Priya Soparkar 1 8 itxa 1330-17-o IN HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL (IT) NO.1330 OF 2017 Pr. Commissioner of Income Tax-13, Mumbai. Appellant V/s. Rishabhdev Tachnocable Ltd. Respondent Mr.Akhileshwar Sharma, Advocate for Appellant. CORAM : UJJAL BHUYAN & MILIND N. JADHAV, JJ. DATE : FEBRUARY 10, 2020 P.C.:- 1. Heard Mr.Akhileshwar Sharma, learned standing counsel, Revenue for appellant. 2. This appeal has been preferred by Revenue under Section 260A of Income Tax Act, 1961 (briefly Act hereinafter) against order dated 3rd November, 2016 passed by Income Tax Appellate Tribunal, D Bench, Mumbai (briefly Tribunal hereinafter) in Income Tax Appeal No.7773/Mum/2014 for assessment year 2010- 11. 3. Revenue has preferred this appeal projecting following question as substantial question of law:- Whether on facts and in circumstances of case and in law, Tribunal is justified in restricting disallowance to 5% of gross purchases when it is established that none of Uploaded on - 13/02/2020 Downloaded on - 14/02/2020 09:16:19 Priya Soparkar 2 8 itxa 1330-17-o supplier parties are in existence and assessee has just taken accommodation entries without getting actual supplies from said parties? 4. To appreciate question proposed, it may be apposite to advert to orders passed by authorities below. 5. Respondent is assessee under Act. It is company which is engaged in business of manufacturing and dealership of all kinds of industrial power controlling instrument cables and related items. For 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 Act. case was selected for scrutiny and in scrutiny proceedings Assessing Officer noticed that Sales Tax Department, Government of Maharashtra had provided list of persons who had indulged in unscrupulous act of providing bogus hawala entries and purchase bills. Names of beneficiaries were also provided. Assessing Officer noticed that assessee was one of beneficiaries of such bogus hawala bills. Assessing Officer referred to purchases allegedly made by assessee through four hawala entries for assessment year under consideration, details of which are as under :- Name of Party A.Y. of Amount (Rs.) providing Bogus Bills/ transaction Hawala Entries SHREE GANESH 2010-11 54670729 TRADING COMPANY AKSHAT ENTERPRISES 2010-11 76998384 Uploaded on - 13/02/2020 Downloaded on - 14/02/2020 09:16:19 Priya Soparkar 3 8 itxa 1330-17-o SHREYAS MARKETING 2010-11 55018874 AGENCY ASIT TRADERS 2010-11 55118398 241806385 6. In this backdrop, Assessing Officer issued notice to assessee under Section 142(1) of Act to explain as to why suitable action should not be initiated for such undesirable act. It was mentioned in said notice that Assessing Officer was vested with authority of passing order of best judgment assessment under Section 144 of Act. Assessee did not respond to notice issued under Section 142(1) of Act. Therefore, Assessing Officer drew inference that assessee had no plausible explanation and had admitted fact of bogus purchases mentioned in notice under section 142(1) of Act. Accordingly, Assessing Officer proceeded to finalize assessment under Section 144 of Act. For grounds and reasons given in assessment order dated 6th March, 2013 passed under Section 144 of Act, Assessing Officer disallowed entire expenditure shown as incurred by assessee amounting to Rs.24,18,06,385.00. 7. Respondent/assessee assailed aforesaid order of Assessing Officer in appeal before Commissioner of Income Tax (Appeals)-18, Mumbai, (shortly referred to as CIT(A) hereinafter). 8. CIT(A) in appellate proceedings admitted additional evidence furnished by assessee under Section 46A of Income Tax Rules, 1962 (briefly Rules hereinafter) Uploaded on - 13/02/2020 Downloaded on - 14/02/2020 09:16:19 Priya Soparkar 4 8 itxa 1330-17-o and allowed opportunity to Assessing Officer to examine documents and thereafter, to submit remand reports. Following same, Assessing Officer submitted two remand reports dated 10th December, 2013 and 25th July, 2014. Both remand reports were extensively considered by CIT(A). Copies of reports were also furnished to assessee and based on reports opportunity was granted to assessee to show cause as to why quantum of purchases should not be enhanced from Rs.24,18,06,385.00 to Rs.65,65,30,470.00 in terms of Section 251(2) of Act. 9. CIT(A) considered rival submissions and noticed that assessee did not raise any objection to higher figure of purchase because said amount was also declared in revised sales tax return filed by assessee with Sales Tax Department. Thereafter, CIT(A) enhanced quantum of purchases from Rs.24,18,06,385.00 to Rs.65,65,30,470.00. Having enhanced quantum of purchases as above, CIT(A) posed question as to whether entire purchases being bogus purchases were to be added back to taxable income of assessee or only profit margin or difference in gross profit/net profit should be added. 10. For grounds and reasons given in appellate order dated 14th October, 2014, CIT(A) found as matter of fact that assessee had made circular purchases and sales from 12 parties as declared in sales tax return. Though genuineness of purchases and sales were not proved before Uploaded on - 13/02/2020 Downloaded on - 14/02/2020 09:16:19 Priya Soparkar 5 8 itxa 1330-17-o Assessing Officer and also during appellate proceedings, CIT (A) noted that while Assessing Officer had treated purchases as bogus but had accepted sales and gross profit declared in return of income. CIT(A) held that there can be no sales without purchases. When sales were accepted, then corresponding purchases could not be disallowed. Therefore, CIT(A) held that only profit element embedded in purchases would be subject to tax and not entire purchase amount. On due consideration CIT(A) added 2% of purchase amount of Rs.65,65,30,470.00 as profit which worked out to Rs.1,31,30,609.00 to income of assessee and balance addition was deleted. 11. Aggrieved by said order of CIT(A), Revenue preferred appeal before Tribunal. Tribunal vide order dated 3rd November, 2016 took view that 2% of profit which was directed to be added by CIT (A) was on lower side and therefore, Assessing Officer was directed to make further addition of 3%. 12. It is against this order of Tribunal that Revenue is before us in appeal under Section 260-A of Act. 13. Mr.Sharma learned standing counsel, Revenue submits that when purchases were bogus, entire amount covered by such purchases should have been added to total income of assessee. There is no question of only adding profit margin to income of assessee. In this Uploaded on - 13/02/2020 Downloaded on - 14/02/2020 09:16:19 Priya Soparkar 6 8 itxa 1330-17-o connection learned standing counsel has referred to decision of High Court of Allahabad in Kaveri Rice Mills Vs. Commissioner of Income-Tax, (2006)157 Taxman 376. He has also placed reliance on decision of Delhi High Court in Commissioner of Income-Tax Vs. La Medica, 250 ITR 575, wherein it was held that once it was accepted that supplies made were fictitious, question of assessee making purchases from other sources ought not to have been considered by Tribunal. It was not open to Tribunal to make out third case which was not even case of assessee. He therefore submits that atleast arguable case is made out by department and therefore, appeal should be admitted on question of law proposed. 14. We have carefully considered submissions made by learned standing counsel and have also perused materials on record. 15. We have already discussed context in which Assessing Officer had made additions. We have also noted that in appellate proceedings before first appellate authority i.e. CIT(A) quantum of purchases was enhanced from Rs.24,18,06,385.00 to Rs.65,65,30,470.00. Having raised quantum of purchases as above, CIT(A) posed question to itself as to what should be treatment of purchases; whether same should be added back to taxable income of assessee as whole or only profit margin should be added back. After referring to various case laws on subject, CIT(A) Uploaded on - 13/02/2020 Downloaded on - 14/02/2020 09:16:19 Priya Soparkar 7 8 itxa 1330-17-o returned finding of fact that assessee had made circular purchases and sales with 12 parties as disclosed in sales tax return. Though genuineness of purchases and sales were not proved, yet it was noted that Assessing Officer had accepted sales and gross profit declared in return of income. CIT(A) held that there can be no sales without purchases. When sales were accepted, then entire purchases could not be disallowed. Referring to decision of Gujarat High Court in case of CIT Vs. Bholanath Polyfab Limited, 355 ITR 290 (Guj) CIT(A) held that only profit element embedded in purchases would be subjected to tax and not entire amount. Having said so, CIT(A) noted that gross profit rate of assessee showed decreasing trend over years. In such circumstances, CIT(A) took view that 2% of purchases of Rs. 65,65,30,470.00 would be fair and reasonable profit percentage which should be added to income of assessee, deleting balance amount. 16. While doing so, CIT (A) observed that only reasonable profit on purchases made from hawala party should be added back to income of assessee. Relevant portion of order of CIT (A) is extracted hereunder:- 2.7 From perusal of decisions of Hon ble courts on this issue, specially decision of Hon ble Bombay High Court in case of CIT Vs. Nikunj Eximp Enterprises Pvt. Ltd. (supra), it was clearly held that A.O. and CIT (A) had disallowed amount of Rs.1.33 crores on account of purchases merely on basis of suspicion because sellers and canvassing agents have not been produced before them. Uploaded on - 13/02/2020 Downloaded on - 14/02/2020 09:16:19 Priya Soparkar 8 8 itxa 1330-17-o Hon ble Mumbai Tribunal in case of Saroj Anil Steel Pvt. Ltd. Vs. ITO vide order dated 30-10- 2012 has also decided this issue that only profit margin @ 1 % is to be added back. Similar view has been taken by Hon ble Tribunal Mumbai in case of Anil Goyal Exim (P) Ltd. Vs. ITO vide order dated 25-04-2005. Hon ble Gujarat High Court in case of CIT Vs. Bholanath Polyfab Pvt. Ltd., 40 Taxman.com 494 has held that whether assessee did purchase cloth and sell finished goods and purchasers were not traceable, profit element embedded in purchases would be subject to tax and not entire amount. From facts of present case, it is noticed that assessee has made circular purchases and sales with 12 parties as declared in sales tax return. genuineness of purchases and sales were not proved before A.O. and even during appellate proceedings. A.O. has treated purchases as bogus but accepted sales and gross profit declared in return of income. Now question arise whether there can be any sales without purchases. answer is always in negative that no sales can be made without purchases. situation can be that purchases may not be made from parties from whom invoices have been obtained as mentioned by A.O. in assessment order. But when sales are accepted then whole purchases cannot be disallowed as held by various courts stated above. As per decision of Hon ble Gujarat High Court in case of CIT Vs. Bholanath Polyfab Pvt. Ltd., it is clearly held that only profit element embedded in purchases would be subject to tax and not entire amount. Now question arises how to determine profit element. For this purpose, total turnover and percentage of gross profit for earlier three years was obtained from AR of appellant. It is noticed that in earlier years, main business of assessee was manufacturing and dealership of all kinds of industrial power control instruments and related items but in year under consideration it has shown trading of Uploaded on - 13/02/2020 Downloaded on - 14/02/2020 09:16:19 Priya Soparkar 9 8 itxa 1330-17-o Rs.65,65,30,470/- out of total purchases at Rs.67,34,02,306/-. gross profit shown in year under consideration was at 5.71 % as against 8.77% in preceding year. From perusal of submissions made by AR of appellant, it is noticed that contention of appellant was correct that in earlier years main business of assessee was manufacturing and in year under consideration major activity is of trading. gross profit rate was also decreasing every year and in year under consideration it has decreased to 3%. It is also established fact that gross profit of trading activity is lower than manufacturing activity. AR of appellant has also offered that additional gross profit of turnover can be added back. But there is no reasonableness in adopting this G.P. Keeping in view principles of natural justice and decision of Honble Courts on this issue, only reasonable profit has to be added back on purchases made from hawala parties. gross profit has been reduced from 8.77% to 5.71% during year under consideration which is explained as major manufacturing activity in last year and major part of trading activity in year under consideration. Keeping in view of these facts and circumstances, I am of view that 2% of purchases made from hawala parties amounting to Rs.65,65,30,470/- which works out at Rs.1,31,30,609/- is fair and reasonable, hence, upheld and balance addition made is deleted. Ground of appeal is partly allowed. 17. Before Tribunal, Revenue expressed grievance that CIT (A) had erred in disallowing bogus purchases at 2% being profit on purchases made by assessee from Uploaded on - 13/02/2020 Downloaded on - 14/02/2020 09:16:19 Priya Soparkar 10 8 itxa 1330-17-o grey market. Tribunal vide its order dated 3 rd November, 2016 held as under :- 4. We have heard rival contentions and gone through facts and circumstances of case. Admitted facts are that AO neither in original proceedings nor during remand proceedings objected to sales made by assessee. In that eventuality it is imperative on our part to hold that there must be purchases. Whether purchases are from Grey Market or whatever assessee has made purchases although payments are made to hawala dealers. In that eventuality it is to be seen whether payments are recorded in books of account or not. This fatum is not denied by Revenue, rather assessee has proved that payments are made through accounts payee cheques and purchases are entered in its books of account. Once assessee is able to prove that purchases were made only in alternative way, revenue is to estimate excess profit at rate. Here, our difference is that 2% is reasonable or some higher profit is to be estimated. We are of view that assessee s gross profit varies from 5% to 8.77%, but these purchases are from Grey Market and its profit element is little higher and accordingly, we direct Assessing Officer to make further addition of 3% of bogus purchases and accordingly estimate income. We direct Assessing Officer accordingly. This issue of Revenue s appeal is partly allowed. 18. Tribunal noted that it was admitted fact that Assessing Officer did not object to sales made by assessee. Therefore, it was evident that they were corresponding purchases. Having noted above, Tribunal examined books of accounts of assessee wherefrom it was found that assessee had made payments on account of purchases through account payee cheques Uploaded on - 13/02/2020 Downloaded on - 14/02/2020 09:16:19 Priya Soparkar 11 8 itxa 1330-17-o and purchases were entered in its books of account. Thus, assessee was able to prove that purchases were made only in alternative way. If that be so, then Revenue was only required to estimate profit at particular rate. Referring to figure of 2% arrived by CIT(A), Tribunal observed that assessee's gross profit varied from 5% to 8.77%. Since purchases were made from grey market, corresponding profit element would be little higher. Therefore, Tribunal directed Assessing Officer to make further addition of 3% on bogus purchases and to estimate income on such basis. 19. On thorough consideration of matter, we do not find any error or infirmity in view taken by Tribunal. lower appellate authorities had enhanced quantum of purchases much beyond that of Assessing Officer i.e., from Rs.24,18,06,385.00 to Rs.65,65,30,470.00 but having found that purchases corresponded to sales which were reflected in returns of assessee in sales tax proceedings and in addition, were also recorded in books of accounts with payments made through account payee cheques, purchases were accepted by two appellate authorities and following judicial dictum decided to add profit percentage on such purchases to income of assessee. While CIT (A) had assessed profit at 2% which was added to income of assessee, Tribunal made further addition of 3% profit, thereby protecting interest of Revenue. We have also considered two decisions relied upon by learned standing counsel and we Uploaded on - 13/02/2020 Downloaded on - 14/02/2020 09:16:19 Priya Soparkar 12 8 itxa 1330-17-o find that facts of present case are clearly distinguishable from facts of those two cases to warrant application of legal principles enunciated in two cited decisions. 20. In Bholanath Polyfab Limited (supra), Gujarat High Court was also confronted with similar issue. In that case Tribunal was of opinion that purchases might have been made from bogus parties but purchases themselves were not bogus. Considering fact situation, Tribunal was of opinion that not entire amount of purchases but profit margin embedded in such amount would be subjected to tax. Gujarat High Court upheld finding of Tribunal. It was held that whether purchases were bogus or whether parties from whom such purchases were allegedly made were bogus was essentially question of fact. When Tribunal had concluded that assessee did make purchase, as natural corollary not entire amount covered by such purchase but profit element embedded therein would be subject to tax. 21. We are in respectful agreement with view expressed by Gujarat High Court. 22. Thus, we do not find any merit in this appeal. No substantial question of law arises from order passed by Tribunal. Consequently, appeal is dismissed. However, there shall be no order as to cost. (MILIND N. JADHAV, J.) (UJJAL BHUYAN, J.) Uploaded on - 13/02/2020 Downloaded on - 14/02/2020 09:16:19 Pr. Commissioner of Income-tax-13, Mumbai v. Rishabhdev Tachnocable Ltd