Bogus purchases: AO directed to restrict the impugned addition to the extent of 2% of bogus purchases

Short Ovreview  In instant case, addition made by AO on account of bogus purchases was restricted to the extent of 2% keeping in view the decision of Tribunal in assessee’s own case for earlier assessment year on similar facts and circumstances and also keeping in view the fact that assessee maintained quantitative details of goods purchased and sold and also furnished quantitative reconciliation of goods so purchased and sold.

During course of search proceedings, AO found that assessee had taken accommodation entries from various concerns. Thus, the purchases made from the said concerns were added by AO considering them as bogus on the ground that the assessee failed to substantiate his claim and prove the genuineness of the said purchases.

 It is held that It was found that in assessee’s own case for earlier assessment year on similar facts and circumstances, the addition made on account of bogus purchases was upheld by Tribunal to the extent of 2%. Thus, keeping in view the said decision of Tribunal also keeping in view the fact that assessee maintained quantitative details of goods purchased and sold and also furnished quantitative reconciliation of goods so purchased and sold, the correctness of which was not doubted by Revenue, the AO was directed to restrict the impugned addition to the extent of 2% of bogus purchases.

Decision: Partly in favour of assessee.

IN THE ITAT, MUMBAI BENCH

R.C. SHARMA, A.M. AND PAWAN SINGH, J.M.

Prateek Gupta v. Dy. CIT

ITA No. 3793, 3792, 3861, 3862/Mum/2018

11 September, 2019

Assessee by: Bhupendra Karkhanis

Revenue by: Awungshi Gimson

R.C. Sharma, A.M.

These are the cross appeals filed by the assessee and revenue against the order of Commissioner (Appeals)-52, Mumbai dt. 21-3-2018 for assessment year 2008-09 & 2010-11 respectively, in the matter of order passed under section 143(3) read with section 153A of the Income Tax Act, 1961.

2. Grievance of both the assessee and revenue relates to addition made and partly deleted on account of alleged bogus purchases.

3. Briefly stated, the facts of the case are that search & seizure action under section 132 has been carried out on the under section Dev Group on 11-9-2014. The assessee is the Managing Director and the key person of under section Dev International (P.) Ltd., the flagship company of the group which is engaged in the business of trading in ferrous and non-ferrous metals. For the assessment year  2010-11 under consideration, the assessee filed its return of income on 30-9-2010 declaring a total income of Rs. 52,11,421. Assessment under section 143(3) of the Act was completed on 30-3-2013 and income was assessed at total income of Rs. 9,89,23,388. In the course of search proceedings, there was collection of evidences which showed that the assessee and its various group concerns have taken accommodation entries from various concerns.

Consequent to the search, a notice under section 153A dt. 4-3-2015 was issued and duly served on the assessee. After consideration of the facts, the assessing officer held that the assessee was a beneficiary of accommodation entries from Aadit International (Rs. 12,25,497), Ms Mishika Traders (I) P Ltd. (Rs. 3,65,58,677), Ms N.K.B. Metal Deals (I) (P.) Ltd. (Rs. 5,04,15,036), Ms Ragini Trading & Investments P Ltd. (Rs. 15,77,02,992). Ms S.B. Metal Corporation (Rs. 8,55,46,613) and Ms Sai International Impex (Rs. 9,37,11,967) totally aggregating to Rs. 42,51,60,782. The assessing officer thereafter proceeded to add the entire amount of purchases of Rs. 42,51,60,782 on the ground that the assessee has not been able to substantiate its claim and prove the genuineness of the said purchases.

4. By the impugned order, Commissioner (Appeals) restricted addition to the extent of 12.5% of GP, after considering the documents filed by the assessee before the assessing officer and also facts and circumstances of the case. The learned Commissioner (Appeals) also deliberated on various judicial pronouncements on the issue. Precise conclusion of the learned Commissioner (Appeals) was as under:-

7.34 In view of the aforesaid discussion, the assessing officer is directed to compute the additional profits in respect of the purchases from the said 5 alleged hawala  bogus suppliers – Ms Aadit International (Rs. 12,25,497), Ms Mishika Traders (I) P Ltd. (Rs. 3,65,58,677), Ms N.K.B. Metal Deals (I) P Ltd. (Rs. 5,04,15,036), Ms Ragini Trading & Investments (P.) Ltd. (Rs. 15,77,02,992), Ms S.B. Metal Corporation (Rs. 8,55,46,613) and Ms Sai International Impex (Rs. 9,37,11,967) by adopting a rate of 12.5%, However, the assessing officer will allow a set off of the GP already shown by the assessee in the regular books in respect of the purchases from the said alleged hawala  bogus suppliers while computing the additional profits in respect of each of the alleged hawala bogus suppliers. Moreover, the amount of purchases from RTIPL which have been sourced from alleged hawala bogus suppliers should be quantified by the assessing officer and the rate of 12.5% should be applied to such purchases to compute the additional profits.

Here also, the assessing officer will allow a set off of the GP already shown by the assessee in the regular books in respect of the purchases from Ms. RTIPL which have been sourced from the alleged hawala bogus suppliers while computing the additional profits.

7.35 The assessee in course of the appellate proceedings has also contended that while giving effect to the order of the learned Commissioner (Appeals) against the original assessment under section 143(3), the assessing officer had retained addition @ 12.5% of Rs. 1,17,13,996 in respect of purchases made from M/s. Sai International Impex and subsequently in the assessment under section 143(3) read with section 153A, a further addition of the entire amount of alleged bogus purchases of Rs. 9,37,11,967 from the said party has been made which has resulted in double addition of an amount of Rs. 1,17,13,996. The assessing officer is directed to verify this claim of the assessee and ensure that double addition of the same amount is not done. Accordingly, grounds No 3, 4, 5 & 6 of the appeal are partly allowed.”

5. At the outset, learned authorised representative placed on record the order of the Tribunal in assessee’s own case for the assessment year 2010-11, wherein under similar facts and circumstances, addition on account of bogus purchases from one of parties  Sai International Impex was upheld to the extent of 2% of such bogus purchases.

6. We have considered rival contentions and carefully gone through the orders of the authorities below and found from record that assessee is engaged in the business of trading in steel items (ferrous metal), under the propriety concern by name ‘(P.) G. Traders.’ There was search at assessee’s business premises wherein it was found that assessee had entered into bogus transaction of purchases from the aforesaid parties.

The learned assessing officer asked the assessee regarding such purchases and to prove the genuineness of the purchase transaction with the said party alongwith the supporting documents. Assessee had submitted quantitative details of material purchased and corresponding sales details. It was also submitted that payments were made by way of account paying cheques.

The bank statements highlighting the payments were also submitted to the learned assessing officer. With regard to transportation documents, it was submitted that assessee does not take delivery nor handle logistics and follow Just In Time (JIT) Methodology. This aspect was also evident from the details of purchase invoice & sales invoice as these happened on the same date.

Nature of business is such that assessee has back to back purchases & sales. The assessee does not take the possession of goods but ensure that goods directly go from supplier to customers without being involved in logistics. Accordingly, the assessee was not having the copies of delivery challans or lorry receipts transportation receipts. However, not satisfied with the assessee’s reply, assessing officer added entire amount of such purchases in assessee’s income.

7. By the impugned order, Commissioner (Appeals) restricted the addition to the extent of 12.5% of G.(P.) less the profit already declared by assessee in respect of purchases from these parties after relying on the decision of Sanket Steel Traders (IT No. 2801/Ahd/2008 dt. 20-5-2011) : 2011 TaxPub(DT) 1140 (Ahd-Trib) and CIT v. Simit Sheth (2013) 38 Taxmann.com 385 (Guj. HC) : 2013 TaxPub(DT) 2115 (Guj-HC)). It was argued by learned authorised representative that Sanket steel was carrying out its business operation in city of Vadodara, Gujarat and the judgement related to assessment year 2004-05 whereas the present assessee is operating in South Mumbai, Maharashtra and the transactions related to assessment year 2008-09 & 2010-11 where competition is very high.

8. With respect to decision of Simit Sheth, as per learned authorised representative, the judgment in the case of Simit Sheth is relevant to assessment year assessment year 2006-07 whereas the assessee’s case pertains to assessment year 2008-09 & 2010-11.

Simit Sheth was carrying out his business operation in state of Gujarat whereas the present assessee is operating in South Mumbai, Maharashtra where competition is very high. In the case of Simit Sheth, the suppliers made their statements on oath to the effect that they had not supplied the steel to the assessee but in the case of the assessee company no such statement was given by the supplier.

9. During the course of hearing before us, learned authorised representative also placed on record the copy of decision in case of Suman Gupta in ITA No. 4774/Mum/2014 Order dt. 23-8-2017, group concern  family member of the assessee, wherein under similar facts and circumstances disallowance to the extent of 2% of the alleged bogus purchases was upheld.

10. Further, the learned authorised representative relied on the following decision where the facts of the case were similar to the case of the assessee:

(i) CIT v. Nikunj Eximp Enterprises (P.) Ltd. (2015) 35 Taxmann.com 384 (Bom-HC) : 2015 TaxPub(DT) 1855 (Bom-HC)

(ii) Rajesh (P.) Soni v. ACIT (2006) 100 TTJ 892 (Ahd.)(Trib.) : 2006 TaxPub(DT) 1013 (Ahd-Trib)

(iii) Dy. CIT v. Brahmaputra Steels (P) Ltd. (2002) 122 Taxman 32 (Gauhati)(Mag.) : 2002 TaxPub(DT) 0989 (Gau-Trib)

(iv) Totaram Sharma v. ITO Ward (Ahmedabad Tax Appeal No. 1344 of 2008 with Tax Appeal No. 1355 of 2008.)

(v) Balaji Textile Industries (P) Ltd. v. ITO (1994) 49 ITD 177 (ITAT Mumbai) : 1994 TaxPub(DT) 0527 (Mum-Trib)

(vi) Asst. CIT-19(3) v. Steel Line (India) (ITA No. 1321Mum2016) (Mum-Trib) : 2017 TaxPub(DT) 4409 (Mum-Trib)

(vii) Suman Gupta v. ACIT-12(1) (ITA No. 4774/Mum/2014)(Mum-Trib)

 (viii) Geolife Organics v. ACIT-23(2) (ITA No. 3699/Mum/2016) (Mum-Trib) : 2017 TaxPub(DT) 1441 (Mum-Trib)

11. The learned authorised representative has relied on the decision of the Hon’ble Bombay High Court in the case of Principal CIT v. Mohommad Haji Adam & Co. Income Tax Appeal No. 1004 of 2016 dt. 11-2-2019, wherein it was held that the addition in respect of bogus purchases should be restricted to difference between the gross profit shown by the assessee in respect of bogus purchases vis-a-vis normal purchases. Meaning thereby the addition should be confined to gross profit shown on the bogus purchases which is found to be lower than the gross profit on normal purchases. The precise observation of the Hon’ble Bombay High Court was as under:

“8. In the present case, as noted above, the assessee was a trader of fabrics. The assessing officer found three entities who were indulging in bogus billing activities. assessing officer 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 Commissioner (Appeals) 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 favour of the assessee and partially in favour 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.”

12. It was further argued by learned authorised representative that assessee maintained quantitative records of goods purchased and sold evidencing the facts of movement of goods. In fact, the assessee has furnished quantitative reconciliation of goods purchased and sold. The correctness of the same is not doubted by the lower authority. The assessee is assessed to sales tax and has paid VAT. The purchases and sales are properly reflected in the books of accounts. Payments for purchases are made through account payee cheque and on payment of the amount to the supplier; the purchaser has no control on the affairs of the supplier. Sales receipts are also through account payee cheques and properly recorded. In fact, the ledger account of the supplier and the relevant bank statements highlighting the payments made to the supplier were also submitted to the learned assessing officer. Assessee is not stockiest, as such is running its business on meager profit by keeping a small margin difference between purchase price & sales prices by undertaking purchase transaction for every corresponding sales transaction.

13. We had also carefully gone through the order of the Tribunal in assessee’s own case for the assessment year 2010-11 dt. 4-4-2018 wherein under similar facts and circumstances alleged bogus purchases from one of the parties i.e. Sai International Impex was found, and the Tribunal after considering all the facts and circumstances restricted the same to the extent of 2% after observing as under:-

“10. We have considered rival contentions and carefully gone through the orders of the authorities below. We have also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by learned authorised representative during the course of hearing before us in the context of factual matrix of the case. From the record, we found that 25% of purchases alleged to be bogus was added by assessing officer in assessee’s income. Commissioner (Appeals) has reduced same to 12.5%. Before the assessing officer, assessee has filed year wise details of purchases, details of payment made through account payee cheque. In addition to the purchase details, assessee has ITA No. 4774/Mum/2014 & 5116/Mum/2014 Suman Gupta also filed details of corresponding sales affected by the assessee in respect of the very same goods. The sales so affected are not in dispute and the same were accepted in total by the assessing officer. We found that in this case assessing officer has only alleged purchase made from Sai International.

11. In respect of the goods purchased from Sai International and sold by the assessee, the assessee had shown GP rate 0.15%, however, in respect of purchases other than from Sai International, the assessee has disclosed same GP of 0.15%. Thus, it is not the case where assessee has shown lower G.(P.) in respect of alleged bogus purchases. In the immediately preceding assessment year, the GP shown by the assessee on the entire sale was 0.14%. Thus, it is clear that GP shown by the assessee during the year under consideration is better than the GP shown in the immediately preceding assessment year.

12. In view of the above discussion and keeping in view the totality of facts and circumstances of the case, we modify the order of lower authorities and direct the assessing officer to upheld addition of 2% of bogus purchases. We direct accordingly.”

14. We had carefully gone through the order of the authorities below as well as the order of the Tribunal in assessee’s own case for the assessment year 2010-11 wherein under similar facts and circumstances and after considering all the judicial pronouncements, the addition was upheld to the extent of 2% of the bogus purchases. We had also deliberated on various judicial pronouncements referred by the lower authorities in their respective orders as well as cited by the learned authorised representative of the assessee during the course of hearing before us in the context of factual matrix of the case.

From the record we found that during these assessment years, the assessee had also paid sales tax amounting to Rs. 36,04,306 and Rs. 53,05,061 alongwith interest thereon. Thus, there is no saving on account of sales tax liability which was alleged to be evaded by having entered into such alleged bogus purchases. Keeping in view the fact that the assessee has maintained quantitative details of goods purchased and sold and had also furnished quantitative reconciliation of goods so purchased and sold, the correctness of which was not doubted by the lower authorities. Under these facts and circumstances and respectfully following the order of the Tribunal in assessee’s own case, wherein the facts and circumstances are same, we direct the assessing officer to restrict addition to the extent of 2% of bogus purchases.

15. From the record, we also found that in the assessment year 2008-09, assessee had shown profit of 0.62% on the normal purchases i.e. purchases other than alleged bogus purchases, whereas margin earned in respect of alleged bogus purchases was 0.61%. Thus, we found that there is only difference of 0.01% in the margin shown by the assessee in respect of alleged bogus purchases vis-à-vis purchases other than alleged bogus purchases. Similarly, in the assessment year 2010-11 margin earned in respect of normal purchases i.e. purchases other than from alleged bogus purchases is 2.65%, whereas margin in respect of alleged bogus purchases is 1.89%. Thus, the difference in margin is just 0.76%. Thus, we found that upholding the addition to the extent of 2% of bogus purchases will serve the end of justice, which is in consonance with the order passed by the Tribunal in assessee’s own case and group concern, as stated above.

16. Since the Tribunal have already upheld the addition to the extent of 2% vide Order dt. 14-4-2018 in respect of purchases made from Sai International Impex, which purchases was again added by the assessing officer while completing assessment under section 143(3) read with section 153A, which amounts to double addition. Accordingly, assessing officer is directed to take care of addition already upheld by the Tribunal in respect of purchases from Sai International Impex. We direct accordingly.

17. In the result, appeals of the assessee are allowed in part in terms indicated hereinabove and appeals of the revenue are dismissed.