020

Vs

M/s SHREE GAJANANA INDUSTRIES INDIA PVT LTD
C-7, GROUND FLOOR, HIND SURASHTRA INDL ESTATE
ANDHERI KURLA ROAD, ANDHERI(E), MUMBAI-400069
PAN NO:AAKCS3108E

Sandeep Gosain, JM & Manoj Kumar Aggarwal, AM

Date of Hearing: July 09, 2019
Date of Decision: July 15, 2019

Appellant Rep by: Chaudhary Arun Kumar, Ld. DR
Respondent Rep by: 
Shri M Subramanian, Ld. AR

Income Tax – Bogus purchases – Profit element – Written down value

THE assessee had filed its return for the AY 2011-12 and the assessment was completed u/s 143(3). Subsequently, the AO received certain information from DGIT(Investigation)/Sales Tax Department, that the assessee had obtained bogus hawala purchase bills/entries from 14 parties. Consequentally, the case was re-opened by issuance of notice u/s 148, followed by statutory notices u/s.142(1)/143(2) wherein the assessee was directed to substantiate the purchase transactions. However, the assessee failed to produce any of the suppliers to confirm the transactions and also could not prove delivery of material by furnishing proof of transportation of goods/weigh slips. Therefore, treating all the transactions as non-genuine purchases, the amount of Rs.81.76 Lacs was added to the income of the assessee. Further, the AO observed that the assessee had claimed @15% on Written Down Value of Certain Plant & Machinery. However, the AO made a consequential disallowance on such claim. Since the capital expenditure of Rs.51.18 Lacs on account of Plant & Machinery was disallowed in AY 2009- 10. On appeal, the CIT(A) restricted the additions to 12% of bogus purchases.

On appeal, the Tribunal held that,

Whether additions on account of bogus purchases merits to be restricted to the extent of profit element embedded in these purchases and undue benefit of VAT obtained on such puchases – YES: ITAT

++ the assessee was in possession of primary purchase documents and the payments to the suppliers was through banking channels. Thus, the Tribunal opined there could be no sale without actual purchase of material keeping in view the assessee’s nature of business activities. At the same time, notices u/s 133(6) did no elicit any satisfactory response from any of the suppliers and the assessee failed to produce even a single supplier to confirm the purchase transactions. Therefore, in such a situation, the addition, which could be made, was to account for profit element embedded in these purchase transactions to factorize for profit earned by assessee against possible purchase of material in the grey market and undue benefit of VAT against such bogus purchases, which CIT(A) has rightly done. Therefore, Tribunal does not find any infirmity in the order of the CIT(A);

++ in so far as the disallowance of depreciation is concerned, Tribunal finds the the depreciation was disallowed as a matter of consequence since certain capital expenditure incurred by assessee in earlier AY 2009-10 was disallowed, consequentially, depreciation was disallowed in this year also on the written down value as claimed by the assessee. Therefore, this issue was percolating from AY 2009-10. Therefore, by setting aside the directions of first appellate authority in this regard, the Tribunal direct AO to compute the disallowance as per the final outcome of disallowance of capital expenditure in AY 2009-10 and the assessee is directed to provide requisite information, in this regard.

Revenue’s appeal partly allowed

ORDER

Per: Manoj Kumar Aggarwal:

1. Aforesaid appeal by Revenue for Assessment Year [in short referred to as ‘AY’] 2011-12 contest the order of Ld. Commissioner of Income-Tax (Appeals)-18, Mumbai, [in short referred to as ‘CIT(A)’], Appeal No.CIT(A)-36/IT-39/ITO-11(2)(2)/16-17 dated 05/06/17 on following Grounds of appeal: –

a) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in restricting the disallowance of the purchases of Rs. 81,76,272/- shown from two accommodation entry provider concern, to 12% by simply ignoring the fact that in this case the AO had held entire purchases to the tune of Rs. 81,76,272/- themselves as bogus and as such the instant case was not merely a case where the party from whom such purchases were allegedly made was acting as conduit between the assessee and the actual sellers of the material.

b) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating the fact that the then AO called upon the assessee to prove the genuineness of the purchases to the tune of Rs. 81,76,272/- and only after considering the submission filed by the assessee, the AO held that the impugned purchases were wholly bogus and as such, there is no finding of the fact in the assessment order if any such purchases were made by the assessee at all.

c) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating the fact that the apparent seller who had issued sales bills was not traceable and the assessee had failed to establish if such goods were received from the parties other than the person who had issued bills for such goods.

d) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in restricting the disallowance of the purchases to the extent of 12% without any cogent finding or evidence on record if the apparent seller was not merely accommodation entry provider but was acting as conduit between the assessee and the actual sellers of the material.

e) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating the fact that the Hon’ble Apex Court in the case of M/s NK Proteins Ltd. Vs. DCIT – 2017-TIOL-23-SC-IT has held that the entire undisclosed income generated out of bogus purchase transactions deserves to be added to total income.

f) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to rework the depreciation after estimating profit only @12% of Rs.51,18,7507- on the alleged purchase of plant & machinery without appreciating the fact that the purchase of plant & machinery is through bogus purchase that has been disallowed by the AO in A.Y.2009-10 which was not capitalized to qualify for claiming depreciation. Further, the entire bogus purchases of A.Y.2009-10 has been dismissed by the CIT(A) in limine.”

2.1 Facts in brief are that the assessee being resident corporate assessee stated to be engaged in manufacturing of engineering goods, molds and dyes was subjected to re-assessment proceedings for impugned AY. The assessment was framed u/s 143(3) r.w.s. 147 on 11/03/2016 wherein income of the assessee was determined at Rs.101.68 Lacs after certain additions as against returned income of Rs.13.39 Lacs e-filed by the assessee on 30/09/2011 which was processed u/s.143(1).

2.2 Pursuant to receipt to certain information from DGIT(Investigation)/Sales Tax Department, Govt. of Maharashtra, it transpired that the assessee obtained bogus hawala purchase bills/entries aggregating to Rs.81.76 Lacs from 14 parties, the details of which have already been extracted in para-4.1 of the quantum assessment order. Accordingly, the case was re-opened by issuance of notice u/s.148 on 25/02/2015 which was followed by statutory notices u/s.142(1)/143(2) wherein the assessee was directed to substantiate the purchase transactions.

2.3 To confirm the stated transactions, notices u/s.133(6) were issued to all parties but the same were returned back unserved by postal authorities. The assessee was confronted with the same and directed to file evidences to substantiate the purchases. In defense, the assessee submitted ledger extracts, photo copies of purchase bills etc. However, the assessee failed to produce any of the suppliers to confirm the transactions and also could not prove delivery of material by furnishing proof of transportation of goods/weigh slips etc. Consequently, Ld. AO formed a belief that the assessee failed to discharge the onus casted upon him to substantiate the purchases. Accordingly, treating the same as non-genuine purchases, the amount of Rs.81.76 Lacs was added to the income of the assessee.

2.4 The Ld. AO made another consequential disallowance on account of depreciation for Rs.6,52,641/- which was claimed @15% on Written Down Value of Certain Plant & Machinery since the capital expenditure of Rs.51.18 Lacs on account of Plant & Machinery was disallowed in AY 2009- 10.

3. Aggrieved, the assessee contested the stand of the Ld. AO on legal grounds as well as on merits. The Ld. CIT(A), after considering the factual matrix and relying upon various judicial decisions including the decision of Hon’ble Gujarat High Court rendered in CIT Vs. Simit P. Sheth [356 ITR 451] & CIT Vs. Bholanath Poly Fab. P. Ltd. [355 ITR 290 = 2012-TIOL-1220-HC-AHM-IT, restricted the additions to 12% of alleged bogus purchases. The disallowance of depreciation was also directed to be recomputed after considering the profit on alleged bogus purchases @12%. Aggrieved, the revenue is in further appeal before us.

4. The assessee has filed an application u/r 27 to submit that the reasons for reopening were not recorded by the revenue and therefore, the reassessment proceedings were bad in law. However, in rebuttal, the Ld. DR has placed on record a copy of the reasons as recorded by Ld. AO to initiate reassessment proceedings against the assessee. We are convinced with the revenue’s submissions and therefore, reject the assessee’s plea, in this regard and proceed to adjudicate the issue on merits.

5. We have carefully heard the rival submissions and perused relevant material on record and deliberated on judicial announcements cited before us. We find that assessee was in possession of primary purchase documents and the payments to the suppliers was through banking channels. We are of the considered opinion that there could be no sale without actual purchase of material keeping in view the assessee’s nature of business activities. At the same time, notices u/s 133(6) did no elicit any satisfactory response from any of the suppliers and the assessee failed to produce even a single supplier to confirm the purchase transactions. The delivery of material remained unsubstantiated. Therefore, in such a situation, the addition, which could be made, was to account for profit element embedded in these purchase transactions to factorize for profit earned by assessee against possible purchase of material in the grey market and undue benefit of VAT against such bogus purchases, which Ld. first appellate authority has rightly done. Therefore, we do not find any infirmity in the same.

6. Our aforesaid view is in line with the recent decision of Hon’ble Bombay High Court rendered in bunch of appeals titled as Pr.CIT Vs. M/s Mohommad Haji Adam & Co. [ITA No.1004 & others of 2016, dated 11/02/2019] =2019-TIOL-1181-HC-MUM-IT wherein Hon’ble Court distinguishing the cited case law of Hon’ble Gujarat High Court rendered in N.K. Industries Ltd. Vs Dy. C.I.T. in Tax Appeal No. 240 of 2003 = 2016-TIOL-3165-HC-AHM-ITand connected appeals decided on 20th June, 2016 observed as under: –

8. In the present case, as noted above, the assessee was a trader of fabrics. The A.O. found three entities who were indulging in bogus billing activities. A.O. found that the purchases made by the assessee from these entities were bogus. This being a finding of fact, we have proceeded on such basis. Despite this, the question arises whether the Revenue is correct in contending that the entire purchase amount should be added by way of assessee’s additional income or the assessee is correct in contending that such logic cannot be applied. The finding of the CIT(A) and the Tribunal would suggest that the department had not disputed the assessee’s sales. There was no discrepancy between the purchases shown by the assessee and the sales declared. That being the position, the Tribunal was correct in coming to the conclusion that the purchases cannot be rejected without disturbing the sales in case of a trader. The Tribunal, therefore, correctly restricted the additions limited to the extent of bringing the G.P. rate on purchases at the same rate of other genuine purchases. The decision of the Gujarat High Court in the case of N.K. Industries Ltd. (supra) cannot be applied without reference to the facts. In fact in paragraph 8 of the same Judgment the Court held and observed as under-

“So far as the question regarding addition of Rs.3,70,78,125/- as gross profit on sales of Rs.37.08 Crores made by the Assessing Officer despite the fact that the said sales had admittedly been recorded in the regular books during Financial Year 1997-98 is concerned, we are of the view that the assessee cannot be punished since sale price is accepted by the revenue. Therefore, even if 6 % gross profit is taken into account, the corresponding cost price is required to be deducted and tax cannot be levied on the same price. We have to reduce the selling price accordingly as a result of which profit comes to 5.66%. Therefore, considering 5.66% of Rs.3,70,78,125/- which comes to Rs.20,98,621.88 we think it fit to direct the revenue to add Rs.20,98,621.88 as gross profit and make necessary deductions accordingly. Accordingly, the said question is answered partially in favor of the assessee and partially in favor of the revenue.”

9 In these circumstances, no question of law, therefore, arises. All Income Tax Appeals are dismissed, accordingly. No order as to costs.

Drawing strength from the same, we hold that no fault could be find with the estimation made by Ld. CIT(A), in this regard. Ground Nos. (a) to (e) stand dismissed.

7. So far as the disallowance of depreciation is concerned, we find that Ld. first appellate authority has erred in noting the factual matrix. The depreciation was disallowed as a matter of consequence since certain capital expenditure incurred by assessee in earlier AY 2009-10 was disallowed and depreciation was disallowed to the assessee in that year. Consequentially, depreciation was disallowed in this year also on the written down value as claimed by the assessee. Therefore, this issue was percolating from AY 2009-10. Therefore, by setting aside the directions of first appellate authority in this regard, we direct Ld. AO to compute the disallowance as per the final outcome of disallowance of capital expenditure in AY 2009-10. The assessee is directed to provide requisite information, in this regard. Ground (f) stand allowed for statistical purposes.

8. The appeal stands partly allowed for statistical purposes.

(Order pronounced in the open court on 15.07.2019)

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