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Commissioner Of Income-Tax vs Bright Automotive And Plastics ... on 7 February, 2005
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Income Tax Appellate Tribunal - Mumbai
Jitendra S. Motani, Mumbai vs Department Of Income Tax on 23 November, 2011
                                                              ITA NO.6178 of 2007
                                                         Jitendra S Motani Mumbai

                        "J" Bench, Mumbai

               Before Shri D.K. Agarwal, Judicial Member
             and Shri B. Ramakotaiah, Accountant Member

                      ITA No. 6178/Mum/2007
                      (Assessment Year: 2004-05)

Dy. Commissioner of Income Tax                 Jitendra S. Motani
15(1), Room No.104, Matru                      Shop No.5, 51 Bada Mandir
Mandir, 1st Floor, Tardeo Road                 Opp:2nd Panjrpole Lane
Grant Road Mumbai 400007              Vs       Mumbai 400 004
                                               PAN: AADPM 3770 G
              Appellant                                Respondent

                     Appellant by:    Smt. Kusum Ingle (CIT-DR)
                     Respondent by:   Shri K.Shivaram/Ajay R.Singh

                     Date of Hearing:       23/11/2011
                     Date of Pronouncement: 30/11/2011


Per B. Ramakotaiah, A.M.

This is Revenue's appeal against the orders of the CIT (A) XV Mumbai dated 20/07/2007. The issue in this appeal is with reference to deletion of an amount of `7,48,42,424/- on account of certain purchases disallowed as non-genuine which the CIT (A) allowed.

2. Briefly stated, the assessee is a proprietor running business in the name and style of M/s Nitin Impex and engaged in the business of export of steel utensils. The assessee was entitled for deduction under section 80HHC. A survey operation under section 133A was carried out in the Office and Warehouse of the assessee on 19.12.2005. The Assessing Officer on the basis of the report of the investigation unit examined the purchases made by the assessee. The assessee had an export sale of `11,29,94,093/- and has purchased to the tune of `12,34,90,490/-. Out of that, the Page 1 of 8 ITA NO.6178 of 2007 Jitendra S Motani Mumbai Assessing Officer identified 35 parties totaling to `7,48,42,474/- from whom the assessee seems to have purchased various items during the year but could not be verified by the Assessing Officer as the notices issued under section 133(6) have returned with the remarks "not known". The assessee was asked to furnish the evidence justifying the purchases from the above parties. After considering the replies of the assessee, the Assessing Officer came to a conclusion that the purchases listed to have been made from the above parties are not genuine and they are to be considered as inflated purchases. Accordingly, entire amount was disallowed and added to the income declared. However, the Assessing Officer allowed deduction us/ 80HHC on the gross total of the income so worked out including the disallowances of purchases. The CIT (A) after considering the assessee's explanation and on remanding the matter to the Assessing Officer on the additional evidence furnished in terms of confirmation letters from parties, deleted the above. In deleting the CIT (A) considered that the G.P after disallowance of substantial purchases comes to 56.9% which is not possible in the nature of the business and further the assessee furnished quantitative tally on the basis of record and without those purchases the assessee could not have exported the goods and further that the Assessing Officer did not speak even a whisper on export of goods and substantial evidence in the form of confirmations have been filed. He considered various case law and the facts of the case while deleting the addition. His order runs from Para 3.6 in pages 8 to page 20. The final conclusion is as under:

"In this particular case there is scantly and very feeble evidence on record to hold that purchases are bogus in case of 34 parties. Only in one case purchase remained unverifiable. In that case also, it can also not be held that purchase was not made at all. AO has proceeded only on the basis that parties were not produced. AO has also not rejected the books of account. Simply adding the entire purchases defies all accounting Page 2 of 8 ITA NO.6178 of 2007 Jitendra S Motani Mumbai principles. It appears to be finagles fly by AO. AO has not at all questioned the rate of purchase in comparison to market rate. Therefore, AO's finding is without any supportive material on record".

3. The learned Departmental Representative referring to various findings of the Assessing Officer submitted that the CIT (A) considered extraneous factors in deleting the addition. It was his submission that the assessee has not made genuine purchases and had not furnished any evidence to support. Relying on the decision of the Hon'ble Delhi High Court in case of Cit vs. La Medica 250 ITR

575. Learned DR submitted that since the assessee has not supported the purchases, the disallowance made by the Assessing Officer is to be upheld.

4. The learned Counsel however, submitted that assessee has exported the goods and furnished various confirmations in the form of invoices, payment of through bank details (from page 1 to 309 of the paper book furnished before the CIT (A)) in the form of evidence which was sent on remand to the Assessing Officer and the CIT (A) order is after verification of facts, which should be upheld. He also relied on the decision of the Hon'ble Delhi High Court in the case of CIT vs. Hilux Automotive (P) Ltd 23 DTR Del 385 wherein the above decision relied by the Departmental Representative was distinguished to hold that when the assessee furnishes sufficient material namely, bank account of such parties to show payment, the findings of the fact arrived at by the Tribunal that the said parties were genuine suppliers and that they received payment by account payee cheques is plausible and based on evidence. It was further submitted that the Assessing Officer in the earlier years as well as in later years did not disallow purchases but only estimated at GP at 4.5% on the entire turnover, whereas the CIT restricted the GP estimation to 3% of the tainted purchases in other years, the orders of which were upheld by the ITAT in ITA No.5927/Mum/ Page 3 of 8 ITA NO.6178 of 2007 Jitendra S Motani Mumbai 2009 for Assessment Year 2006-07 and ITA No.3024 to 3028/Mum/2008 for the Assessment Year 2000-01 to 2003-04 and 2005-06. It was his submission that in all the years from 2000-01 to 2006-07 except this Assessment Year purchases were not disallowed. Therefore, the orders of the CIT (A) require to be confirmed.

5. We have considered the issue and examined the facts on record. It is noticed that the Assessing Officer disallowed the entire purchases from 35 parties for the reason that they are not verifiable holding them as non-genuine parties in this Assessment Year, whereas purchases from similar parties/same parties in earlier years and later year were not disallowed but, GP was assessed on the entire turnover at 4.5%. The CIT (A) while deleting the entire purchases disallowed this year. In other years GP was restricted to 3% of the tainted purchases. This issue was considered by the ITAT in a batch of appeals in ITA Nos.3024 to 3028/Mum/2008 vide Para 7 as under:

"7. We have carefully perused and considered the facts of the case, rival submissions and relevant record. The Assessing Officer applied the G.P.@ 4.5% on the entire sales turnover including the alleged bogus sales and consequently, made addition to the total income of the as, over and above the net profit shown, in the P&L account, for the respective Assessment Years. Such addition made by the Assessing Officer on the basis of GP rate applied to the entire sales is not legally and factually tenable. The element of inflation in purchases can be possible only in respect of such bogus purchases. The estimation and application of uniform G.P @ 4.5% on the entire sales of the assessee is not reasonable and not in consonance with the facts of the present case, as the entire purchases and entire sales were not non- genuine. The said G.P rate may not be applicable, in respect of export business. The Assessing Officer has treated the purchases from the alleged 16 parties as bogus purchases. No adverse finding has been given by the Assessing Officer in respect of remaining purchases. Therefore, uniform estimation and application of GP @ Page 4 of 8 ITA NO.6178 of 2007 Jitendra S Motani Mumbai 4.5% is not sustainable. In view of this, we are of the considered opinion that the GP rate applied by the learned CIT (A) at 3% in respect of tainted purchases is fair and reasonable. Therefore, the findings of the learned CIT (A) in respect of all the assessment involved in the present appeals are upheld and the appeals of the revenue for all the Assessment Years are dismissed".

6. In view of this, disallowance of purchases by the AO is not correct and to that extent the CIT (A) order is to be upheld. Not only that the details of the verification of PAN of some cases have been placed on record which do indicate that the PAN is matching in many of the confirmations filed by the assessee. There may be certain name differences due to reason that those assessee's may be operating under a different proprietorship name where as PAN might have been in individual name, like the case of the assessee. The assessee is running business in the name and style of Nitin Impex and bills are being issued in this name, whereas the PAN is in the assessee's own name. So if there is verification, only the name of the assessee would come on record and not M/s Nitin Impex. This sort of differences in name cannot be a reason for holding that the parties are not genuine. Only when a non existing PAN is reported, then only the requirement of the complete verification is required. There are very few entries of such nature in the list. Therefore disallowance of purchases in its entirety is not justified unless it is established that those parties are nonexistent and bogus. No such enquiry was done to establish.

7. It is also noticed that the Assessing Officer himself has estimated the income at 4.5% of the GP in all the years AY 2000-01 to AY 2006-07 except in this year. The estimation of GP was ultimately confirmed at 3% on the tainted purchases. To be consistent with orders in other years, in this year GP estimation at 3% on the entire amount of tainted purchases would justify the facts of the case.

Page 5 of 8

ITA NO.6178 of 2007 Jitendra S Motani Mumbai

8. In the course of the arguments the learned Counsel however, submitted that the assessee has furnished confirmations to a large extent and purchases to the extent of `1,02,51,203/- should be excluded in case estimation was resorted to. We find that the confirmations filed by the assessee includes an enterprise M/s Nisha Enterprise in whose case the CIT vide page 10 of the order gave a finding that the purchases cannot be accepted as genuine. Even though, purchases from the above Nisha Enterprises was considered as non genuine, the CIT (A) however deleted the entire amount considered by the Assessing Officer. Therefore, considering these fact of purchases from M/s Nisha Enterprises to the tune of `.7,07,975/-, we are of the opinion that estimation of 3% GP on the total purchases so disallowed at `.7,48,42,474/- would justify on the given facts and is consistent with the orders in other years.

9. The assessee raised a ground as per rule 27 of the Appellate Tribunal Rules in respect of set off of additions sustained under section 69 against the addition made on the reason that if the above contention is not raised there would be double addition. The ground raised under rule 27 is as under:

"1. The assessee submits that set-off of `.16,76,200/- (Peak cash credit) may be allowed against gross profit addition (if any) to avoid double addition".

10. The assessee claimed set off of peak cash deficit and suppressed the cash balance against the addition on account of bogus purchases vide Ground No.4 (S.No.11) before the CIT (A). The CIT (A) dismissed the ground stating as under:-

"6.1 According to the appellant, the learned Assessing Officer erred in making double addition on account of bogus purchases and then peak of cash deficit and again on suppressed cash balance which cannot be sustained. I have considered this argument. I find that since the addition on account of bogus purchases have not been sustained, this ground of appeal becomes infructuous. Hence it is dismissed".
Page 6 of 8
ITA NO.6178 of 2007 Jitendra S Motani Mumbai

11. It was the submission of the learned Counsel that in case the GP addition is considered as in other years in the revenue appeal, the assessee can contest the double addition made on the amount of peak cash deficit sustained by the CIT (A) on which the assessee has not preferred any appeal. It was his contention that if any addition is made on GP basis to the returned income, the peak cash deficit taxed at `.16,76,200/- should be given set off. The learned Departmental Representative however submitted that the dates of peak cash deficit and the GP on the bogus purchases vary and set off can not be allowed in the absence of co-relation between the GP income and income brought to tax as peak cash deficit.

12. We have considered the issue. As per rule 27 of the ITAT Rules the respondent though may not have appealed may support the order appealed against on any ground decided against him. Since the ground of double addition was dismissed by the CIT (A) on the reason that the addition of bogus purchases was deleted, the assessee has a right to contest that ground under rule 27. Accordingly, the assessee's objection on rule 27 is to be considered. The details of peak cash deficit and the dates on which the same were worked out and also the GP profits which might be earned in the case of the assessee could not be correlated before us. Therefore, we are not in a position to direct the Assessing Officer to give telescoping benefit of this amount which was taxed as peak cash deficit to the GP addition being made in the Revenue appeal. However, the assessee is free to furnish the revised working before the Assessing Officer to claim any set off, if the assessee is in a position to explain the earnings of GP to the cash availability with the assessee. The Assessing Officer is directed to examine the same before considering the benefit of telescoping.

13. With these directions, the appeal is considered partly allowed. The Assessing Officer is directed to bring to tax 3% of the Page 7 of 8 ITA NO.6178 of 2007 Jitendra S Motani Mumbai GP on the tainted purchases, as was done in earlier years and later year as upheld by the ITAT. The grounds are determined accordingly.

14. In the result, revenue's appeal is partly allowed.

Order pronounced in the open court on 30th November 2011.

             Sd/-                                 Sd/-
        (D.K.Agarwal)                       (B. Ramakotaiah)
       Judicial Member                     Accountant Member

Mumbai, dated 30th November, 2011.
Copy to:
  1. The Appellant
  2. The Respondent
  3. The concerned CIT(A)
  4. The concerned CIT
  5. The DR, " " Bench, ITAT, Mumbai

                            //By Order//

                       Assistant Registrar
                  Income Tax Appellate Tribunal,
                    Mumbai Benches, MUMBAI

                                 Page 8 of 8