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Disallowance of bogus purchases merits being restricted to extent of profit element embedded where purchases themselves are not doubted: ITAT

2019-TIOL-1500-ITAT-MUM

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘J’ MUMBAI

ITA No.2297/Mum/2017
Assessment Year: 2010-11

M/s SEA LINKERS PVT LTD
BPT, PLOT NO 107, QUAY STREET
DARUKHANA, MUMBAI-400010
PAN NO: AAHCS5084N

Vs

ASSISTANT COMMISSIONER OF INCOME TAX 8(1)(2)
AAYAKAR BHAVAN, M K ROAD, MUMBAI-400020

Mahavir Singh, JM & Ramit Kochar, AM

Date of Hearing: May 02, 2019
Date of Decision: July 03, 2019

Appellant Rep by: Shri Deepak Tralshawala
Respondent Rep by: 
Shri Manish Kumar Singh, DR

Income Tax – Sections 143(3), 147 & 148.

Keywords – Reopening of assessment – Bogus Purchases – Disallowance of purchases.

The assessee, engaged in the business of manufacturing & dealers in Wire Ropes, Chain Pulley Blocks, filed return for relevant AY. Thereafter, assessment u/s 143(3) was originally framed by the AO. Thereafter, reasons were recorded by the AO for reopening of the concluded assessment u/s 147 of the Act and notice u/s 148 of Act was issued by AO to the assessee within four years from the end of the AY. The reason for reopening was that AO had received information from DGIT(Inv.) Mumbai that the assessee had claimed bogus purchases to the tune of Rs. 33,65,552/- in relevant previous year. The AO asked assessee to produce for verification these parties but the assessee failed to produce parties before the AO. The AO, made additions to the income of the assessee to the tune of Rs. 33,65,552/- by disallowing entire claim for bogus purchases made by assessee. The CIT(A), partly allowed the appeal of the assessee by upholding disallowance to the tune of 12.5% of the alleged bogus purchases as profit embedded in these alleged bogus purchases. Aggrieved assessee filed appeal before Tribunal.

On appeal, Tribunal held that,

Whether disallowance for bogus purchases can be reduced to the extent of profit element embedded in these purchase where sales are not in doubt – YES: ITAT 

++ Revenue has received this information from Maharashtra VAT Department that the four parties were involved in providing hawala accommodation entries without supplying any material by issuing false invoices and the assessee is beneficiaries of these accommodation entries aggregating to Rs. 33,65,552/- from four parties. These parties have stated on oath before Maharashtra Sales Tax Department that they were engaged in providing accommodation entries wherein they were issuing bogus bills without supplying any material and the assessee was listed as one of the beneficiaries of these bogus accommodation entries from these four hawala dealers to the tune of Rs. 33,65,552/-. The assessee was asked to prove genuineness of these purchases as well to produce these parties before the authorities below, but the assessee failed to produce these parties before the authorities below. The assessee also could not produce these four parties even before us nor offer has been made by assessee before the Bench to produce these parties before the authorities below in case the matter/issue is remanded to authorities below. The assessee also could not also furnish complete details such as transportation of material, delivery challan etc. and hence genuineness of these purchases remained unverified. The statements on oath recorded of these hawala dealers wherein these hawala dealers had admitted to be engaged in issuing false bills to provide bogus accommodation entries of purchases and sales, with assessee being listed as one of the beneficiaries of the said bogus accommodation entries has still remained un-rebutted/unshaken by the assessee. The AO made additions to the income of the assessee to the tune of entire purchases, while CIT(A) keeping in view that the assessee was able to shown consequent sales to these purchases restricted disallowance to 12.5% of bogus purchases being profits embedded in these purchases which was suppressed by assessee while filing return of income. The decision of Hon’ble Supreme Court in the case of Kachwala Gems v. JCIT reported in (2007) 288 ITR 10 (SC) = 2006-TIOL-200-SC-IT is relevant. In estimation some guess work is involved but it should be fair, reasonable and honest. We donot find any infirmity in estimation done by learned CIT(A). The AO on its part has rightly relied on provisions of Section 101,103 and 106 of the Indian Evidences Act, 1872. These purchases are appearing in books of accounts of the assessee and the assessee is claiming deduction of these purchases from its income. These purchases as were made by assessee were admitted on oath by sellers to be bogus accommodation entries by issuance of false bills without supplying material physically. The assessee could not demolish these statements given on oath by alleged sellers of material who were infact hawala dealers as even proper transportation bills, delivery challans were not furnished by the assessee. These parties could not be produced by assessee before the authorities below. The onus was on the assessee to produce these parties before the authorities below and also to prove genuineness of these purchases. Tribunal in the immediately preceding year viz. AY 2009-10 on the similar factual matrix prevailing in that year in assessee’s own case was pleased to up-hold the appellate order of the CIT(A) wherein disallowance to the tune of 12.5% of bogus purchases towards embedded profits in these bogus purchases were upheld on merits in addition to income declared by the assessee;

++ the factual matrix in the impugned assessment year AY 2010-11 is similar to that prevailing in AY 2009-10 and no reason was found to deviate from detailed and well reasoned order passed by tribunal for the immediately preceding year viz. AY 2009-10 in assesses own case in ITA no. 4904 & 5395/Mum/2016 = 2018-TIOL-272-ITAT-MUM in cross appeals, thus Respectfully following the decision of the tribunal it was decided to uphold additions to the income of the assessee to the tune of 12.5% of Bogus Purchases towards embedded profits in these bogus purchases which was suppressed by the assessee which additions shall be in addition to the income declared by assessee.Guided by the decision of Supreme Court in the case of Radhasoami Satsang v. CIT, 2002-TIOL-745-SC-IT so as to maintain consistency and judicial discipline by following preceding year decision of tribunal. In the result, appeal of the assessee stands dismissed.

Assessee’s appeal dismissed

ORDER

Per: Ramit Kochar:

This appeal, filed by assessee, being ITA No. 2297/Mum/2017, is directed against appellate order dated 28.02.2017, passed by learned Commissioner of Income Tax (Appeals)-14, Mumbai (hereinafter called “the CIT(A)”) in appeal number CIT(A)-14/IT-378/15-16, for assessment year 2010-11, the appellate proceedings had arisen before learned CIT(A) from assessment order dated 11.03.2016 passed by learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) r.w.s. 147 of the Income-tax Act, 1961 (hereinafter called “the Act”) for AY 2010-11.

2. The grounds of appeal raised by assessee in memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called “the tribunal”) read as under:-

“Being aggrieved by the order of the Commissioner of Income Tax (Appeals)-14, the appellant prefers the following amongst other grounds:

1. On the facts and in the circumstances of the case, and in law, the Learned CIT(A) has erred in upholding the reopening of the assessment on the premise that information received from the Sales tax department that the purchases are bogus constitutes enough reason to believe for re opening of the assessment, and also holding at Para 4 of his order that “at the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief whether the material would conclusively prove escapement is not the concern at that stage. This is because the formation of belief by the AO is within the realm of subjective, satisfaction. Therefore, as the case was re-opened on the basis of specific information received by the AO, the re-assessment proceedings is held as valid.”

2. On the facts and in the circumstances of the case, and in law, the Learned Commissioner of Income tax (Appeals), erred inter alia

a) in sustaining the addition to the extent of 12.5% of the alleged bogus purchases by holding in para 5.3 of his order “Looking into the entirety of the facts, therefore in my considered opinion only the profit derived out of such transactions should be assessed to tax and relying on the decision in the case of Bholenath Poly Fab Pvt. Ltd, addition to the extent of 12.5% of such tainted purchases is considered reasonable and sustained as suppressed profit element embedded in such purchase. This estimation is in addition to the gross profit shown by the appellant “

b) by consciously overlooking that the purchases were made by account payee cheques to these suppliers whose identity was established by the fact of payment to them being confirmed by Bankers and no evidence has been produced by him for receipt of cash by the assessee as alleged by him.

c). by holding in his order that the purchases made by the assessee were “bogus purchases”, while not disputing the sales made from these purchases, which are genuine and which were booked in the regular books of accounts and which were also verified by him from the assessment records in presence of the Learned AO.

d). in not considering the quantitative disposal statements of purchase made from these alleged bogus parties and sales there from, which was filed before him. as well as the Learned AO and which was also verified by him from the assessment records in presence of the Learned AO.

e). in not considering the fact that on the alleged bogus purchases, the appellant has disclosed profits which is higher than the average rate of gross profit disclosed by the appellant;

f) in not considering the fact that the Learned Assessing Officer has not found any infirmities in the sales, books of accounts or other materials nor has he found any evidence to prove that purchases from these parties are bogus.

3. Hence, it is submitted that the re opening of the assessment being bad in law be quashed or in the alternative, the addition of Rs.420,694/- [@12.5% of the alleged bogus purchases of Rs. 33,65,552/-] upheld by the Learned Commissioner of Income tax (Appeals) being arbitrary and contrary to the principles of natural justice and equity be deleted in toto.”

3. The brief facts of the case are that the assessee is in the business of manufacturing & dealers in Wire Ropes, Chain Pulley Blocks etc..

3.2 The assessee originally filed its return of income on 27.09.2010 which was processed u/s 143(1) of the 1961 Act. Thereafter, the case of the assessee was selected for scrutiny under CASS by Revenue for framing scrutiny assessment u/s 143(3) read with Section 143(2) of the 1961 Act and assessment order dated 22.03.2012 was originally framed by the AO against the assessee u/s 143(3) of the 1961 Act. Thereafter, reasons were recorded by the AO for reopening of the concluded assessment u/s 147 of the 1961 Act, and notice dated 19.02.2015 u/s 148 of the 1961 Act was issued by AO to the assessee within four years from the end of the assessment year. The assessee vide letter dated 25.02.2015 requested AO to treat return of income filed by it on 27.09.2010 as return of income filed in persuance to notice issued u/s 148 of the 1961 Act. A copy of reasons recorded by the AO for reopening of the concluded assessment were furnished to the assessee by the AO vide letter dated 17.08.2015. The notices u/s 143(2) and Section 142(1) of the 1961 Act were later issued to the assessee in compliance with statutory requirements. These are admittedly undisputed facts between rival parties.

3.3 The AO had received information from DGIT(Inv.) Mumbai that the assessee has claimed bogus purchases to the tune of Rs. 33,65,552/- in previous year relevant to AY 2010-11 from four parties who were listed in Sales Tax Website as Hawala dealers by Sales Tax Department. The DGIT(Inv.), Mumbai also informed AO that these parties were examined by Sales Tax Department and that these parties admitted on oath before Sales Tax Department that they did not made any sale or purchase and they were engaged in only raising false bills to be utilised by various beneficiaries. Copies of statements taken under oath from these parties by Sales Tax Department were also forwarded by DGIT(Inv.), Mumbai to the AO. The details of parties from whom the assessee had allegedly obtained bogus bills during the previous year relevant to impugned assessment year, are as under:-

Sr No.Name of the Purchasing PartiesAmt. (in Rs.)
1Siddhivinayak Steel67,500
2Vijay Steels16,427
3Shiv Industries29,250
4Shree Navdurga Steel Traders32,52,375
 Total33,65,552

3.4 The AO asked assessee to produce for verification these parties but the assessee failed to produce aforesaid parties before the AO. The AO asked assessee to produce all the relevant documents/evidences to support its claim of genuineness of these purchase transactions along with their filed copies of ITR’s and bank statements but the assessee failed to produce before the AO relevant evidences/documents to substantiate genuineness of these purchase transactions from aforesaid four parties as well assessee also failed to produce these parties before the AO. The AO referred to and relied upon provisions of Section 101, 103 and 106 of Indian Evidence Act, 1872. The AO also relied upon decisions in the case of Nund & Samant Company Private Limited v. CIT reported in (1970) 78 ITR 268(SC) = 2002-TIOL-2237-SC-IT-LB, Watkings Mayer(Agrico) Private Limited v. CIT (1979) 117 ITR 202(P&H), CIT v. Shervani Sugar Syndicate Private Limited (1980) 125 ITR 158(All.), Eastern Sales Private Limited v. CIT (1979) 117 ITR 477(Cal.) and CIT v. West Coast Shipping Agencies Private Limited (1981) 127 ITR 442(Ker.) to hold against the assessee. The AO, thus, made additions to the income of the assessee to the tune of Rs. 33,65,552/- by disallowing entire claim for bogus purchases made by assessee, vide re-assessment order dated 11.03.2016 passed by the AO u/s 143(3) read with Section 147 of the 1961 Act.

4. Being Aggrieved by reassessment order dated 11.03.2016 passed by AO u/s 143(3) read with Section 147 of the 1961 Act, the assessee filed first appeal with learned CIT(A). The assessee filed detailed submissions before learned CIT(A), who was pleased to partly allow the appeal of the assessee by upholding disallowance to the tune of 12.5% of the alleged bogus purchases as profit embedded in these alleged bogus purchases vide appellate order dated 28.02.2017, instead of disallowance of 100% of alleged bogus purchases as was earlier done by the AO in reassessment order dated 11.03.2016, by holding as under:-

“4. As regards ground No.1, I have considered the submissions made. In the case of Rajesh Jhaveri Stockbrokers Pvt LTD vs ACIT 291 ITR 500(SC) = 2007-TIOL-95-SC-IT Hon’ble Apex Court held that “at the initiation stage, what is required is reason to believe, but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is because the formation of belief by the A.O is within the realm of subjective satisfaction.” Therefore as the case was reopened on the basis of specific information received by AO, the reassessment proceedings is held as valid. Ground No 1 is dismissed.

5. As regards ground No. 2, the facts of the case are the AO has added purchases of Rs 33,65,552/- from 4 different parties on the basis of information received from Sales Tax department regarding these parties being hawala dealers and further due to the fact that such parties were also not produced during the course of assessment proceedings alongwith necessary evidence for verification of transactions.

5.1 The submissions of the appellant are reproduced above. I have considered the submissions made. In this case, the appellant contends that all the necessary submissions were given before the AO during the course of assessment proceedings. In this connection, the assessment record was verified.it was noted that the complete delivery challans are not furnished during assessment proceeding and further most of the challans are unsigned. Looking into the background of the facts and as proper transportation details of the items could not be furnished, I am of the opinion that the appellant failed to prove beyond doubt that the items are purchased from the alleged parties. However it is further noted that the subsequent sales details are furnished during assessment proceeding as contended in the submission. Under the facts therefore I am of the opinion that only the embedded profit in the transactions is to be considered.

5.2 In the case of Bholenath Poly Fab Pvt. Ltd 355 ITR 290 (Guj) = 2012-TIOL-1220-HC-AHM-IT, the Hon’ble Tribunal held that purchases were made from bogus parties. However, in this case, entire quantity of opening stock, purchase and quantity manufactured during the year under consideration were sold by the assessee. Hon’ble Tribunal held that goods were purchased from some other party and profit amount embedded in such amount amount would be subjected to tax. The decision in the case of Sanket Steel Trader vs. ITO and Vijay Protein Ltd vs ACIT 58 ITD 428(Ahd) were relied upon. Hon’ble Gujarat High Court confirmed the decision. Similarly in the case of CIT vs. Simit Sheth 38 taxman.com 385 (Guj), under similar circumstances, the addition to the extent of 12.5% was sustained relying on the decision in the case of Vijay M Mistry Construction Ltd 355 ITR 498 (Guj) = 2011-TIOL-64-HC-AHM-IT and Vijay Proteins Ltd 58 ITD 428 (Ahd). In the case of Sanket Steel Traders ITA No. 2801/And/2008 dated 20/5/2011 also profit element of 12.5% was sustained.

5.3 Looking into entirety of the facts, therefore in my considered opinion only the profit derived out of such transactions should be assessed to tax and relying on the decision in the case of Bholenath Poly Fab Pvt. Ltd (Supra), addition to the extent of 12.5% of such tainted purchases is considered reasonable and sustained as the suppressed profit element embedded in such purchases. In absence of any further details this estimation is in addition to the gross profit shown by the appellant. The A.O is to take action accordingly.”

4.2 As could be seen from appellate order passed by ld. CIT(A), the reopening of the concluded assessment u/s. 147 was upheld on legal ground as in the opinion of learned CIT(A) the reopening was done based on tangible incriminating material received by AO from DGIT(Inv.), Mumbai which in turn was based on information received from Maharashtra Sales Tax Department that the assessee is beneficiary of alleged bogus purchases from aforesaid four parties, totalling to Rs. 33,65,552/- thus such incriminating information having a live link/nexus with formation of belief that income has escaped assessment within the mandate of Section 147/148 of the 1961 Act. The additions were also upheld by learned CIT(A) on merits to the tune of 12.5% of alleged bogus purchases being suppressed profits embedded in these purchases which was ordered to be brought to tax by learned CIT(A) in addition to profits declared by the assessee, vide appellate order dated 28.02.2017 passed by learned CIT(A).

5. The assessee being aggrieved by an appellate order dated 28.02.2017 passed by learned CIT(A) has filed an appeal with tribunal.

5.2 The ld. counsel for the assessee submitted that assessment year under consideration is AY 2010-11 and additions are made to the income of the assessee by disallowance of bogus purchases to the tune of Rs.33,65,552/- by the AO, while learned CIT(A) restricted disallowance to profits embedded in these alleged bogus purchases to the tune of 12.5% in addition to the income declared by the assessee. It was submitted that assessment was reopened by the AO u/s. 147 of the Act and reasons for reopening of the concluded assessment were specified in re-assessment order passed the AO, to which our attention was drawn. It was submitted that original assessment was framed u/s. 143(3) and reopening of the concluded assessment u/s 147 was done within four years from the end of assessment by the AO by issuance of notice u/s 148, dated 19.02.2015. The learned counsel for the assessee relied upon the judgment of Hon’ble Gujarat High Court in the case of PCIT v. Manzil Dineshkumar Shah (2018) 406 ITR 326(Guj.) = 2018-TIOL-948-HC-AHM-IT and judgment of Hon’ble Delhi High Court in the case of PCIT v. RMG Polyvinyl India Limited (2017) 396 ITR 5(Del.) = 2017-TIOL-1388-HC-DEL-IT. It was submitted on merits that cross examination of the said parties were not done and their statement was recorded at the back of the assessee which cannot be accepted without cross examination. The learned counsel for the assessee relied upon judgment of Hon’ble Bombay High Court in the case of CIT v. Ashish International in ITA no. 4299 of 2009 vide judgment dated 22.02.2011. The Ld. Counsel for the assessee relied upon the judgment of Hon’ble Bombay High Court in the case of H.R Mehta v. ACIT reported in (2016) 387 ITR 561(Bom.) = 2016-TIOL-1317-HC-MUM-IT. The Ld. Counsel for the assessee also relied upon the judgment of Hon’ble Bombay High Court in the case of PCIT v. Chawla Interbild Construction Co. in ITA no. 1103 of 2015 dated 28.02.2018 = 2018-TIOL-409-HC-MUM-IT. On legal ground with respect to challenge to reopening of concluded assessment u/s. 147 of the 1961 Act, this legal issue was not pressed by learned counsel for the assessee and prayers were made by learned counsel for the assessee to dismiss this legal challenge to reopening of concluded assessment as not being pressed. So far as challenge to additions made to the income of assessee on merits, the learned counsel for the assessee prayed that the issue may be restored to the file of the AO for denovo determination of the issue by the AO on merits in accordance with law. It was also brought to the notice of the Bench at this stage by learned counsel for the assessee that in the preceding year vide ITA no. 4904/Mum/2016 and ITA no. 5395/Mum/2016 = 2018-TIOL-272-ITAT-MUM for AY 2009-10 in assessee’s own case, the tribunal in cross appeals had passed common order dated 11.12.2017, wherein tribunal upheld the disallowance to the tune of 12.5% of alleged bogus purchases being profits embedded in these bogus purchases in addition to income declared by the assessee and appellate order passed by learned CIT(A) for AY 2009-10 was upheld by tribunal. The Ld. Counsel for the assessee also relied upon the judgment dated 11.02.2019 of Hon’ble Bombay High Court in the case of PCIT v. Mohommad Haji Adam & Company & ors. in ITA no. 1004 of 2016 = 2019-TIOL-1181-HC-MUM-IT.

5.3 The learned DR supported appellate orders passed by learned CIT(A). The Ld. DR did not raised any objection to the assessee conceding to the dismissal of ground no. 1 as to challenge to reopening of the concluded assessment u/s 147 of the 1961 Act on legal grounds.

6. We have considered rival contention and perused the material on record. We have observed that the assessee is in the business of manufacturing & dealing in Wire Ropes, Chain Pulley Blocks etc..

6.2 First we will dispose of Ground No. 1 raised by assessee in its appeal filed with tribunal wherein assessee raised legal challenge to reopening of the concluded assessment by the AO by invocation of provisions of Section 147 of the 1961 Act. After hearing both the parties, we hereby dismiss ground no. 1 as to legal challenge to reopening of the concluded assessment u/s 147 of the 1961 Act as not being pressed. While dismissing ground number 1 as above, we have noted that the learned counsel for the assessee has conceded before the Bench to dismiss Ground No. 1 as not been pressed. We have also noted that tribunal in assessee’s own case for AY 2009-10 vide common orders dated 11.12.2017 in ITA no. 4904/Mum/2016 and 5395/Mum/2016 = 2018-TIOL-272-ITAT-MUM has dismissed legal challenge to reopening of the concluded assessment u/s 147 with detailed reasonings, by holding as under :

“7. We have heard the counsel and perused the records. The ld. Counsel of the assessee submitted that the reopening has been based upon the information received from the Sales Tax Department. The same is based upon the website of Sales Tax Department which he claimed that was akin to newspaper information. He further submitted that the hawala dealers must have given some statements and if so the assessee would like to know how the assessee has been implicated. He further submitted that DGIT Investigation report has been said to be basis of reopening. The ld. Counsel of the assessee submitted that what is the report of the DGIT (Invtg.) is not known. The ld. Counsel of the assessee further pleaded that the original assessment was done u/s. 143(3) of the Act. Hence, the reopening is not at all justified. In this regard, the ld. Counsel of the assessee placed reliance upon Hon’ble Delhi High Court decision in the case of Principal CIT vs. Meenakshi Overseas (P.) Ltd. [2017] 395 ITR 677 (Delhi) = 2017-TIOL-1060-HC-DEL-IT, CIT vs. Jyoti Prakash Dutta [2014] 367 ITR 568 (Bom) = 2014-TIOL-1539-HC-MUM-IT; CIT vs. Vardhman Industries [2014] 363 ITR 625 (Raj); CIT vs. Eastern Commercial Enterprises [1994] 210 ITR 103 (Cal.). The ld. Counsel of the assessee further submitted that findings of the Sales Tax Department have not been given to the assessee and the assessee has not been provided any opportunity to cross examine the said hawala dealers. The ld. Counsel of the assessee further submitted that the books have not been rejected in this case, sales have been accepted, profits have been declared have not found to be unreasonable. Hence, the ld. Counsel of the assessee submitted that no addition is liable to be made in this case.

8. Per contra, the ld. Departmental Representative submitted that the reopening has been made upon cogent materials received by the Assessing Officer. The ld. Departmental Representative submitted that the information from the Sales Tax Department is not akin to newspaper report. For the reopening, the ld. Departmental Representative relied upon the Hon’ble Gujarat High Court decision in 73 taxman.com 185 and the Hon’ble Supreme Court decision in the case of CIT(A) Vs. Rajesh Jhaveri Stock Brokers P. Ltd, 291 ITR 500 = 2007-TIOL-95-SC-IT and the ITAT decision in the case of Sukh Ram vs. Asst. CIT [2006] 103 TTJ 914 (ITAT-Del) = 2006-TIOL-42-ITAT-DEL. The ld. Departmental Representative further submitted that the assessee has not been able to produce the said hawala dealers. The said dealers have been found to be nonexistent. Apart from enquiry by the Assessing Officer, inspector report to that extent is also there. Under these circumstances, the ld. Departmental Representative submitted that 100% addition should be made. For this proposition, the ld. Departmental Representative relied upon the Hon’ble Gujarat High Court decision in the case of N K Industries vs. Dy CIT in Income Tax Appeal No. 240 of 2003, vide order dated 20.06.2016 = 2016-TIOL-3165-HC-AHM-IT. He submitted that the SLP against this order has been dismissed by the Hon’ble Apex Court.

9. Upon careful consideration, as regards the reopening of the assessee, on a careful consideration, we note that in this case information was received by the Assessing Officer from DGIT Investigation (Mumbai) there are some parties who are engaged in the hawala transactions and are also involved in issuing bogus purchase bills for sale of material without delivery of goods, which information was based on information received by Revenue from Maharashtra Sales Tax Authority. Information was received that the assessee was beneficiary of hawala accommodation entries from entry providers by way of bogus purchase. The accommodation entry provider has deposed and admitted before the Maharashtra Sales Tax Authority vide statement/ affidavit that they were engaged in providing bogus accommodation entries wherein bogus sale bills were issued without delivery of goods, in consideration for commission. These, accommodation entry providers, on receipt of cheques from parties against bogus bills for sale of material, later on withdrew cash from their bank accounts, which was returned to beneficiaries of bogus bills after deduction of their agreed commission. The Assessee was stated to be one of the beneficiaries of these bogus entries of sale of material from hawala entry operators in favour of the assessee wherein the assessee made alleged bogus purchases through these bogus bills issued by hawala entry providers in favour of the assessee. These dealers were surveyed by the Sales Tax Investigation Department whereby the directors of these dealers have admitted in a deposition vide statements/affidavit made before the Sales Tax Department that they were involved in issuing bogus purchase bills without delivery of any material. There is a list of such parties wherein the assessee is stated to be beneficiary of bogus purchase bills.

10. From the above, we find that tangible and cogent incriminating material were received by the AO which clearly showed that the assessee was beneficiary of bogus purchase entries from bogus entry providers which formed the reason to believe by the AO that income has escaped assessment. The information so received by the AO has live link with reason to believe that income has escaped assessment. On these incriminating tangible material information, assessment was reopened. At this stage there has to be prima facie belief based on some tangible and material information about escapement of income and the same is not required to be proved to the guilt. In this regard, I refer to the decision of the Hon’ble Apex Court in the case of CIT(A) Vs. Rajesh Jhaveri Stock Brokers P. Ltd, 291 ITR 500 = 2007-TIOL-95-SC-IT :-

“Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to lax if he has reason to believe that income for any assessment year has escaped assessment. The word “reason” in the phrase “reason to believe” would mean cause or justification. If the AO has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the AO should have finally ascertained the fact by legal statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Supreme Court in Central Provinces Managnese Ore Co, ltd. v. ITO(1991) 191 ITR 662 = 2002-TIOL-736-SC-IT, for initiation of action under section 147(a) as the provision stood at the relevant time) fulfillment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is “reason to believe”, but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the AO is within the realm of subjective satisfaction ITO v. Selected Dalurband Coal Co, (P.) Ltd. (1996) 217 ITR 597 (Supreme Court) = 2002-TIOL-2198-SC-IT: Raymond Woollen Mills Ltd. v. ITO (1999) 236 ITR 34 (Supreme Court) = 2002-TIOL-864-SC-IT.”

11. The above discussion and precedent from Apex Court fully justify the validity of reopening in this case. Further I find that the Ld. CIT(A) has carefully examined the issue and has properly appreciated the issue. Hence, I do not find any infirmity in the same. Accordingly, we uphold the order of the Ld. CIT(A) on the issue of reopening. Since, the issue has been decided on the basis of the Hon’ble Apex Court decision, the other case laws referred by assessee are not supporting the assessee’s case. “

6.3 Now coming to challenge raised by the assessee on merits of the additions to the income on account of these alleged bogus purchases, we have observed that return of income was filed by assessee on 27.09.2010 and assessment was originally framed u/s. 143(3) on 22.03.2012. Subsequently, the AO reopened the assessment of the assessee by issuing notice u/s. 148 dated 19.02.2015 based on the tangible incriminating material received from DGIT(Inv.), Mumbai which was based on information received from Maharashtra Sales Tax Department that the assessee had made bogus purchases to the tune of Rs. 33,65,552/- from four parties who are hawala dealers, as under:-

Sr No.Name of the Purchasing PartiesAmt. (in Rs.)
1Siddhivinayak Steel67,500
2Vijay Steels16,427
3Shiv Industries29,250
4Shree Navdurga Steel Traders32,52,375
 Total33,65,552

6.4 The Revenue has received this information from Maharashtra VAT Department that the aforesaid four parties were involved in providing hawala accommodation entries without supplying any material by issuing false invoices and the assessee is beneficiaries of these accommodation entries aggregating to Rs. 33,65,552/- from aforesaid four parties. These parties have stated on oath before Maharashtra Sales Tax Department that they were engaged in providing accommodation entries wherein they were issuing bogus bills without supplying any material and the assessee was listed as one of the beneficiaries of these bogus accommodation entries from these four hawala dealers to the tune of Rs. 33,65,552/-. The assessee was asked to prove genuineness of these purchases as well to produce these parties before the authorities below, but the assessee failed to produce these parties before the authorities below. The assessee also could not produce these four parties even before us nor offer has been made by assessee before the Bench to produce these parties before the authorities below in case the matter/issue is remanded to authorities below. The assessee also could not also furnish complete details such as transportation of material, delivery challan etc. and hence genuineness of these purchases remained unverified. The statements on oath recorded of these hawala dealers wherein these hawala dealers had admitted to be engaged in issuing false bills to provide bogus accommodation entries of purchases and sales, with assessee being listed as one of the beneficiaries of the said bogus accommodation entries has still remained un-rebutted/unshaken by the assessee. The AO made additions to the income of the assessee to the tune of entire purchases, while Ld. CIT(A) keeping in view that the assessee was able to shown consequent sales to these purchases restricted disallowance to 12.5% of bogus purchases being profits embedded in these purchases which was suppressed by assessee while filing return of income. The decision of Hon’ble Supreme Court in the case of Kachwala Gems v. JCIT reported in (2007) 288 ITR 10 (SC) = 2006-TIOL-200-SC-IT is relevant. In estimation some guess work is involved but it should be fair, reasonable and honest. We donot find any infirmity in estimation done by learned CIT(A). The AO on its part has rightly relied on provisions of Section 101,103 and 106 of the Indian Evidences Act, 1872. These purchases are appearing in books of accounts of the assessee and the assessee is claiming deduction of these purchases from its income. These purchases as were made by assessee were admitted on oath by sellers to be bogus accommodation entries by issuance of false bills without supplying material physically. The assessee could not demolish these statements given on oath by alleged sellers of material who were infact hawala dealers as even proper transportation bills, delivery challans were not furnished by the assessee. These parties could not be produced by assessee before the authorities below. The onus was on the assessee to produce these parties before the authorities below and also to prove genuineness of these purchases. We have also observed that tribunal in the immediately preceding year viz. AY 2009-10 on the similar factual matrix prevailing in that year in assessee’s own case was pleased to up-hold the appellate order of the Ld. CIT(A) wherein disallowance to the tune of 12.5% of bogus purchases towards embedded profits in these bogus purchases were upheld on merits in addition to income declared by the assessee, vide detailed and well reasoned common order dated 11.12.2017 in cross appeals in ITA no. 4904 & 5395/Mum/2016 = 2018-TIOL-272-ITAT-MUM , by holding as under :-

“12. As regards the merits of the case, we find that credible and cogent information was received in this case by the assessing officer that certain accommodation entry provider/bogus suppliers were being used by certain parties to obtained bogus bills. The assessee was found to have taken accommodation entry/bogus purchase bills during the concerned assessment year from different parties. Based upon this information assessment was reopened. The credibility of information relating to reopening remains un-assailed. In such factual scenario, the assessing officer has made the necessary enquiry. The so called suppliers have been found to be non existing. Assessee has not been able to provide any confirmation from any of the party. Assessee has also not been able to produce any of the parties. Necessary evidence relating to transportation of the goods was also not on record. In this factual scenario, it is amply clear that the assessee has obtained bogus purchase bills. Mere preparation of documents for purchases cannot controvert overwhelming evidence that the provider of these bills is bogus and non-existent.

13. The Sales Tax Department in its enquiry has found the parties to be providing bogus accommodation entries. Assessee has not been able to produce any of the parties. Neither the assessee has been able to produce any confirmation from these parties. In such circumstances, there is no doubt that these parties are non-existent. We find it further strange that assessee wants the Revenue to produce assessee’s own vendors, whom the assessee could not produce. The purchase bills from these nonexistent/bogus parties cannot be taken as cogent evidence of purchases. In light of the overwhelming evidence, the Revenue authorities cannot put upon blinkers and accept these purchases as genuine. This proposition is duly supported by Hon’ble Apex Court decision in the case of Sumati Dayal vs. CIT [1995] 214 ITR 801 (SC) = 2002-TIOL-885-SC-IT-LB and CIT vs. Durga Prasad More [1971] 82 ITR 540 (SC) = 2002-TIOL-877-SC-IT. In the present case, the assessee wants that the unassailable fact that the suppliers are non-existent and, thus, bogus should be ignored and only the documents being produced should be considered. This proposition is totally unsustainable in light of Hon’ble Apex Court decisions.

14. In these circumstances, the learned Departmental Representative has referred to Hon’ble Gujarat High Court decision in the case of Tax Appeal No. 240 of 2003 in the case of N K Industries vs. Dy. CIT vide order dated 20.06.2016 = 2016-TIOL-3165-HC-AHM-IT, wherein 100% of the bogus purchases was held to be added in the hands of the assessee and tribunals restriction of the addition to 25% of the bogus purchases was set aside. It was expounded that when purchase bills have been found to be bogus, 100% disallowance was required. The special leave petition against this order along with others has been dismissed by the Hon’ble Apex Court vide order dated 16.1.2017.

15. We further note that Hon’ble Rajasthan high court has similarly taken note of decisions of the apex court on the issue of bogus purchases in the case of CIT Jaipur vs Shruti Gems in ITA No. 658 of 2009. The Hon’ble High Court has referred to the decision of CIT Jaipur vs. Aditya Gems, D. B. in ITA No. 234 of 2008 dated 02.11.2016, wherein the Hon’ble Court had inter alia held as under:

“Considering the law declared by the Supreme Court in the case of Vijay Proteins Ltd. Vs. Commissioner of Income Tax, Special Leave to Appeal (C) No.8956/2015 decided on 06.04.2015 whereby the Supreme Court has dismissed the SLP confirmed the order dated 09.12.2014 passed by the Gujarat High Court and other decisions of the High Court of Gujarat in the case of Sanjay Oilcake Industries Vs. Commissioner of Income Tax (2009) 316 ITR 274 (Guj) = 2008-TIOL-267-HC-AHM-IT and N.K. Industries Ltd. Vs. Dy. C.I.T., Tax Appeal No.240/2003 decided on 20.06.2016, the parties are bound by the principle of law pronounced in the aforesaid three judgments.

16. However, we note that the Hon’ble jurisdictional High Court in the case of Nikunj Eximp Enterprises (in Writ petition no 2860, order dt. 18.6.2014) has upheld 100% allowance for the purchases said to be bogus when the sales have not been doubted. However, the facts of that case were different. Furthermore, the sales in that case were basically to government departments. Hence, the ratio from this decision is not fully applicable on the facts of the case. But facts of the case indicate that the assessee has engaged into dealing in the grey market. Dealings in grey market give certain benefit to the assessee at the expense of exchequer, in the shape of savings in taxes and use of undisclosed funds. In such circumstances, the Hon’ble Gujarat High Court in the case of Simith P. Seth has upheld 12.5% disallowance. We find following the same is just and appropriate in this case.

17. Upon the facts and circumstances, the interest of the justice will be served if 12.5% disallowance of the bogus purchase is sustained. Accordingly, we confirm the order of the ld. Commissioner of Income Tax (Appeals).

6.5 We have observed that the factual matrix in the impugned assessment year AY 2010-11 is similar to that prevailing in AY 2009-10 and we did not find any reason to deviate from detailed and well reasoned order passed by tribunal for the immediately preceding year viz. AY 2009-10 in assesses own case in ITA no. 4904 & 5395/Mum/2016 = 2018-TIOL-272-ITAT-MUM in cross appeals vide common order dated 11.12.2017, thus Respectfully following the aforesaid decision of the tribunal we are upholding additions to the income of the assessee to the tune of 12.5% of Bogus Purchases towards embedded profits in these bogus purchases which was suppressed by the assessee which additions shall be in addition to the income declared by assessee.We are guided by the decision of Hon’ble Supreme Court in the case of Radhasoami Satsang v. CIT reported in (1992) 193 ITR 321(SC) = 2002-TIOL-745-SC-IT so as to maintain consistency and judicial discipline by following preceding year decision of tribunal. We order accordingly.

7. In the result, appeal of the assessee in ITA no. 2297/Mum/2017 for AY 2010-11 stands dismissed.

(Order pronounced in the open court on 03.07.2019)

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