IN THE HIGH COURT OF JUDICATURE AT BOMBAY
\nORDINARY ORIGINAL CIVIL JURISDICTION
\nINCOME TAX APPEAL (IT) NO.1330 OF 2017
\nPr.Commissioner of Income Tax-13, Mumbai.\u2026 Appellant
\nV\/s.
\nRishabhdev Tachnocable Ltd. \u2026 Respondent
\n—
\nMr.Akhileshwar Sharma, Advocate for the Appellant.
\n—
\nCORAM : UJJAL BHUYAN &
\nMILIND N. JADHAV, JJ.
\nDATE : FEBRUARY 10, 2020
\nP.C.:-
\n1. Heard Mr.Akhileshwar Sharma, learned standing counsel,
\nRevenue for the appellant.
\n2. This appeal has been preferred by the Revenue under
\nSection 260A of the Income Tax Act, 1961 (briefly \u201cthe Act\u201d
\nhereinafter) against the order dated 3rd November, 2016
\npassed by the Income Tax Appellate Tribunal, \u201cD\u201d Bench,
\nMumbai (briefly \u201cthe Tribunal\u201d hereinafter) in Income Tax
\nAppeal No.7773\/Mum\/2014 for the assessment year 2010-
\n11.
\n3. Revenue has preferred this appeal projecting the
\nfollowing question as substantial question of law:-
\n\u201cWhether on the facts and in the circumstances
\nof the case and in law, Tribunal is justified in
\nrestricting the disallowance to 5% of the gross
\npurchases when it is established that none of the
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\nsupplier parties are in existence and the assessee
\nhas just taken accommodation entries without
\ngetting actual supplies from the said parties?\u201d
\n4. To appreciate the question proposed, it may be apposite
\nto advert to the orders passed by the authorities below.
\n5. Respondent is an assessee under the Act. It is a
\ncompany which is engaged in the business of manufacturing
\nand dealership of all kinds of industrial power controlling
\ninstrument cables and related items. For the assessment year
\n2010-11 assessee filed e-return of income declaring income
\nof Rs.1,35,31,757.00. In addition, assessee also declared
\nincome of Rs.3,64,15,007.00 under Section 115JB of the Act.
\nThe case was selected for scrutiny and in scrutiny
\nproceedings Assessing Officer noticed that Sales Tax
\nDepartment, Government of Maharashtra had provided a list
\nof persons who had indulged in the unscrupulous act of
\nproviding bogus hawala entries and purchase bills. Names of
\nbeneficiaries were also provided. Assessing Officer noticed
\nthat assessee was one of the beneficiaries of such bogus
\nhawala bills. Assessing Officer referred to purchases allegedly
\nmade by the assessee through four hawala entries for the
\nassessment year under consideration, the details of which are
\nas under :-
\nName of the Party
\nproviding Bogus Bills\/
\nHawala Entries
\nA.Y. of the
\ntransaction
\nAmount (Rs.)
\nSHREE GANESH
\nTRADING COMPANY
\n2010-11 54670729
\nAKSHAT ENTERPRISES 2010-11 76998384
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\nSHREYAS MARKETING
\nAGENCY
\n2010-11 55018874
\nASIT TRADERS 2010-11 55118398
\n241806385
\n6. In this backdrop, Assessing Officer issued notice to the
\nassessee under Section 142(1) of the Act to explain as to
\nwhy suitable action should not be initiated for such
\nundesirable act. It was mentioned in the said notice that
\nthe Assessing Officer was vested with the authority of passing
\nan order of best judgment assessment under Section 144 of
\nthe Act. Assessee did not respond to the notice issued under
\nSection 142(1) of the Act. Therefore, Assessing Officer drew
\nthe inference that assessee had no plausible explanation
\nand had admitted the fact of bogus purchases mentioned in
\nthe notice under section 142(1) of the Act. Accordingly,
\nAssessing Officer proceeded to finalize the assessment under
\nSection 144 of the Act. For the grounds and reasons given in
\nthe assessment order dated 6th March, 2013 passed under
\nSection 144 of the Act, Assessing Officer disallowed the entire
\nexpenditure shown as incurred by the assessee amounting to
\nRs.24,18,06,385.00.
\n7. Respondent\/assessee assailed the aforesaid order of the
\nAssessing Officer in appeal before the Commissioner of
\nIncome Tax (Appeals)-18, Mumbai, (shortly referred to as
\n\u201cCIT(A)\u201d hereinafter).
\n8. CIT(A) in the appellate proceedings admitted additional
\nevidence furnished by the assessee under Section 46A of
\nthe Income Tax Rules, 1962 (briefly \u201cthe Rules\u201d hereinafter)
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\nand allowed opportunity to the Assessing Officer to
\nexamine the documents and thereafter, to submit remand
\nreports. Following the same, Assessing Officer submitted two
\nremand reports dated 10th December, 2013 and 25th July,
\n2014. Both the remand reports were extensively considered
\nby the CIT(A). Copies of the reports were also furnished to the
\nassessee and based on the reports an opportunity was
\ngranted to the assessee to show cause as to why the quantum
\nof purchases should not be enhanced from
\nRs.24,18,06,385.00 to Rs.65,65,30,470.00 in terms of Section
\n251(2) of the Act.
\n9. CIT(A) considered the rival submissions and noticed that
\nassessee did not raise any objection to the higher figure of
\npurchase because the said amount was also declared in the
\nrevised sales tax return filed by the assessee with the Sales
\nTax Department. Thereafter, CIT(A) enhanced the quantum
\nof purchases from Rs.24,18,06,385.00 to Rs.65,65,30,470.00.
\nHaving enhanced the quantum of purchases as above, CIT(A)
\nposed a question as to whether the entire purchases being
\nbogus purchases were to be added back to the taxable
\nincome of the assessee or only the profit margin or the
\ndifference in gross profit\/net profit should be added.
\n10. For the grounds and reasons given in the appellate order
\ndated 14th October, 2014, CIT(A) found as a matter of fact
\nthat assessee had made circular purchases and sales from
\n12 parties as declared in the sales tax return. Though the
\ngenuineness of purchases and sales were not proved before
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\nthe Assessing Officer and also during the appellate
\nproceedings, CIT (A) noted that while Assessing Officer had
\ntreated the purchases as bogus but had accepted the sales
\nand gross profit declared in the return of income. CIT(A) held
\nthat there can be no sales without purchases. When the sales
\nwere accepted, then the corresponding purchases could not
\nbe disallowed. Therefore, CIT(A) held that only the profit
\nelement embedded in the purchases would be subject to tax
\nand not the entire purchase amount. On due consideration
\nCIT(A) added 2% of the purchase amount of
\nRs.65,65,30,470.00 as profit which worked out to
\nRs.1,31,30,609.00 to the income of the assessee and the
\nbalance addition was deleted.
\n11. Aggrieved by the said order of the CIT(A), Revenue
\npreferred appeal before the Tribunal. Tribunal vide the order
\ndated 3rd November, 2016 took the view that 2% of the profit
\nwhich was directed to be added by the CIT (A) was on the
\nlower side and therefore, the Assessing Officer was directed
\nto make further addition of 3%.
\n12. It is against this order of the Tribunal that Revenue is
\nbefore us in appeal under Section 260-A of the Act.
\n13. Mr.Sharma learned standing counsel, Revenue submits
\nthat when the purchases were bogus, the entire amount
\ncovered by such purchases should have been added to the
\ntotal income of the assessee. There is no question of only
\nadding the profit margin to the income of the assessee. In this
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\nconnection learned standing counsel has referred to a
\ndecision of the High Court of Allahabad in Kaveri Rice Mills
\nVs. Commissioner of Income-Tax, (2006)157 Taxman
\n376. He has also placed reliance on a decision of the Delhi
\nHigh Court in Commissioner of Income-Tax Vs. La Medica,
\n250 ITR 575, wherein it was held that once it was
\naccepted that the supplies made were fictitious, question of
\nthe assessee making purchases from other sources ought not
\nto have been considered by the Tribunal. It was not open to
\nthe Tribunal to make out a third case which was not even the
\ncase of the assessee. He therefore submits that atleast an
\narguable case is made out by the department and therefore,
\nthe appeal should be admitted on the question of law
\nproposed.
\n14. We have carefully considered the submissions made by
\nlearned standing counsel and have also perused the
\nmaterials on record.
\n15. We have already discussed the context in which the Assessing
\nOfficer had made the additions. We have also noted that in the
\nappellate proceedings before the first appellate authority i.e.CIT(A)
\nthe quantum of purchases was enhanced from Rs.24,18,06,385.00
\nto Rs.65,65,30,470.00. Having raised the quantum of purchases
\nas above, CIT(A) posed a question to itself as to what
\nshould be the treatment of purchases; whether the same
\nshould be added back to the taxable income of the assessee
\nas a whole or only profit margin should be added back.
\nAfter referring to various case laws on the subject, CIT(A)
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\nreturned a finding of fact that assessee had made circular
\npurchases and sales with 12 parties as disclosed in the sales
\ntax return. Though genuineness of the purchases and sales
\nwere not proved, yet it was noted that the Assessing Officer
\nhad accepted the sales and gross profit declared in the
\nreturn of income. CIT(A) held that there can be no sales
\nwithout purchases. When the sales were accepted, then the
\nentire purchases could not be disallowed. Referring to a
\ndecision of the Gujarat High Court in the case of CIT Vs.
\nBholanath Polyfab Limited, 355 ITR 290 (Guj) CIT(A)
\nheld that only the profit element embedded in purchases
\nwould be subjected to tax and not the entire amount. Having
\nsaid so, CIT(A) noted that the gross profit rate of the
\nassessee showed a decreasing trend over the years. In such
\ncircumstances, CIT(A) took the view that 2% of the purchases
\nof Rs.65,65,30,470.00 would be a fair and reasonable profit
\npercentage which should be added to the income of the
\nassessee, deleting the balance amount.
\n16. While doing so, CIT (A) observed that only reasonable
\nprofit on the purchases made from the hawala party should
\nbe added back to the income of the assessee. Relevant
\nportion of the order of the CIT (A) is extracted hereunder:-
\n\u201c2.7 From the perusal of the decisions of the
\nHon\u2019ble courts on this issue, specially the decision
\nof the Hon\u2019ble Bombay High Court in the case of
\nCIT Vs. Nikunj Eximp Enterprises Pvt. Ltd. (supra),
\nit was clearly held that the A.O. and the CIT (A)
\nhad disallowed the amount of Rs.1.33 crores on
\naccount of purchases merely on the basis of
\nsuspicion because the sellers and the canvassing
\nagents have not been produced before them. The
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\nHon\u2019ble Mumbai Tribunal in the case of Saroj Anil
\nSteel Pvt. Ltd. Vs. ITO vide order dated 30-10-
\n2012 has also decided this issue that only profit
\nmargin @ 1 % is to be added back. Similar view
\nhas been taken by the Hon\u2019ble Tribunal Mumbai in
\nthe case of Anil Goyal Exim (P) Ltd. Vs. ITO vide
\norder dated 25-04-2005. The Hon\u2019ble Gujarat High
\nCourt in the case of CIT Vs. Bholanath Polyfab Pvt.
\nLtd., 40 Taxman.com 494 has held that whether
\nthe assessee did purchase cloth and sell finished
\ngoods and purchasers were not traceable, profit
\nelement embedded in purchases would be subject
\nto tax and not entire amount. From the facts of
\nthe present case, it is noticed that the assessee
\nhas made circular purchases and sales with 12
\nparties as declared in sales tax return. The
\ngenuineness of purchases and sales were not
\nproved before the A.O. and even during the
\nappellate proceedings. The A.O. has treated the
\npurchases as bogus but accepted the sales and
\ngross profit declared in the return of income. Now
\nquestion arise whether there can be any sales
\nwithout purchases. The answer is always in the
\nnegative that no sales can be made without
\npurchases. The situation can be that purchases
\nmay not be made from the parties from whom
\ninvoices have been obtained as mentioned by the
\nA.O. in the assessment order. But when the sales
\nare accepted then the whole purchases cannot be
\ndisallowed as held by various courts stated above.
\nAs per the decision of the Hon\u2019ble Gujarat High
\nCourt in the case of CIT Vs. Bholanath Polyfab Pvt.
\nLtd., it is clearly held that only the profit element
\nembedded in purchases would be subject to tax
\nand not the entire amount. Now the question
\narises how to determine the profit element. For
\nthis purpose, the total turnover and percentage
\nof gross profit for the earlier three years was
\nobtained from the AR of the appellant. It is
\nnoticed that in earlier years, the main business of
\nthe assessee was manufacturing and dealership
\nof all kinds of industrial power control instruments
\nand related items but in the year under
\nconsideration it has shown trading of
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\nRs.65,65,30,470\/- out of the total purchases at
\nRs.67,34,02,306\/-. The gross profit shown in the
\nyear under consideration was at 5.71 % as
\nagainst 8.77% in the preceding year. From the
\nperusal of the submissions made by the AR of the
\nappellant, it is noticed that the contention of the
\nappellant was correct that in the earlier years the
\nmain business of the assessee was
\nmanufacturing and in the year under
\nconsideration the major activity is of trading. The
\ngross profit rate was also decreasing every year
\nand in the year under consideration it has
\ndecreased to 3%. It is also an established fact
\nthat the gross profit of trading activity is lower
\nthan the manufacturing activity. The AR of the
\nappellant has also offered that additional gross
\nprofit @ \u00bd% of the turnover can be added
\nback. But there is no reasonableness in adopting
\nthis \u00bd% G.P. Keeping in view the principles of
\nnatural justice and the decision of the Hon\u2019ble
\nCourts on this issue, only the reasonable profit
\nhas to be added back on the purchases made
\nfrom the hawala parties. The gross profit has
\nbeen reduced from 8.77 % to 5.71% during the
\nyear under consideration which is explained as
\nmajor manufacturing activity in the last year and
\nmajor part of the trading activity in the year
\nunder consideration. Keeping in view of these
\nfacts and circumstances, I am of the view that
\n2% of the purchases made from the hawala
\nparties amounting to Rs.65,65,30,470\/- which
\nworks out at Rs.1,31,30,609\/- is fair and
\nreasonable, hence, upheld and the balance
\naddition made is deleted. Ground of appeal is
\npartly allowed.\u201d
\n17. Before the Tribunal, Revenue expressed the grievance
\nthat CIT (A) had erred in disallowing bogus purchases at 2%
\nbeing profit on purchases made by the assessee from the
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\ngrey market. Tribunal vide its order dated 3rd November, 2016
\nheld as under :-
\n\u201c4. We have heard rival contentions and gone
\nthrough the facts and circumstances of the case.
\nAdmitted facts are that the AO neither in the
\noriginal proceedings nor during remand
\nproceedings objected to sales made by assessee.
\nIn that eventuality it is imperative on our part to
\nhold that there must be purchases. Whether the
\npurchases are from Grey Market or whatever the
\nassessee has made purchases although
\npayments are made to hawala dealers. In that
\neventuality it is to be seen whether the payments
\nare recorded in the books of account or not. This
\nfatum is not denied by Revenue, rather the
\nassessee has proved that the payments are made
\nthrough accounts payee cheques and purchases
\nare entered in its books of account. Once the
\nassessee is able to prove that the purchases were
\nmade only in alternative way, the revenue is to
\nestimate the excess profit at a rate. Here, our
\ndifference is that 2% is reasonable or some
\nhigher profit is to be estimated. We are of the
\nview that the assessee\u2019s gross profit varies from
\n5% to 8.77%, but these purchases are from
\nGrey Market and its profit element is little higher
\nand accordingly, we direct the Assessing Officer
\nto make further addition of 3% of the bogus
\npurchases and accordingly estimate the income.
\nWe direct the Assessing Officer accordingly. This
\nissue of Revenue\u2019s appeal is partly allowed.\u201d
\n18. Tribunal noted that it was an admitted fact that the
\nAssessing Officer did not object to the sales made by the
\nassessee. Therefore, it was evident that they were
\ncorresponding purchases. Having noted the above, Tribunal
\nexamined the books of accounts of the assessee wherefrom
\nit was found that the assessee had made payments on
\naccount of the purchases through account payee cheques
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\nand the purchases were entered in its books of account. Thus,
\nassessee was able to prove that the purchases were made
\nonly in the alternative way. If that be so, then Revenue was
\nonly required to estimate the profit at a particular rate.
\nReferring to the figure of 2% arrived by the CIT(A), Tribunal
\nobserved that assessee’s gross profit varied from 5% to
\n8.77%. Since the purchases were made from the grey market,
\nthe corresponding profit element would be little higher.
\nTherefore, Tribunal directed the Assessing Officer to make
\nfurther addition of 3% on the bogus purchases and to
\nestimate the income on such basis.
\n19. On thorough consideration of the matter, we do not find
\nany error or infirmity in the view taken by the Tribunal. The
\nlower appellate authorities had enhanced the quantum of
\npurchases much beyond that of the Assessing Officer i.e.,
\nfrom Rs.24,18,06,385.00 to Rs.65,65,30,470.00 but having
\nfound that the purchases corresponded to sales which were
\nreflected in the returns of the assessee in sales tax
\nproceedings and in addition, were also recorded in the
\nbooks of accounts with payments made through account
\npayee cheques, the purchases were accepted by the two
\nappellate authorities and following judicial dictum decided to
\nadd the profit percentage on such purchases to the income
\nof the assessee. While the CIT (A) had assessed profit at 2%
\nwhich was added to the income of the assessee, Tribunal
\nmade further addition of 3% profit, thereby protecting the
\ninterest of the Revenue. We have also considered the two
\ndecisions relied upon by learned standing counsel and we
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\nfind that facts of the present case are clearly distinguishable
\nfrom the facts of those two cases to warrant application of the
\nlegal principles enunciated in the two cited decisions.
\n20. In Bholanath Polyfab Limited (supra), Gujarat High
\nCourt was also confronted with a similar issue. In that case
\nTribunal was of the opinion that the purchases might have
\nbeen made from bogus parties but the purchases themselves
\nwere not bogus. Considering the fact situation, Tribunal was
\nof the opinion that not the entire amount of purchases but
\nthe profit margin embedded in such amount would be
\nsubjected to tax. Gujarat High Court upheld the finding of the
\nTribunal. It was held that whether the purchases were bogus
\nor whether the parties from whom such purchases were
\nallegedly made were bogus was essentially a question of
\nfact. When the Tribunal had concluded that the assessee did
\nmake the purchase, as a natural corollary not the entire
\namount covered by such purchase but the profit element
\nembedded therein would be subject to tax.
\n21. We are in respectful agreement with the view expressed
\nby the Gujarat High Court.
\n22. Thus, we do not find any merit in this appeal. No
\nsubstantial question of law arises from the order passed by
\nthe Tribunal. Consequently, the appeal is dismissed. However,
\nthere shall be no order as to cost.
\n(MILIND N. JADHAV, J.) (UJJAL BHUYAN, J.)<\/p>\n","protected":false},"excerpt":{"rendered":"
Having found that the purchases corresponded to sales which were reflected in the returns of the assessee in sales tax proceedings and in addition, were also recorded in the books of accounts with payments made through account payee cheques, the purchases were accepted by the two appellate authorities and following judicial dictum decided to add the profit percentage on such purchases to the income of the assessee. While the CIT (A) had assessed profit at 2% which was added to the income of the assessee, Tribunal made further addition of 3% profit, thereby protecting the interest of the Revenue<\/p>\n