Validity of Addition under section 69 towards Alleged unverifiable purchases

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SEC 69

Income Tax Act, 1961, Section 69

Income from undisclosed sources—Addition under section 69—Alleged unverifiable purchases

Conclusion: As assessee had taken accommodation bills and supplied such bills by initiating bogus sales and earned some commission income on such transaction, it transpires that the assessee had given name, address, PAN, copy of return, copy of audit report in support of his claim of purchases. Hence, purchases could not be termed as unverifiable. Moreover, CIT(A) following his findings in Dineshkumar Chandmal Jain v. ITO [I.T.A. No. 2635 & 2636/Ahd/2009, assessment years 2005-06 and 2006-07, dated 5-4-2013], had directed the AO to compute the income from such accommodation entries @ 0.25%. Thus, the same was affirmed.

AO noted that the notice issued to purchaser parties was returned unserved. Further, in view of the Report of the DDIT(Inv), wherein it had been stated that tha assessee was engaged in hawala transaction of providing accomodation entries. The AO had disallowed 25% of purchases. However, CIT(A) had restricted the addition to the extent of 0.25% of such unverifiable purchases. Held: It was an admitted fact that assessee had taken accommodation bills from erstwhile concerns and supplied such bills by initiating bogus sales and earned some commission income on such transaction. It transpires that the assessee had given name, address, PAN, copy of return, copy of audit report in support of his claim of purchases. Hence, purchases could not be termed as unverifiable. However, as the Gross Profit and NP disclosed by assessee was on higher side, same was not disturbed by CIT(A). However, CIT(A) following his findings in Dineshkumar Chandmal Jain v. ITO [I.T.A. No. 2635 & 2636/Ahd/2009, assessment years 2005-06 and 2006-07, dated 5-4-2013], had directed the AO to compute the income from such accommodation entries @ 0.25%. Thus, the decision of CIT(A) was confirmed.

Decision: In assessee’s favour

Referred: Poona Electric Supply Company Ltd. v. CIT (1965) 57 ITR 521 (SC) : 1965 TaxPub(DT) 0316 (SC),Mayank Diamonds Pvt. Ltd. v. ITO [Tax Appeal No. 200 of 2003], dated 17-11-2014, M/s. Arman Fashion Pvt. Ltd. v. ITO [I.T.A. No. 2400 & 2407/Ahd, dated 10-5-2013 : 2013 TaxPub(DT) 2931 (Ahd-Trib), Manoj Aggarwal & Ors. v. Dy. CIT (2008) 113 ITD 377 (Del) : 2009 TaxPub(DT) 0672 (Del-Trib), Dineshkumar Chandmal Jain v. ITO [I.T.A. No. 2635 & 2636/Ahd/2009, assessment years 2005-06 & 2006-07, dated 5-4-2013].

 

IN THE ITAT, AHMEDABAD BENCH

AMRJIT SINGH, J.M. & O.P. MEENA, A.M.

Dy. CIT v. Anil J Kothari Proprietor

I.T.A Nos. 2048/Ahd/2010 & 2645/Ahd/2013

4 October, 2019

Assessee by: Prakash Jhunjhunwala, C.A.

Revenue by: Mayank Pandey, Sr. D.R.

ORDER

O.P. Meena, A.M.

This appeal by the Revenue is directed against the order of learned Commissioner (Appeals)-IV, Surat (in short “the CIT(A)”) dated 23-3-2010 for the assessment year 2007-08 against quantum addition deleted by the learned Commissioner (Appeals) and appeal by the assessee is directed against the order of learned Commissioner (Appeals)-1, Surat dated 3-9-2013 for the assessment year 2007-08 against the confirmation of penalty of Rs. 91,017  levied under section 271(1)(c) of the Act.

I.T.A. No. 2048/Ahd/2010; By the Revenue –

2. Ground No. 1 as amended by the Revenue states that learned Commissioner (Appeals) has erred in deleting the addition of Rs. 2,70,40,363 made by the assessing officer on account of unverifiable purchases.

3. Succinct facts are that the assessee has filed return of income on 26-10-2007 declaring total income of Rs. 7,52,422. On verification carried out under section 133(6), the assessing officer noted that the notice issued to purchaser parties namely U.M. Exports, L.G. Diamonds, S.P. Enterprise and Ashi Gems was returned unserved.

Further information was also received from DDIT-(Inv.) Mumbai regarding suspicious transaction in the bank account of the parties from whom the assessee has purchased goods. This was based on the statement of one Mahesh Mehta, one of the proprietor of above mentioned parties. The DDIT-(Inv) Mumbai in his report has stated the havala transaction of providing accommodation entries. In view of this matter, the assessing officer has disallowed 25% of such purchases from the above mentioned parties amounting to Rs. 10,81,61,455 which resulted in the addition of Rs. 2,70,40,363.

4. The assessee has carried the matter before learned Commissioner (Appeals). However, learned Commissioner (Appeals) after considering the submissions of the assessee observed that it is an admitted facts that the appellant has take accommodation bills from erstwhile concerns and supplied such bills by initiating bogus sales. In return, earning some commission on such transaction. It transpires that the assessee has given name, address, PAN, copy of return, copy of audit report in support of his claim of purchases. Hence, purchases cannot be termed as unverifiable as the appellant has fulfilled the primary onus cast upon him to prove the purchases. However, core issue that the seller has accepted before the authorities for providing accommodation entries bills, the genuineness of transaction is doubted. This leaves to estimate the real income. However, the Gross Profit and NP disclosed by the assessee was on higher side. Hence, Commissioner (Appeals) has not disturbed the same. However, learned Commissioner (Appeals) following his findings in the case of Dines C Jain [CAUSE-IV/110/2008-09 has directed the assessing officer to compute the income from such accommodation entries @ 0.25%. Accordingly, the addition was restricted to Rs. 2,70,403 as against Rs. 2,70,40,363.

5. Being aggrieved, the Revenue has filed this appeal before the Tribunal. The learned D.R. assailed the order of Commissioner (Appeals). It was contended that the tribunal by following decision in the case of Mayank Diamonds Pvt. Ltd. v. ITO, [Tax Appeal No. 200 of 2003], dated 17-11-2014, [2014] 11 (TMI) 812 (Gujarat) is estimating 5% Net Profit of unverifiable purchases.

6. Per contra, the learned counsel for the assessee supported the order of learned Commissioner (Appeals) and submitted that the learned Commissioner (Appeals) has allowed the appeal of the assessee by restricting to addition to 0.25% of unverifiable purchases by following his own order in the case of Dineshkumar Chandanmal Jain for assessment year 2006-07. The revenue has filed an appeal against the said order before tribunal. The Tribunal in the case of Dineshkumar Chandanmal Jain vide Order, dated 5-4-2013 in I.T.A. No. 2635 & 2636/Ahd/2009, assessment years 2005-06 & 2006-07, dated 5-4-2013 has dismissed the revenue appeal and upheld the decision of learned Commissioner (Appeals) for restriction of addition to 0.25% of unverifiable purchases. Therefore, the issue is covered in favour of the assessee. Hence, the order of learned Commissioner (Appeals) may be confirmed. Further, the purchases and sales are verifiable and the assessee has only received commission income as the assessee has acted as commission agents and not carried out any business its own. Therefore, decision relied by the learned Sr. D.R. is distinguishable. The learned counsel for the assessee further relied in the case of Arman Fashion Pvt. Ltd. v. ITO, Ward 1(1) Surat [I.T.A. No. 2400 & 2407/Ahd, dated 10-5-2013 : 2013 TaxPub(DT) 2931 (Ahd-Trib) of Ahmedabad tribunal, wherein net profit was estimated at 0.5% of turnover. The learned counsel for the assessee Further, submitted the Special Bench in the case of Manoj Agarwal v. DCIT, (2008) 113 ITD 377 (Del) : 2009 TaxPub(DT) 0672 (Del-Trib) has estimated commission income at 0.50% for giving accommodation entries by holding the Commissioner (Appeals) was justified in estimating net commission at 0.355 after allowing 0.15% for expenses. The learned counsel for the assessee. Therefore, it was submitted that the issue is squarely covered in favour of the assessee. The learned Counsel further, relied on number of case laws as para his case laws Paper Book.

7. We have heard the rival submissions and perused the relevant material on record. We find that the Tribunal in the case of Dineshkumar Chandanmal Jain vide Order, dated 5-4-2013 in I.T.A. No. 2635 & 2636/Ahd/2009, assessment years 2005-06 & 2006-07, dated 5-4-2013 has dismissed the revenue appeal and upheld the decision of learned Commissioner (Appeals) for restriction of addition to 0.25% of unverifiable purchases. It was observed by Tribunal that learned Commissioner (Appeals) has allowed appeal on the ground that when income of the assessee has been directed to compute @ 0.25% on total turnover of Rs. 1,08,76,86,861, which was worked out at Rs. 27,19,217. The learned Commissioner (Appeals) had allowed all the expenses claimed by the appellant by relying upon the decision in case of Bharat A Master v. ITO in ITA No. 177/Ahd/2013, dated 29-2-2008 and Hon Supreme Court decision in case of Poona Electric v. CIT, (1965) 57 ITR 521 (SC) : 1965 TaxPub(DT) 0316 (SC). After considering the orders of the assessing officer and submission of the assessee, the learned Commissioner (Appeals) has directed to compute the income on the basis of 0.25% on total turnover and no benefit of any expenditure would be allowed. The learned counsel for the assessee has relied in the case of Arman Fashion Pvt. Ltd. v. ITO, Ward 1(1) Surat [I.T.A. No. 2400 & 2407/Ahd, dated 10-5-2013 : 2013 TaxPub(DT) 2931 (Ahd-Trib) of Ahmedabad tribunal, wherein net profit was estimated at 0.5% of turnover. The learned counsel for the assessee Further, submitted the Special Bench in the case of Manoj Agarwal v. DCIT (2008) 113 ITD 377 (Del) : 2009 TaxPub(DT) 0672 (Del-Trib) has estimated commission income at 0.50% for giving accommodation entries by holding the Commissioner (Appeals) was justified in estimating net commission at 0.355 after allowing 0.15% for expenses.

Therefore, we find that the issue is covered in favour of the assessee hence, following same we are not inclined to interfere with the order of learned Commissioner (Appeals) hence, same is upheld. This ground is dismissed.

8. Ground No. 2 relates to deletion of addition of Rs. 3,95,644 being undisclosed income from interest.

9. The assessing officer noted that the assessee has received interest of Rs. 2,22,548 from Vitrag Metal Pvt. Ltd., Rs. 1,73,096 from Sapphire Biz Forecasting & Consulting (P) Ltd. and Rs. 5,294 from Rahul Fabrics. It was explained that interest of Rs. 11,650 was received from Rahul Fabric on which TDS of Rs. 1188 was made which has been duly accounted in the books of accounts. However, no advances were made to Vitrag Metal (P) Ltd. and Saphhire Biz Forecasting. Hence, there was no question of showing the interest income. However, the assessing officer has observed that the assessee has not shown the interest, hence, he made the addition of Rs. 3,95,644 on this account.

10. Feeling dissatisfied, the assessee carried the matter in appeal before Commissioner (Appeals). It was submitted that the assessee has had enquired the matter and found that advances were pertained to his sister concern made Arpit Jewels and the PAN of the assessee was wrongly mentioned in place of Arpit Jewels in TDS quarterly return. Interest from both the concerns was duly shown in the books of accounts of Arpit Jewels. The name of the company of Neol Equity Research (P) Ltd. had changed as Sapphire Biz Forecasting and Consulting (P) Ltd. and cy of fresh certificate issued by the ROC was filed. Form No. 16A was obviously issued in old name and books of accounts Arpit Jewels were also reflected entries of old name.

In view of these facts and circumstances, the Commissioner (Appeals) held that based on relevant facts the assessing officer was not justified in making addition based on AIR information. Since the appellant has explained with duly document hence, addition was deleted.

11. Being aggrieved, the Revenue has filed this appeal before the Tribunal. The learned D. R. relied on the order of the assessing officer and could not bring anything contrary to the finding of the learned Commissioner (Appeals).

12. Au contraire, the learned counsel for the assessee relied on Commissioner (Appeals).

13. We have heard the rival submissions and perused the relevant material on record. We find that the interest received was duly reflected in the books of accounts of Arpit Jewels (a sister concern of the assessee) which has been duly verified by the learned Commissioner (Appeals). In view of this matter, we do not find any infirmity in the order of Commissioner (Appeals), accordingly, same is upheld. This ground of appeal is therefore, dismissed.

14. In the result, the appeal of the Revenue is dismissed.

I.T.A. No. 2645/Ahd/2013 by the assessee 

15. Ground No. 1 to 3 relates to confirming penalty of Rs. 91,017 levied under section 271(1)(c) of the Act.

16. Brief facts are that that the assessee has filed return of income on 26-10-2007 declaring total income of Rs. 7,52,422 which was assessed at Rs. 2,81,88,438 by making addition of Rs. 2,70,40,363 on account of unverifiable purchases, disallowance of donation of Rs. 2,352 and addition of interest income of Rs. 3,95,644. On which penalty proceedings under section 271(1)(c) were also initiated. The assessee has preferred an appeal before Commissioner (Appeals) who deleted the addition of Rs. 3,95,644 and restricted the addition of Rs. 2,70,40,363 to Rs. 2,70,403 by directing the assessing officer to compute income by applying 0.25% of unverifiable purchases. The assessing officer thereafter, has given fresh opportunity of being heard and levied a penalty of Rs. 9,11,017 in respect of addition of Rs. 2,70,403 sustained in appeal by observing that the assessee has furnished inaccurate particulars of income to that extent.

17. Being, aggrieved, the assessee filed an appeal before the learned Commissioner (Appeals). However, Commissioner (Appeals) has confirmed the levy of penalty on the ground that the assessee was not able to give satisfactory explanation in respect of bogus purchases hence, addition so made is deemed “concealment of income” under explanation 1 to section 271(1)(c) of the Act.

18. Being, aggrieved the assessee filed this appeal before the Tribunal. The learned counsel for the assessee submitted that addition made at Rs. 2,70,40,363 was restricted to Rs. 0.25% of purchases which amounts to merely an estimate of income. Further, the assessee has furnished all material fact before the assessing officer, hence, there is no “concealment of income”. The learned counsel for the assessee contended that the assessing officer has levied penalty on account of furnishing inaccurate particulars of income, whereas the Commissioner (Appeals) has confirmed the penalty on account of deemed “concealment of income”. Whereas the assessee has not concealed any income. Therefore, in such circumstances the penalty levied and sustained by the learned Commissioner (Appeals) is not exigible. The learned Counsel has placed reliance on the decision in the case of Ajay Loknath Lohia v. ITO, 25(2)(1) Mumbai in I.T.A. No. 2998/Mum/2017, dated 5-10-2018] : 2018 TaxPub(DT) 7823 (Mum-Trib) wherein it was held that mere disallowance of purchases on adhoc basis does not tantamount to willful furnishing inaccurate particulars of income within the meaning of section 271(1)(c) of Income Tax Act, 1961. Hence, we are of the considered view that the assessing officer erred in levying penalty under section 271(1)(c) of the Act. The learned Counsel further placed reliance on the decision in the case of Deepak Gogri v. ITO in I.T.A. No. 1396/Mum/2017, Pr. CIT v. Fortune Techno Comps. Pvt. Ltd., I.T.A. No. 313/2016 : 2016 TaxPub(DT) 2511 (Del-HC) of Hon’ble Delhi High Court and also in the case of Shervni Hospitalities Ltd. v. CIT, 85 CCH 76 (Del. SC) : 2013 TaxPub(DT) 1941 (Del-HC) in support of this contention. It was further submitted that the assessing officer has issued notice under section 271(1)(c) read with section 274 but has not strike out the relevant para.

Hence, the assessee was not sure for which default the penalty is initiated. The learned counsel for the assessee has argued that the learned Commissioner (Appeals) as wrongly considered that it is not a case of estimation of income. The addition of Rs. 2.70 crores made by the assessing officer was reduced to Rs. 70,403by applying the net profit ratio of 0.25% of unverifiable purchases. The penalty cannot be levied on estimated addition as decided in many judicial pronouncements like CIT v. Lalubhai Jogibhai Patel, (2003) 261 ITR 216 (Guj) : 2003 TaxPub(DT) 0969 (Guj-HC), Hari Gopal Singh v. CIT, (2002) 258 ITR 85 (P&H) : 2002 TaxPub(DT) 1625 (P&H-HC), CIT v. Valmikibhai H Patel, (2006) 280 ITR 487 (Guj) : 2006 TaxPub(DT) 0569 (Guj-HC).

19. Per contra, learned D.R. supported the order of Commissioner (Appeals).

20. We have heard the rival submissions and perused the relevant material on record. Looking to the facts and circumstances of the case, we find that the assessing officer has made addition on account of unverifiable purchases at Rs. 2,70,40,363 being entire purchases which were reduced to 0.25% of total disputed purchases. Thus, the addition was estimated @ 0.25% of transaction amount, which cannot therefore, be termed as conclusive proof of concealment of income or furnishing inaccurate particulars of income. The finding recorded in assessment order is not conclusive for imposition of penalty but it has only persuasive value. Therefore, the profit arrived at is only a guess work which could be estimated by applying any rate of net profit based on NP disclosed in earlier years. Thus, the facts remains that it is a case of estimate on which no penalty offer concealment of income could be levied. We find that in the assessment order, the assessing officer has made and of total amounts and transaction as reflected however, Commissioner (Appeals) has estimated income by applying the formula of % of transactions. The ld.Counsel has placed reliance on the decision in the case of Ajay Loknath Lohia v. ITO, 25 (2)(1) Mumbai in I.T.A. No. 2998/Mum/2017, dated 5-10-2018] : 2018 TaxPub(DT) 7823 (Mum-Trib) wherein it was held that mere disallowance of purchases on ad hoc basis does not tantamount to willfull furnishing inaccurate particulars of income within the meaning of section 271(1)(c) of Income Tax Act, 1961. Hence, we are of the considered view that the assessing officer erred in levying penalty under section 271(1)(c) of the Act. The learned Counsel further placed reliance on the decision in the case of Deepak Gogri v. ITO in I.T.A. No. 1396/Mum/2017, Pr. CIT v. Fortune Techno Comps. Pvt. Ltd., I.T.A. No. 313/2016 : 2016 TaxPub(DT) 2511 (Del-HC) of Hon’ble Delhi High Court in which it was observed that “Once the assessment order of the assessing officer in the quantum proceedings was altered by the Commissioner (Appeals) in a significant way, the very basis of initiation of the penalty proceedings was rendered non-existent. The assessing officer could not have thereafter continued the penalty proceedings on the basis of the same notice. Also, the Court concurs with the Commissioner (Appeals) and the ITAT that once the finding of the assessing officer on bogus purchases was set aside, it could not be said that there was any concealment of facts or furnishing of inaccurate particulars by the Assessee that warranted the imposition of penalty under section 271(1)(c) of the Act. The judgment of Hon’ble Delhi High Court in the case of Shervani Hospitalities Ltd. v. CIT, 85 CCH 76 (Del-SC) : 2013 TaxPub(DT) 1941 (Del-HC) supports this case. We find that the addition was made and income was estimated. Therefore, we are of the view that the penalty cannot be levied. Accordingly, penalty levied at Rs. 91,017 levied and confirmed by the Commissioner (Appeals) is directed to be deleted.

21. In the result, the appeal of the assessee stands allowed.

22. To sum up, appeal of the Revenue in I.T.A. No. 2048/Ahd/2010 is dismissed and appeal of assessee in I.T.A. No. 2645/Ahd/2013 is allowed.

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