Itxa/1330/2017 Of Pr. Commissioner Of Income Tax-13, Mumbai v. Rishabhdev Technocable Ltd

Priya Soparkar IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL (IT) NO.1330 OF 2017 Pr.Commissioner of Income Tax-13, Mumbai.… AppellantV/s.Rishabhdev Tachnocable Ltd.… Respondent --- Mr.Akhileshwar Sharma, Advocate for the Appellant. --- CORAM : UJJAL BHUYAN & MILIND N. JADHAV, JJ. DATE : FEBRUARY 10, 2020 P.C.:- 1.Heard Mr.Akhileshwar Sharma, learned standing counsel,Revenue for the appellant. 2.This appeal has been preferred by the Revenue underSection 260A of the Income Tax Act, 1961 (briefly “the Act”hereinafter) against the order dated 3[rd] November, 2016passed by the Income Tax Appellate Tribunal, “D” Bench,Mumbai (briefly “the Tribunal” hereinafter) in Income TaxAppeal No.7773/Mum/2014 for the assessment year 2010-11. 3.Revenue has preferred this appeal projecting thefollowing question as substantial question of law:- “Whether on the facts and in the circumstancesof the case and in law, Tribunal is justified inrestricting the disallowance to 5% of the grosspurchases when it is established that none of the supplier parties are in existence and the assesseehas just taken accommodation entries withoutgetting actual supplies from the said parties?” 4.To appreciate the question proposed, it may be appositeto advert to the orders passed by the authorities below. 5.Respondent is an assessee under the Act. It is acompany which is engaged in the business of manufacturingand dealership of all kinds of industrial power controllinginstrument cables and related items. For the assessment year2010-11 assessee filed e-return of income declaring incomeof Rs.1,35,31,757.00. In addition, assessee also declaredincome of Rs.3,64,15,007.00 under Section 115JB of the Act.The case was selected for scrutiny and in scrutinyproceedings Assessing Officer noticed that Sales TaxDepartment, Government of Maharashtra had provided a listof persons who had indulged in the unscrupulous act ofproviding bogus hawala entries and purchase bills. Names ofbeneficiaries were also provided. Assessing Officer noticedthat assessee was one of the beneficiaries of such bogushawala bills. Assessing Officer referred to purchases allegedlymade by the assessee through four hawala entries for theassessment year under consideration, the details of which areas under :- Priya Soparkar SHREYAS MARKETING2010-1155018874AGENCYASIT TRADERS2010-1155118398241806385 6. In this backdrop, Assessing Officer issued notice to theassessee under Section 142(1) of the Act to explain as towhy suitable action should not be initiated for suchundesirable act. It was mentioned in the said notice thatthe Assessing Officer was vested with the authority of passingan order of best judgment assessment under Section 144 ofthe Act. Assessee did not respond to the notice issued underSection 142(1) of the Act. Therefore, Assessing Officer drewthe inference that assessee had no plausible explanationand had admitted the fact of bogus purchases mentioned inthe notice under section 142(1) of the Act. Accordingly,Assessing Officer proceeded to finalize the assessment underSection 144 of the Act. For the grounds and reasons given inthe assessment order dated 6[th] March, 2013 passed underSection 144 of the Act, Assessing Officer disallowed the entireexpenditure shown as incurred by the assessee amounting toRs.24,18,06,385.00. 7.Respondent/assessee assailed the aforesaid order of theAssessing Officer in appeal before the Commissioner ofIncome Tax (Appeals)-18, Mumbai, (shortly referred to as“CIT(A)” hereinafter). 8.CIT(A) in the appellate proceedings admitted additionalevidence furnished by the assessee under Section 46A ofthe Income Tax Rules, 1962 (briefly “the Rules” hereinafter) Priya Soparkar 7.Respondent/assessee assailed the aforesaid order of theAssessing Officer in appeal before the Commissioner ofIncome Tax (Appeals)-18, Mumbai, (shortly referred to as“CIT(A)” hereinafter). 8.CIT(A) in the appellate proceedings admitted additionalevidence furnished by the assessee under Section 46A ofthe Income Tax Rules, 1962 (briefly “the Rules” hereinafter) Priya Soparkar and allowed opportunity to the Assessing Officer toexamine the documents and thereafter, to submit remandreports. Following the same, Assessing Officer submitted tworemand reports dated 10[th] December, 2013 and 25[th] July,2014. Both the remand reports were extensively consideredby the CIT(A). Copies of the reports were also furnished to theassessee and based on the reports an opportunity wasgranted to the assessee to show cause as to why the quantumofpurchasesshouldnotbeenhancedfromRs.24,18,06,385.00 to Rs.65,65,30,470.00 in terms of Section251(2) of the Act. 9.CIT(A) considered the rival submissions and noticed thatassessee did not raise any objection to the higher figure ofpurchase because the said amount was also declared in therevised sales tax return filed by the assessee with the SalesTax Department. Thereafter, CIT(A) enhanced the quantumof purchases from Rs.24,18,06,385.00 to Rs.65,65,30,470.00.Having enhanced the quantum of purchases as above, CIT(A)posed a question as to whether the entire purchases beingbogus purchases were to be added back to the taxableincome of the assessee or only the profit margin or thedifference in gross profit/net profit should be added. 10.For the grounds and reasons given in the appellate orderdated 14[th] October, 2014, CIT(A) found as a matter of factthat assessee had made circular purchases and sales from12 parties as declared in the sales tax return. Though thegenuineness of purchases and sales were not proved before Priya Soparkar the Assessing Officer and also during the appellateproceedings, CIT (A) noted that while Assessing Officer hadtreated the purchases as bogus but had accepted the salesand gross profit declared in the return of income. CIT(A) heldthat there can be no sales without purchases. When the saleswere accepted, then the corresponding purchases could notbe disallowed. Therefore, CIT(A) held that only the profitelement embedded in the purchases would be subject to taxand not the entire purchase amount. On due considerationCIT(A) added 2% of the purchase amount ofRs.65,65,30,470.00 as profit which worked out toRs.1,31,30,609.00 to the income of the assessee and thebalance addition was deleted. 11.Aggrieved by the said order of the CIT(A), Revenuepreferred appeal before the Tribunal. Tribunal vide the orderdated 3[rd] November, 2016 took the view that 2% of the profitwhich was directed to be added by the CIT (A) was on thelower side and therefore, the Assessing Officer was directedto make further addition of 3%. 12.It is against this order of the Tribunal that Revenue isbefore us in appeal under Section 260-A of the Act. 13.Mr.Sharma learned standing counsel, Revenue submitsthat when the purchases were bogus, the entire amountcovered by such purchases should have been added to thetotal income of the assessee. There is no question of onlyadding the profit margin to the income of the assessee. In this Priya Soparkar 68 itxa 1330-17-o 11.Aggrieved by the said order of the CIT(A), Revenuepreferred appeal before the Tribunal. Tribunal vide the orderdated 3[rd] November, 2016 took the view that 2% of the profitwhich was directed to be added by the CIT (A) was on thelower side and therefore, the Assessing Officer was directedto make further addition of 3%. 12.It is against this order of the Tribunal that Revenue isbefore us in appeal under Section 260-A of the Act. 13.Mr.Sharma learned standing counsel, Revenue submitsthat when the purchases were bogus, the entire amountcovered by such purchases should have been added to thetotal income of the assessee. There is no question of onlyadding the profit margin to the income of the assessee. In this Priya Soparkar 68 itxa 1330-17-o connection learned standing counsel has referred to adecision of the High Court of Allahabad in Kaveri Rice MillsVs. Commissioner of Income-Tax, (2006)157 Taxman376. He has also placed reliance on a decision of the DelhiHigh Court in Commissioner of Income-Tax Vs. La Medica,250 ITR 575, wherein it was held that once it wasaccepted that the supplies made were fictitious, question ofthe assessee making purchases from other sources ought notto have been considered by the Tribunal. It was not open tothe Tribunal to make out a third case which was not even thecase of the assessee. He therefore submits that atleast anarguable case is made out by the department and therefore,the appeal should be admitted on the question of lawproposed. 14.We have carefully considered the submissions made bylearned standing counsel and have also perused thematerials on record. 15. We have already discussed the context in which the AssessingOfficer had made the additions. We have also noted that in theappellate proceedings before the first appellate authority i.e.CIT(A)the quantum of purchases was enhanced from Rs.24,18,06,385.00to Rs.65,65,30,470.00. Having raised the quantum of purchasesas above, CIT(A) posed a question to itself as to whatshould be the treatment of purchases; whether the sameshould be added back to the taxable income of the assesseeas a whole or only profit margin should be added back.After referring to various case laws on the subject, CIT(A) Priya Soparkar 7 returned a finding of fact that assessee had made circularpurchases and sales with 12 parties as disclosed in the salestax return. Though genuineness of the purchases and saleswere not proved, yet it was noted that the Assessing Officerhad accepted the sales and gross profit declared in thereturn of income. CIT(A) held that there can be no saleswithout purchases. When the sales were accepted, then theentire purchases could not be disallowed. Referring to adecision of the Gujarat High Court in the case of CIT Vs.Bholanath Polyfab Limited, 355 ITR 290 (Guj) CIT(A)held that only the profit element embedded in purchaseswould be subjected to tax and not the entire amount. Havingsaid so, CIT(A) noted that the gross profit rate of theassessee showed a decreasing trend over the years. In suchcircumstances, CIT(A) took the view that 2% of the purchasesof Rs.65,65,30,470.00 would be a fair and reasonable profitpercentage which should be added to the income of theassessee, deleting the balance amount. 16.While doing so, CIT (A) observed that only reasonableprofit on the purchases made from the hawala party shouldbe added back to the income of the assessee. Relevantportion of the order of the CIT (A) is extracted hereunder:- 16.While doing so, CIT (A) observed that only reasonableprofit on the purchases made from the hawala party shouldbe added back to the income of the assessee. Relevantportion of the order of the CIT (A) is extracted hereunder:- “2.7 From the perusal of the decisions of theHon’ble courts on this issue, specially the decisionof the Hon’ble Bombay High Court in the case ofCIT Vs. Nikunj Eximp Enterprises Pvt. Ltd. (supra),it was clearly held that the A.O. and the CIT (A)had disallowed the amount of Rs.1.33 crores onaccount of purchases merely on the basis ofsuspicion because the sellers and the canvassingagents have not been produced before them. The Priya Soparkar Hon’ble Mumbai Tribunal in the case of Saroj AnilSteel Pvt. Ltd. Vs. ITO vide order dated 30-10-2012 has also decided this issue that only profitmargin @ 1 % is to be added back. Similar viewhas been taken by the Hon’ble Tribunal Mumbai inthe case of Anil Goyal Exim (P) Ltd. Vs. ITO videorder dated 25-04-2005. The Hon’ble Gujarat HighCourt in the case of CIT Vs. Bholanath Polyfab Pvt.Ltd., 40 Taxman.com 494 has held that whetherthe assessee did purchase cloth and sell finishedgoods and purchasers were not traceable, profitelement embedded in purchases would be subjectto tax and not entire amount. From the facts ofthe present case, it is noticed that the assesseehas made circular purchases and sales with 12parties as declared in sales tax return. Thegenuineness of purchases and sales were notproved before the A.O. and even during theappellate proceedings. The A.O. has treated thepurchases as bogus but accepted the sales andgross profit declared in the return of income. Nowquestion arise whether there can be any saleswithout purchases. The answer is always in thenegative that no sales can be made withoutpurchases. The situation can be that purchasesmay not be made from the parties from whominvoices have been obtained as mentioned by theA.O. in the assessment order. But when the salesare accepted then the whole purchases cannot bedisallowed as held by various courts stated above.As per the decision of the Hon’ble Gujarat HighCourt in the case of CIT Vs. Bholanath Polyfab Pvt.Ltd., it is clearly held that only the profit elementembedded in purchases would be subject to taxand not the entire amount. Now the questionarises how to determine the profit element. Forthis purpose, the total turnover and percentageof gross profit for the earlier three years wasobtained from the AR of the appellant. It isnoticed that in earlier years, the main business ofthe assessee was manufacturing and dealershipof all kinds of industrial power control instrumentsand related items but in the year underconsideration it has shown trading of Rs.65,65,30,470/- out of the total purchases atRs.67,34,02,306/-. The gross profit shown in theyear under consideration was at 5.71 % asagainst 8.77% in the preceding year. From theperusal of the submissions made by the AR of theappellant, it is noticed that the contention of theappellant was correct that in the earlier years themain business of the assessee wasmanufacturing and in the year underconsideration the major activity is of trading. Thegross profit rate was also decreasing every yearand in the year under consideration it hasdecreased to 3%. It is also an established factthat the gross profit of trading activity is lowerthan the manufacturing activity. The AR of theappellant has also offered that additional grossprofit @ ½% of the turnover can be addedback. But there is no reasonableness in adoptingthis ½% G.P. Keeping in view the principles ofnatural justice and the decision of the Hon’bleCourts on this issue, only the reasonable profithas to be added back on the purchases madefrom the hawala parties. The gross profit hasbeen reduced from 8.77 % to 5.71% during theyear under consideration which is explained asmajor manufacturing activity in the last year andmajor part of the trading activity in the yearunder consideration. Keeping in view of thesefacts and circumstances, I am of the view that2% of the purchases made from the hawalaparties amounting to Rs.65,65,30,470/- whichworks out at Rs.1,31,30,609/- is fair andreasonable, hence, upheld and the balanceaddition made is deleted. Ground of appeal ispartly allowed.” 17.Before the Tribunal, Revenue expressed the grievancethat CIT (A) had erred in disallowing bogus purchases at 2%being profit on purchases made by the assessee from the grey market. Tribunal vide its order dated 3[rd] November, 2016held as under :- “4.We have heard rival contentions and gonethrough the facts and circumstances of the case.Admitted facts are that the AO neither in theoriginal proceedings nor during remandproceedings objected to sales made by assessee.In that eventuality it is imperative on our part tohold that there must be purchases. Whether thepurchases are from Grey Market or whatever theassessee has made purchases althoughpayments are made to hawala dealers. In thateventuality it is to be seen whether the paymentsare recorded in the books of account or not. Thisfatum is not denied by Revenue, rather theassessee has proved that the payments are madethrough accounts payee cheques and purchasesare entered in its books of account. Once theassessee is able to prove that the purchases weremade only in alternative way, the revenue is toestimate the excess profit at a rate. Here, ourdifference is that 2% is reasonable or somehigher profit is to be estimated. We are of theview that the assessee’s gross profit varies from5% to 8.77%, but these purchases are fromGrey Market and its profit element is little higherand accordingly, we direct the Assessing Officerto make further addition of 3% of the boguspurchases and accordingly estimate the income.We direct the Assessing Officer accordingly. Thisissue of Revenue’s appeal is partly allowed.” 18.Tribunal noted that it was an admitted fact that theAssessing Officer did not object to the sales made by theassessee. Therefore, it was evident that they werecorresponding purchases. Having noted the above, Tribunalexamined the books of accounts of the assessee wherefromit was found that the assessee had made payments onaccount of the purchases through account payee cheques Priya Soparkar 8 itxa 1330-17-o 18.Tribunal noted that it was an admitted fact that theAssessing Officer did not object to the sales made by theassessee. Therefore, it was evident that they werecorresponding purchases. Having noted the above, Tribunalexamined the books of accounts of the assessee wherefromit was found that the assessee had made payments onaccount of the purchases through account payee cheques Priya Soparkar 8 itxa 1330-17-o and the purchases were entered in its books of account. Thus,assessee was able to prove that the purchases were madeonly in the alternative way. If that be so, then Revenue wasonly required to estimate the profit at a particular rate.Referring to the figure of 2% arrived by the CIT(A), Tribunalobserved that assessee's gross profit varied from 5% to8.77%. Since the purchases were made from the grey market,the corresponding profit element would be little higher.Therefore, Tribunal directed the Assessing Officer to makefurther addition of 3% on the bogus purchases and toestimate the income on such basis. 19.On thorough consideration of the matter, we do not findany error or infirmity in the view taken by the Tribunal. Thelower appellate authorities had enhanced the quantum ofpurchases much beyond that of the Assessing Officer i.e.,from Rs.24,18,06,385.00 to Rs.65,65,30,470.00 but havingfound that the purchases corresponded to sales which werereflected in the returns of the assessee in sales taxproceedings and in addition, were also recorded in thebooks of accounts with payments made through accountpayee cheques, the purchases were accepted by the twoappellate authorities and following judicial dictum decided toadd the profit percentage on such purchases to the incomeof the assessee. While the CIT (A) had assessed profit at 2%which was added to the income of the assessee, Tribunalmade further addition of 3% profit, thereby protecting theinterest of the Revenue. We have also considered the twodecisions relied upon by learned standing counsel and we Priya Soparkar 8 itxa 1330-17-o find that facts of the present case are clearly distinguishablefrom the facts of those two cases to warrant application of thelegal principles enunciated in the two cited decisions. 20.In Bholanath Polyfab Limited (supra), Gujarat HighCourt was also confronted with a similar issue. In that caseTribunal was of the opinion that the purchases might havebeen made from bogus parties but the purchases themselveswere not bogus. Considering the fact situation, Tribunal wasof the opinion that not the entire amount of purchases butthe profit margin embedded in such amount would besubjected to tax. Gujarat High Court upheld the finding of theTribunal. It was held that whether the purchases were bogusor whether the parties from whom such purchases wereallegedly made were bogus was essentially a question offact. When the Tribunal had concluded that the assessee didmake the purchase, as a natural corollary not the entireamount covered by such purchase but the profit elementembedded therein would be subject to tax. 21.We are in respectful agreement with the view expressedby the Gujarat High Court. 22.Thus, we do not find any merit in this appeal. Nosubstantial question of law arises from the order passed bythe Tribunal. Consequently, the appeal is dismissed. However,there shall be no order as to cost. (MILIND N. JADHAV, J.) (UJJAL BHUYAN, J.)