I. T. A. No. 83/Chd/2013

H. L. Karwa (Vice-President) And Rano Jain (Accountant Member)

Sudhir Sehgal For the Appellant :
Sushil Kumar For the Respondent :

ORDER

The order of the Bench was delivered by

H. L. Karwa (Vice-President)- This appeal filed by the assessee is directed against the order of the Commissioner of Income-tax (Appeals), Panchkula, dated December 19, 2012, relating to the assessment year 2009- 10.

2. In this appeal, the assessee has raised the following grounds :

"1. That the worthy Commissioner of Income-tax (Appeals), Panchkula, has erred in confirming the addition of Rs. 3,07,95,467 on account of bogus purchases.

2. That the worthy Commissioner of Income-tax (Appeals) has failed to consider the fact that the sales having been accepted by the Commissioner of Income-tax (Appeals) and, as such, there was no justification in making the addition of bogus purchases.

3. That the Commissioner of Income-tax (Appeals) has failed to consider the fact that by disallowing the purchases, the gross profit rate comes to 83 per cent. which cannot be there in the assessee's business.

4. That the Commissioner of Income-tax (Appeals) has failed to give any finding on ground No. 1 taken before herewith regard to the fact that the Assessing Officer has exceeded the limit of assessing under the scheme of selection through CASS which he could not have and departed from the jurisdiction envisaged under the scrutiny through CASS selection of the cases as clarified in E. No. 225/26/ 2006-ITA.II (Pt.)."

3. At the time of hearing of the appeal, Shri Sudhir Sehgal, learned counsel for the assessee, did not press for ground No. 4 of the appeal and, hence, we dismiss the same as not pressed.

4. As regards ground Nos. 1 to 3 of the appeal, the relevant facts are that the assessee submitted its return of income on September 30, 2009, declaring a total income at Rs. 5,410. The assessee carries on wholesale cloth business. The only source of income was shown to be the business income. The return was processed under section 143(1) of the Income-tax Act, 1961 (in short "the Act"). Subsequently, the case was selected for scrutiny and statutory notices were issued to the assessee. During the course of assessment proceedings, the assessee produced purchase bills of the material for the financial year 2008-09, out of which copies of certain bills were obtained. The details of the same are marked as annexure A which is annexed to the assessment order. The Assessing Officer conducted field enquires and noted that no such parties are in existence. He, therefore, issued a show-cause notice to the assessee to explain as to why these purchase bills should not be treated to be ingenuine and bogus for inflated purchases with the intention to conceal the profit. In response to the said notice, the assessee submitted a reply giving detailed explanation regarding purchases. However, the Assessing Officer did not accept the explanation of the assessee and, as such, it has been held by the Assessing Officer that the assessee had made these credit entries in the books of account and has created thereunder false liability on account of the alleged so-called purchases. The Assessing Officer held the aggregate sum involved in these purchase bills as bogus and, hence, made an addition of Rs. 3,07,95,467 to the assessee's total income.

5. On appeal, the Commissioner of Income-tax (Appeals) upheld the order of the Assessing Officer, and, hence, the assessee is in appeal before the Tribunal.

6. Before us, Shri Sudhir Sehgal, learned counsel for the assessee, submitted that the authorities below have miserably failed to appreciate that the purchases were made through broker who used to deliver goods and receive payment on behalf of the partners as it is the practice of the assessee's line of business. Shri Sudhir Sehgal pointed out that the purchases from the parties mentioned in annexure A annexed to the assessment order were made from them through brokers who used to deliver goods and receive payments on behalf of the parties as is the practice in this line of business. It is also claimed that due to keen competition in this line of business, the parties supply the goods at the shops of the purchasers and also collect money from them itself. Thus, the assessee is not supposed to know the said sources especially when the payments have been made after delivery of goods and no advance payments have been made. The learned counsel for the assessee vehemently argued that there was no justification in doubting the purchases because in the absence of the purchases, how the sales could be made. He further contended that if the purchases are to be excluded, as proposed, corresponding sales are also to be decreased, which will mean no effect on the gross profit worked out in the trading account, if redrafted. Shri Sudhir Sehgal, the learned counsel for the assessee, also submitted that as per the Assessing Officer's assumption redrafting of the trading account vis-a-vis decreasing the purchase and working out the profit by increasing the same to that extent, is highly objected to as the rate of profit will work out to 83 per cent. which is normally impossible/ unbelievable being unimaginable and, hence, cannot be there at all in all probabilities, looking to the market conditions of this line of business. According to the learned counsel for the assessee, if purchases are disbelieved, the sales are also to be reduced as the sales cannot be there without purchases. Shri Sudhir Sehgal, learned counsel for the assessee vehemently argued that the Assessing Officer has not brought out any material on record to justify the profit rate of 83 per cent. deemed to be adopted. He, therefore, submitted that impugned addition deserves to be deleted.

Reliance was also placed on the following decisions :

In view of the above, Shri Sudhir Sehgal, learned counsel for the assessee, submitted that there was no justification in making the addition on account of bogus purchases.

7. On the other hand, Shri Sushil Kumar, learned Departmental representative, heavily relied on the orders of the authorities below in support of Revenue's case. He further submitted that the assessee had made false entries in his books and created a false liability on account of the purchases. He, accordingly, submitted that the sums credited on account of alleged purchases in the assessee's books of account created thereunder liability in the form of sundry creditors have been rightly treated as unexplained credit entries by the lower authorities. He, therefore, submitted that the impugned addition may be upheld.

8. We have heard the rival submissions and have perused the materials available on record. The perusal of the profit and loss account of the assessee shows the details as under :

Trading account for the year ended 31 March, 2009

9. The redrafted trading account adopted by the Assessing Officer is as under :
Redrafted trading account adopted by the Assessing Officer

10. Comparative chart of gross profit for the earlier years and the year under consideration are as under :

Comparative chart

From the combined reading of the above, it is clear that gross profit margin of the assessee comes to 6.73 per cent., if purchases of Rs. 3,07,95,467 are treated as bogus and the same is added to the gross profit then the gross profit works out at 83 per cent., which is unbelievable and unimaginary as sales cannot be the profits. In our opinion, the whole trading results would present a distorted picture, if the Assessing Officer's version is accepted, which, in our opinion, is not possible in the assessee's line of business. At this stage, we may refer to the decision of the Income- tax Appellate Tribunal, Delhi Bench, in the case of Piyush Developers P. Ltd. v. Asst. CIT (supra) relied on by Shri Sudhir Sehgal, learned counsel for the assessee, wherein the Assessing Officer made the addition of Rs. 2,89,34,711. The purchases from three parties were held to be bogus and non-genuine. On appeal, the Commissioner of Income-tax (Appeals) held that if these purchases are disallowed, the gross profit margin would jump to 68 per cent., which is abnormal in this line of business. However, the Commissioner of Income-tax (Appeals) estimated the gross profit of the assessee at 27 per cent. as against 68 per cent. worked out by the Assessing Officer. The Revenue challenged the order of the Commissioner of Income-tax (Appeals) before the Tribunal and the Tribunal, vide its order dated July 8, 2015, in ITA No. 5599/Del/2010 relating to the assessment year 2008-09 held as under :

"14.1 No defects have been found in the stock register nor any defects have been pointed out by the Assessing Officer in the audited books of account maintained by the assessee. Despite search and seizure no adverse material was found to substantiate the disallowance made by the Assessing Officer. The so-called spot enquiry done by the Inspector has no credence as no details have been filed before us nor was the assessee confronted with the manner in which spot enquiry was conducted, the persons who conducted the spot enquiry or the material gathered by the Revenue in the spot enquiry. Thus, the Revenue cannot place reliance on this enquiry. The purchases which are disallowed relate to cement and steel which are essential for the purpose of construction. No enquiries are made with the banks, other statutory authorities on the identity of the parties. Details such as whether sales tax authorities have accepted the quantum of purchases made by the assessee have not been obtained identity could be ascertained by the Assessing Officer, both from the banker and the sales tax authorities. Under the circumstances, we have to uphold the contentions of the assessee that the finding of the Assessing Officer, that the assessee has not furnished full details, is factually incorrect.

14.2. Coming to the identity of the parties we find that all the parties are registered with the Sales Tax Department and have charged VAT in each of the bills. All these parties have bank accounts and payments were made through account payee cheques. Evidence of material having been received by the assessee, has been filed.

14.3. As regards the fact that the assessee was not able to produce the parties, we agree with the contentions of the assessee that non- production of the parties cannot be a ground of disallowance of all the purchases for the following reasons :
(i) The persons from whom purchases are made could not always be in the control of the assessee, specifically when they are unrelated parties.
(ii) The volume and quality of evidence produced by the assessee is such that non-production of the party from whom the assessee purchased cannot lead to a conclusion that the purchases are not genuine.

The learned Commissioner of Income-tax (Appeals) at paragraph 4.4 held as follows.

'4.4. It is also seen that during the course of assessment proceed ings the assessee had filed various evidences (which have been filed in the paper book) of the purchases made from the said parties in the shape of copies of bills, purchase vouchers, material receipt notes, as well as the copies of bank statement of the assessee-company evidencing the payment made to the said parties, which have been cleared from the account of the assessee. In few cases copies of gross receipts along with evidence of weighment of goods from dharm kanta have been filed by the assessee. It is also an undisputed fact that the invoices issued by the various parties are bearing the truck number of the vehicle used for delivery of goods and VAT has also been charged by the parties in their bills. The goods mentioned in the bills are mainly cement and steel (TMT bars) which are the basic component required for construct ion of any building or complex. The evidence of receipt of such goods by the assessee in the form of purchase voucher/material receipt note is also there. Most impor tantly as stated by the authorised representative all the payments made to the parties have been made by account payee cheques and the same have been cleared from the assessee's bank account. The learned authorised representative has also brought my attention to the fact that the assessee is maintaining item-wise stock register copies of which were filed before the Assessing Officer during the course of assessment proceedings and no defect has been found in the same. Thus, it is observed that sufficient pieces of evidence of transactions of the purchases made from various parties have been produced by the appellant which have not been denied by the Assessing Officer and have not been found to be false. Therefore, in such circumstances there was heavy onus on the Assessing Officer to prove otherwise which has not been discharged by him and on the other hand the initial onus on the assessee has been discharged. The hon'ble apex court in Daulat Ram'scase [1973] 87 ITR 349 (SC) has held that the onus to prove that the apparent was not real was on the party who claimed it to be so. Thus, the onus was heavily on the Assessing Officer in this case. The Assessing Officer has also mentioned the fact of making certain spot enquires which, according to him, have revealed that parties M/s. Jai Ambe Trading Co. and M/s. Shree Ganpati Enterprises did not exist at their given addresses for 6-7 years. The authorised representative stated and assessment order also does not show that such facts or the enquiries have been confronted to the appellant. The Assessing Officer has thus disallowed purchases in violation of the principles of natural justice in such circumstances. I am in agreement with the contentions of the learned authorised representative that the action of the Assessing Officer in simply brushing aside the evidences before him was highly unjustified in the facts and circumstances of the case.'

These findings of the learned Commissioner of Income-tax (Appeals) could not be controverted by the learned Departmental representative. We find no infirmity in the same.

(iii) The other aspects are that the value of work certified, the value of closing stock have been accepted by the Assessing Officer. Both these cannot be independent of the value of purchases. The purchases either form part of work certified or closing stock. When both these are accepted and not disturbed, the question of disallow ing the purchases debited in the profit and loss account does not arise.

(iv) The learned Commissioner of Income-tax (Appeals) has rightly analysed that if this disallowance of purchases is upheld then the gross profit rate of the assessee would be abnormal at 67 per cent.

(v) The hon'ble Calcutta High Court in Diagnostics v. CIT reported in [2011] 334 ITR 111 (Cal) ; [2012] 20 taxmann.com 692 (Cal) at paragraphs 9 and 10 held as follows (page 114 of 334 ITR) :
'However, as regards the payments made to M/s. Selvas Photographics are concerned amounting to Rs. 3,12,302 we find that those have been made by account payee cheques and those have been encashed through the bankers of M/s. Selvas Photographics. It appears that, according to the appellant, at the time of assessment, the appellant had no business transaction with M/s. Selvas Photo graphics and, consequently, the said party did not co-operate with the Assessing Officer. However, the transaction having taken place through account payee cheques, we are unable to accept the contention of Mr. Agarwal, the learned advocate appearing for the Revenue that the transaction was a non-existent one. If an assessee took care to purchase materials for his business by way of account payee cheques from a third party and, subsequently, three years after the purchase, the said third party does not appear before the Assessing Officer pursuant to the notice or even has stopped the business, the claim of the assessee on that account cannot be discarded as non- existent. In the case before us, the Revenue has not put forward any other ground, such as, it was not a genuine transaction for other reasons but has simply rejected the claim on the ground as if there was no such transaction.

10. The transaction having taken place through payment by account payee cheques, such plea is not tenable and in such circumstances, the Tribunal below erred in law in reversing the finding arrived at by the Commissioner of Income-tax (Appeals) accepting the said transaction as a genuine transaction.' (emphasis ours).

14.4. In view of the above discussion, we uphold the finding of the learned Commissioner of Income-tax (Appeals) on the deletion of the disallowance of Rs. 2,89,34,711, which was treated as bogus purchases by the Assessing Officer. These grounds of the Revenue are dismissed."

11. In this case also, the allegation of the Revenue authorities is that the assessee was not able to produce the parties, in view of the decision of the Income-tax Appellate Tribunal Delhi Bench referred to above, we hold that non-production of parties cannot be a ground of disallowance of all the purchases for the following reasons :

"(i) The parties from whom purchases are made could not always be in the control of the assessee specially when they are unrelated parties.
(ii) Non-production of the parties from whom the assessee purchased materials cannot lead to the conclusion that the purchases are not genuine."

12. In our opinion, the decision of the Income-tax Appellate Tribunal, Delhi Bench referred to above is squarely applicable to the facts of the present case, and, therefore, we hold that in this case also, there is no justification in making the disallowance of Rs. 3,07,95,467 on account of bogus purchases. In this case, the Assessing Officer had treated purchases worth Rs. 3,07,95,467 from certain parties as bogus one, however, sales made out of such purchases were not disputed or questioned and the resultant profit on such sales has been accepted in toto by the Assessing Officer and the Commissioner of Income-tax (Appeals). The account books of the assessee were never rejected by the Assessing Officer, in the case of CIT v. Bholanath Poly Fab P. Ltd. [2013] 355 ITR 290 (Guj), the hon'ble High Court held as under (page 293) :

"Having come to such a conclusion, however, the Tribunal was of the opinion that the purchases may have been made from bogus parties, nevertheless, the purchases themselves were not bogus. The Tribunal adverted to the facts and data on record and came to the conclusion that the entire quantity of opening stock, purchases and the quantity manufactured during the year under consideration were sold by the assessee. Therefore, the purchases of the entire 1,02,514 metres of cloth were sold during the year under consideration. The Tribunal, therefore, accepted the assessee's contention that the finished goods were purchased by the assessee, may be not from the parties shown in the accounts, but from other sources. In that view of the matter, the Tribunal was of the opinion that not the entire amount, but the profit margin embedded in such amount would be subjected to tax. The Tribunal relied on its earlier decision in the caseof Sanket Steel Traders and also made reference to the Tribunal's decision in the case of Vijay Proteins Ltd. v. Asst. CIT [1996] 58 ITD 428 (Ahd).

We are of the opinion that the Tribunal committed no error. Whether the purchases themselves were bogus or whether the parties from whom such purchases were allegedly made were bogus is essentially a question of fact. The Tribunal having examined the evidence on record came to the conclusion that the assessee did purchase the cloth and sell the finished goods. In that view of the matter, as natural corollary, not the entire amount covered under such purchase, but the profit element embedded therein would be subject to tax. This was the view of this court in the case of Sanjay Oilcake Industries v. CIT [2009] 316 ITR 274 (Guj). Such decision is also followed by this court in a judgment dated August 16, 2011, in Tax Appeal No. 679 of 2010 in the case of CIT v. Kishor Amrutlal Patel. In the result, tax appeal is dismissed."

13. In the aforesaid case, the Tribunal has categorically held that though purchases were from bogus parties nevertheless purchases themselves were not bogus. Accordingly, the Tribunal held that thus not the entire amount but profit margin embedded in such amount would be subject to tax. The hon'ble Gujarat High Court upheld the order of the Tribunal. In our opinion, there is a merit in the contention of the learned counsel for the assessee that in the absence of the purchases, there could not be sales worth Rs. 4,03,34,375. Not only this, the Assessing Officer has also accepted the opening and closing stock as shown by the assessee in the books of account. The Assessing Officer has not doubted these sales. If the Assessing Officer's version is accepted then the gross profit works out at 83 per cent. which is unbelievable and unimaginary as sales cannot be the profits. Thus, considering the entire facts and circumstances of the present case, we do not see any justification in making the addition of Rs. 3,07,95,467 on account of bogus purchases. Accordingly, we allow ground Nos. 1 to 3 of the appeal.

14. In the result, the appeal is allowed.

The order pronounced in the open court on May 2, 2016.