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2016 (7) TMI 836 - ITAT MUMBAI

2016 (7) TMI 836 - ITAT MUMBAI - TMI - Bogus purchases - applicability of sec 69/69A - Held that:- In view of the foregoing, would require a restoration to the file of the assessing authority for a consideration of these aspects of the matter, i.e., the stock availability on each date; the capital invested in such an exercise; and the profit associated with the procurement of goods from other than the established sources (euphemistically called ‘grey market’), while procuring ‘bills’ of ‘goods’. .....

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decide, in terms of his findings, in accordance with law, and after allowing a reasonable opportunity to the assessee to substantiate his case. The addition for 1% of the impugned purchases (u/s. 69C) is, in any case, confirmed. Further, lest one considers us as having travelled outside the scope of the appeal, we may advert to the decisions, inter alia, in the case of Kapurchand Shrimal v. CIT [1981 (8) TMI 2 - SUPREME Court ] and Ahmedabad Electricity Co. Ltd. v. CIT [1992 (4) TMI 29 - BOMBAY .....

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sing being common, the same were listed for hearing, and were accordingly heard together - the facts and circumstances as well as the respective cases of the parties being also the same, and are being disposed of vide a common, consolidated order. 2. The issue arising in these appeals is the maintainability of the disallowance of/addition qua the impugned purchases, i.e., as evidenced by bills issued (to the assessee) by and in the name of several concerns by one, Shri Rakesh Kumar Madanlal Gupt .....

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133A of the Act on 13/14.02.2009. He named five proprietary concerns of himself and his family members (along with the name of the respective proprietor), i.e., including three concerns afore-mentioned (which were stated by him as old and main concerns) subject to survey, which were admitted to be involved in providing accommodation bills of purchases for consideration, called commission . The bills were issued as per the requirement of the parties, i.e., the purchasers or the buyers . Payments .....

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the debtors and creditors as per the balance-sheet, were admitted as not reflecting actual assets and liabilities, even as no stock was actually found during survey. He, in fact, confirmed of keeping some goods in stock to give a veneer of genuineness, i.e., of being involved in trading in textiles - the assessee being in a business of trading and processing of interlining cloth. Bills for ₹ 5 crores to ₹ 7 crores were issued each year in each of these concerns, and which activity wa .....

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₹ 29,88,033/- for the two consecutive years under reference respectively, its assessments for the said two years were reopened u/s. 147 of the Act on 28.3.2011 and 27.3.2012 respectively after obtaining approval from the competent authority, duly conveying the reasons recorded to the assessee. In the assessment proceedings, it was found by the Assessing Officer (A.O.) that the purchases from these parties were not reflected in the stock register. There was, further, no evidence of transpor .....

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as incorrect in stating that the goods purchased from these parties were not reflected in the stock register, and which gets reflected in the assessment order per the use by him of the words apparently nothing wrong was visible . The A.O. per the remand report (dated 11.9.2013) reiterated his stand, relying on the findings in the assessment order/s. The statement as to: nothing wrong being visible had been wrongly construed in-as-much as it meant just that, i.e., nothing wrong on the face of it. .....

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d, so that by necessary implication the assessee s purchases were also bogus. In view of the ld. CIT(A), the A.O. did not provide opportunity to the assessee to cross examine Shri Rakeshkumar M Gupta, despite specific request by the assessee. The statement/s u/s. 133A/131 of the Act could not be relied upon by the A.O., citing the decision by the apex court in Kishan Chand Chellaram vs. CIT [1980] 125 ITR 713 (SC). The assessee had exhibited day to day stock movement, even as the assessee s acco .....

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rchase was, therefore, not justified, and there was no justification in the stand of both the parties. He, accordingly, confirmed the addition at 10% of the impugned purchases. Aggrieved, both the assessee and the Revenue are in appeal; the Revenue against the deletion qua the impugned purchases (to the extent of 90% thereof) and the assessee against its restriction at 10%. 4. Before us, the ld. AR relied on the orders by the Tribunal in Goolamally Hasanjee vs. ITO (in ITA Nos. 3740 & 3741/M .....

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the purchases - from whatever source - had also been made. The availability of stock reconciliation excluded the possibility of inflation (in terms of quantity) in purchases. The Hon'ble jurisdictional High Court had, in fact, approved of this algorithm/rationale in Nikunj Eximp Enterprises Pvt. Ltd. (supra), wherein the question before the Hon ble Court covered the instant fact-situation, further stating that in-as-much as the books of account had not been rejected, as in the instant case, .....

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d purchases in the stock register. The entire such purchases were under the circumstances inadmissible, and the ld. CIT(A) had, by issuing a wrong finding of fact, inconsistent with and not borne out by the material on record, restricted the disallowance to 10% of that exigible. On a question by the Bench qua the assessee s sales being not doubted by the Revenue, he conceded to it being so, with the A.O. in fact pointing to the possibility of the goods having been purchased outside books, and to .....

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e, with no part of it being doubted by the Revenue. The corresponding purchases, thus, cannot be doubted, so that if the stated source is doubted and, considering as rightly so, the same have been to that extent made from an alternate source/s, to therefore no effect, i.e., on the income as disclosed in-as-much as the payment therefor stands effectively from its books of account. Toward the same, it furnishes a quantitative reconciliation of the traded goods, i.e., presumably in correspondence w .....

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should the assessee, in fact, engage in such an exercise, and which behavior is totally unexplained. Further, even assuming so, the same cannot be without motive or objective of gain. The assessment of the same by the ld. CIT(A) at 10% (of the purchases - taken at the same value) is without basis. Clearly, thus, the case has two components: a) Whether there is scope for any addition qua the impugned purchases u/s. 69/69A or, for that matter, u/s. 69C, toward unexplained source of payment for pu .....

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during hearing, was not addressed by the parties. This is as while the A.O. has applied section 69, the ld. CIT(A) proceeds on the basis that the purchases stand disallowed u/s. 37(1) of the Act, i.e., without rebutting the AO s case, which the Revenue continues to maintain and canvass before us; it s Grounds reading as under: 1. The Ld. CIT(A) has erred in law as well as on fact by not sustaining addition u/s.69 after having accepted the finding in principle that the purchases were made from un .....

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made from such parties on account of bogus purchases made in cash from the open market out of unaccounted cash, in view of the decision held by the Hon'ble ITAT's C-Bench, Ahmedabad, in the case of Vijay Proteins Ltd. Vs. ACIT (58 ITD 428). 3. For the above mentioned reason and any other reasons that may be urged at the time of hearing, it is requested that the order of the CIT(A) be quashed and that of the Assessing Officer be restored. This aspect has also not been dealt with or other .....

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ing (and claiming) the relevant expenditure (on purchases). The assessee admittedly not seeking cross examination of Sh. Rakeshkumar Gupta at any stage of the proceedings, despite the Revenue relying on his depositions, how we wonder can it question the Revenue s reliance on the same. Admission, it may be noted, is the best form of evidence. The same, it is to be appreciated, is not removed from or de hors the other findings of survey, and is thus to be considered in conjunction therewith, viz., .....

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so, the question remains as to how the provision of s. 69, or s. 69A for that matter, the two being para materia, would apply. The money (cash) provided by the bill provider would go to finance such purchases - save to the extent of 1% not returned by the seller, to which extent, therefore, the addition becomes justified. In other words, the actual purchases are paid only out of the capital/sources per the assessee s books, albeit indirectly in-as-much as the same are against cash provided (to t .....

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sclosed/offered as income. The cash received from the seller is again brought in books on receipt (against corresponding book sales) from the buyer/s, paying them in cash. Such an arrangement, extremely unlikely, as it ostensibly provides no benefit to any party, with the assessee on the contrary incurring a loss (of 1%), which perhaps could be recouped on providing sale bills to the customers. The same is nevertheless listed with a view to examine the transaction from all angels, so that in eit .....

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-as-much as the impugned purchases are not genuine - there being no actual purchase of goods to that extent, the same have been made good by the assessee by purchasing from another source/s (of supply). This is precisely what found acceptance by the tribunal as well as by the Hon ble High Court, both emphasizing the need for a final finding - which is definitely one of fact, being delivered on a consideration of the entirety of the facts and circumstances of the case. Continuing further, the pay .....

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chases and that corresponding to the impugned (non-genuine) purchases - the assessee s case being of having made, in lieu thereof, equivalent purchases from the grey market. This segregation may be done adopting a reasonable, as (say) FIFO, basis/method. To the extent it relates to genuine purchases, it (the stock) could either be paid up or unpaid (i.e., financed by unpaid purchases/credit there-against), or even partly by one and partly by another. The same in fact is not in question. It is on .....

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nding (stated) parties being bogus, explained with reference to the assessee s books of account. To this extent the Revenue has a case for addition u/s. 69/69A toward unexplained source of (payment of) stock. The assessee could explain the same with reference to the cash received on account of bogus (nongenuine) purchases, and the same having been utilized to purchase goods (to that extent) from the grey market. A parallel statement in this respect would therefore have to be drawn, stating the d .....

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der the purchase/s (from the grey market) as unpaid. Of course, in actual terms, it is only the peak such value, i.e., at any time during the relevant year, that alone would require being brought to tax u/s. 69/69A. The Revenue s case for addition thereunder would be to this extent valid, even as it would have to be preceded by and subject to the result of an exercise in its respect being undertaken to ascertain the deficiency, if any, for and toward which the addition could be made. Further, le .....

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aspect, and which in fact also explains why we have talked of addition, where exigible, as only for the peak value (of such stock) during the year. This answers limb (a) of the issue arising for our consideration. We may next visit the matter of the disallowance as made by the ld. CIT(A), i.e., as projected by second (b) component of the issue under reference. The same is u/s.37(1) and, further, made on the premise that the purchases from the grey market would yield or result in some benefit to .....

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the purchases booked and claimed. The moot question in this regard, however, is: Why would the assessee indulge in such an exercise, suffering, rather, a loss of 1% in value, unless of course the same is remunerative, i.e., there is a concomitant benefit? That is, it gives rise to a strong inference of the assessee s alternate purchase (from the grey market) being at a lower rate. One may be quick to castigate this as presumptuous. True, no disallowance (or addition) could be made without eviden .....

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oron, financially self-destructive person. He being a businessman, undertaking business (for profit/gain), the exercise has to be with a purpose, as where it results in or gives rise to a financial gain. Why, the ostensible seller not making actual sales (to the assessee) also does so for a gain, stated at 1% of the bill amount. He may, further, not pay tax on his sales , while the assessee claims full deduction (in its VAT returns) for the purchases made from it. This tax component may then be .....

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the trade (i.e., whose accounts are not similarly inflicted), this may be a serious pointer to the assessee s purchases (as booked and claimed), being inflated to that extent, i.e., to the extent of the lower (than normative) trading profit. This, then, would form and constitute evidence or the material suggesting or, rather, exhibiting the financial gain accompanying the assessee s behavior in preferring to purchase from the grey market goods that are readily available, and are in fact being so .....

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l story, explaining it s behavior, that would not detract from the onus on the Revenue to demonstrate in some manner the gain for and toward which the assessee is being sought to be charged with, impugning his book results. The question then boils down to the extent of such gain, which cannot be the matter of presumption, as at 10% (of the purchase amount) by the ld. CIT(A). Of course no standard could be laid down, and which (gain) may itself vary from year to year, and is to be based on the ev .....

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es about it - choosing not to cross-examine the supplier firm/s, and it s case rests on the purchases - its books reflecting actual sales as well as quantitative tally of goods bought and sold, being made from an equivalent source, so that it cannot be denied deduction for the full amount thereof, a premise accepted by the tribunal and since approved by the Hon ble High Court. As a pre-requisite, however, would be required a finding of the trading/manufacturing account being balanced, i.e., in t .....

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in cash, back to the assessee, and which shall be u/s. 69C, proscribing, per proviso thereto, deduction in its respect, so that an addition to that extent shall, therefore, obtain. The assessee, however, has not explained its behavior, much less satisfactorily and/or with reference to any material, at any stage. Why should it purchase goods, otherwise available, from the grey market, incurring a cost, if it is not accompanied by a gain, particularly considering its sales are actual and duly acc .....

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ntenanced. Deduction to the extent of 1% of the impugned purchases, which stand disproved; the books of account admittedly reflecting only an ostensible source of supply, is confirmed for disallowance, establishing their fallibility or unreliability. Further, there is the question of capital, if any, employed in the stock corresponding to the impugned purchases, which is to be regarded as paid-up, i.e., toward the source of investment therein. The source thereof shall be required to be explained .....

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lects negative stock (stock deficiency) on any date/s of the year, in-as-much as the same is a contradiction in terms. This, rather, is a species of the addition qua unexplained source of stock. In this regard, it may be clarified that while the ld. CIT(A) states of the assessee having furnished a quantitative reconciliation, the AO is categorical in stating that no stock register stands furnished. The two are not equivalent. A stock tally/quantitative reconciliation signifies a matching - on an .....

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would also signify that goods were available on the date of their (actual) sale, i.e., as per books of account. The goods purchased subsequent to the sale, which may get absorbed in the overall quantitative statement, will not be able to fill the void, where so, and would be relevant for the addition that may ensue u/s.69/69A (on account of unexplained stock). It is this document (stock register), profiling the purchases and sales date-wise, that is relevant. The stock register would reflect th .....

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evidencing or toward the actual state of affairs. It is for this reason that we have, taking a broad and holistic view of the matter, required the AO to assess the capital deployed in the inventory of goods on the basis of the stock held (at different times during the year), taking guidance from and on the basis of the (book) stock register - which thus becomes a surrogate measure of the stock so held and, further, determine the addition u/s. 69/69A only to the extent it is not explained with re .....

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the same, in effect, leads him to a position worse off than had he not engaged in the exercise, i.e., of procuring bills and purchasing goods from the grey market, which cannot be without a purpose; rather, without the objective of a gain or profit. This is as it militates against the basic notion of business and common sense. What is there, in any case, to show that the equivalent (grey market) purchases cost the same, i.e., as the impugned purchases? Then there could be tax considerations at p .....

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