Bogus Purchases: Entire purchases could not be brought to tax but only the profit element could be brought to tax

Bogus Purchases: Entire purchases could not be brought to tax but only the profit element could be brought to tax

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Bogus Purchases: Entire purchases could not be brought to tax but  only the profit element could be brought to tax

Short Overview  In case of bogus purchases, entire purchases could not be brought to tax and only profit element could be brought to tax, despite the purchases being bogus. Thus, CIT(A) wrongly enhanced the addition on account of bogus purchases to 100% of the bogus purchases as against 12.5% applied by AO and accordingly, the addition @12.5% of the bogus purchases was to be upheld.
AO found that assessee was a beneficiary of Hawala purchase entries, accordingly, he treated the purchases made by the assessee as non-genuine thereby, making an addition of 12.5% of the purchases. On appeal, CIT(A) dismissed the appeal of the assessee and further directed the AO to enhance rate @100% of bogus purchases on the ground that the assessee failed to prove genuineness of the purchases and consumption/utilization of materials purchased. Aggrieved, assessee was in appeal.
It is held that  CIT(A) enhanced the addition on account of bogus purchases to 100% as against 12.5% applied by AO. The only reason given by the CIT(A) was that the assessee failed to prove genuineness of purchases and consumption of material. In case of bogus purchases, entire purchases could not be brought to tax as held in a series of decisions of Co-ordinate Bench of Tribunal, wherein it had been held that only profit element could be brought to tax, despite the purchases being bogus. Thus, the CIT(A) wrongly enhanced the addition to 100% and the same could not be sustained. Accordingly, order of the CIT(A) was set aside and the order of the AO was restored.
Decision: Partly in favour of assessee.
IN THE ITAT, MUMBAI BENCH
MAHAVIR SINGH, V.P. & RAJESH KUMAR, A.M.
United Waterproofing Corporation v. ITO
ITA No. 495/M/2020
14 September, 2021
Assessee by : Phalgoon Desai, A.R.
Revenue by : Smita Verma, D.R.
ORDER
Rajesh Kumar, A.M.
The present appeal has been preferred by the assessee against the order dated 22-11-2019 of the Commissioner (Appeals) [hereinafter referred to as the Commissioner (Appeals)] relevant to assessment year 2011-12.
  1. Ground No.1 is dismissed as not pressed.
  2. The only issue raised by the assessee in ground No.2 is against the order of learned Commissioner (Appeals) enhancing the addition of Rs. 15,373 made by the assessing officer to Rs. 1,22,985 which is 100% of bogus purchases.
  3. The facts in brief are that the assessee filed the return of income on 30-9-2011 declaring a total income of Rs. 13,21,493 which was processed under section 143(1) of the Act. The case of the assessee was thereafter reopened by the assessing officer after receipt of information from DGIT (Inv.), Mumbai that assessee is beneficiary of hawala purchase entries to the extent of Rs. 1,22,985 and accordingly the notice under section 148 of the Act was issued on 17-6-2014. The assessing officer called for various details and information from the assessee from time to time during the course of assessment proceedings which were duly filed before the assessing officer. The assessing officer finally rejected the contentions of the assessee and treated the purchases as non genuine thereby making an addition of Rs. 15,373, being 12.5% of the purchases, to the income of the assessee by framing assessment under section 143(3) read with section 147 of the Act dated 25-3-2016.
  4. In the appellate proceedings, the learned Commissioner (Appeals) dismissed the appeal of the assessee and further directed the assessing officer to apply rate 100% of the bogus purchases on the ground that the assessee has failed to prove the genuineness of the purchases and consumption/utilization of the materials purchased.
  5. After hearing both the parties and perusing the material on record, we note that learned Commissioner (Appeals) has enhanced the addition on account of bogus purchases to 100% of the bogus purchases as against 12.5% applied by the assessing officer. The only reason given by the learned Commissioner (Appeals) is that the assessee has failed to prove the genuineness of purchases and consumption of material. We note that in case of bogus purchases the entire purchases can not be brought to tax as has been held in a series of decisions of the co-ordinate Bench wherein it has been held that only profit element can be brought to tax despite the purchases being bogus. After taking into account the facts of the assessee s case, we are of the considered opinion that learned Commissioner (Appeals) has wrongly enhanced the addition to 100% and the same can not be sustained. Accordingly, we are setting aside the order of learned Commissioner (Appeals) on this issue by restoring the assessment order.
  6. Accordingly, ground No.2 is allowed.
  7. The issue raised in ground No.3 is against the confirmation of addition of Rs. 4,14,421 by learned Commissioner (Appeals) as made by the assessing officer by invoking the provisions of section 40A(3) of the Act.
  8. The facts in brief are that the assessing officer on the basis of examination of books of accounts observed that assessee has made various cash payments exceeding Rs. 20,000 to various parties and accordingly a show cause notice dated 2-3-2016 was issued to the assessee as to why the payment exceeding the limit as specified under section 40A(3) of the Act should not be disallowed which was replied by the assessee by submitting that the payments in most of the cases were below Rs. 20,000 and where the payments exceeded Rs. 20,000, the same were covered under rule 6DD(k) of Income Tax Rules. The learned Authorised Representative submitted that these are the purchases made from the sand suppliers who brought trucks filled with sand to the project site and unloaded the truck on the condition that the payments would be made in cash only. The assessee could not furnish the PAN, names and addresses, however, produced the vouchers containing names and receipts for payment given by these truck drivers. According to the assessing officer since the assessee has failed to give the names and addresses of the agent through whom these supplies of sand were received which remained to be verified. Finally, the assessing officer disallowed these purchases under section 40A(3) of the Act by adding the same to the income of the assessee.
  9. The learned Commissioner (Appeals) dismissed the appeal of the assessee by upholding the order of assessing officer by observing that the payment exceeding Rs. 20,000 in cash can only be allowed if the assessee could establish the unavoidable circumstances necessitating the payments in cash, however, nothing has been done by the assessee to prove that there were practical difficulties and unavoidable circumstances under which the payments were made in cash and covered under rule 6DD(k). Finally, the learned Commissioner (Appeals) dismissed the appeal by distinguishing the decision of co-ordinate Bench of the Tribunal inM/s. A Daga Royal Arts v. ITO ITA No. 1065/JP/2016 dated 15-5-2018 : 2018 TaxPub(DT) 2971 (Jp-Trib) by observing that in that case identity of the seller and the genuineness of the transactions were established whereas in the present case the assessee has failed to establish the identities of both the agent as well as suppliers.
  10. After hearing both the parties and perusing the material on record, we find that assessee is engaged in the business of water proofing and labour job work. It was submitted before us that sand is purchased by the assessee from agent who arranged the loaded truck of sand at the site of the assessee on the condition that payment would be accepted in cash only. These transporters are not having any fixed place of business but bring sand filled lorries and come to the site through some reference. These truck drivers are not having any PAN numbers and therefore we find merit in the contention of the assessee that keeping in view of the nature of business of the assessee and nature of material purchase, it is impracticable to make payment otherwise than in cash. We are therefore not in agreement with the conclusion drawn by the learned Commissioner (Appeals) that the identity of the agent as well as suppliers were required to be established in order to claim the expenditure where the payments are made in cash. We have examined the details furnished by the assessee qua these suppliers a copy of which is filed at page No.105 of the paper book and found that only in three cases the payment has exceeded Rs. 20,000 and in all other cases the payments were below Rs. 20,000. In the case of Bhati Construction Company who is a sub contractor, the payment was Rs. 25,410 whereas in the case of Bhanwarlal, the payment was made of Rs. 26,722 for sand for L& T Splendor site and lastly the payment was made to Mr. Ibrahim Bhai Kabodia for purchase of bricks worth Rs. 25,370. Even in three cases the reasonable cause has been explained by the assessee before us that payment had to be made out of business emergencies and practical difficulties. In view of these facts, we are inclined to set aside the order of learned Commissioner (Appeals) and direct the assessing officer to delete the disallowance.
  11. In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 14-9-2021.

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