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2020 (2) TMI 662

..... the disallowance to 5% of the gross purchases - HELD THAT:- We do not find any error or infirmity in the view taken by the Tribunal. The lower appellate authorities had enhanced the quantum of purchases much beyond that of the Assessing Officer i.e., from ₹ 24,18,06,385.00 to ₹ 65,65,30,470.00 but 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. In Bholanath Polyfab Limited [2013 (10) TMI 933 - GUJARAT HIGH COURT] was also confronted with a similar issue. In that case Tribunal was of the opinion that the purchases might have been made from bogus parties but the purchases themselves were not bogus. Considering the fact situatio .....

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..... and purchase bills. Names of beneficiaries were also provided. Assessing Officer noticed that assessee was one of the beneficiaries of such bogus hawala bills. Assessing Officer referred to purchases allegedly made by the assessee through four hawala entries for the assessment year under consideration, the details of which are as under :- Name of the Party providing Bogus Bills/ Hawala Entries A.Y. of the transaction Amount (Rs.) SHREE GANESH TRADING COMPANY 2010-11 54670729 AKSHAT ENTERPRISES 2010-11 76998384 SHREYAS MARKETING AGENCY 2010-11 55018874 ASIT TRADERS 2010-11 55118398 241806385 6. In this backdrop, Assessing Officer issued notice to theassessee under Section 142(1) of the Act to explain as to why suitable action should not be initiated for such undesirable act. It was mentioned in the said notice that the Assessing Officer was vested with the authority of passing an order of best judgment assessment under Section 144 of the Act. Assessee did not respond to the notice issued under Section 142(1) of the Act. Therefore, Assessing Officer drew the inference that assessee had no plausible explanation and had admitted the fact of bogus purchases mentioned in the notice under .....

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..... bogus but had accepted the sales and gross profit declared in the return of income. CIT(A) held that there can be no sales without purchases. When the sales were accepted, then the corresponding purchases could not be disallowed. Therefore, CIT(A) held that only the profit element embedded in the purchases would be subject to tax and not the entire purchase amount. On due consideration CIT(A) added 2% of the purchase amount of ₹ 65,65,30,470.00 as profit which worked out to ₹ 1,31,30,609.00 to the income of the assessee and the balance addition was deleted. 11. Aggrieved by the said order of the CIT(A), Revenue preferred appeal before the Tribunal. Tribunal vide the order dated 3rd November, 2016 took the view that 2% of the profit which was directed to be added by the CIT (A) was on the lower side and therefore, the Assessing Officer was directed to make further addition of 3%. 12. It is against this order of the Tribunal that Revenue is before us in appeal under Section 260-A of the Act. 13. Mr.Sharma learned standing counsel, Revenue submits that when the purchases were bogus, the entire amount covered by such purchases should have been added to the total income of .....

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..... ears. In such circumstances, CIT(A) took the view that 2% of the purchases of ₹ 65,65,30,470.00 would be a fair and reasonable profit percentage which should be added to the income of the assessee, deleting the balance amount. 16. While doing so, CIT (A) observed that only reasonable profit on the purchases made from the hawala party should be added back to the income of the assessee. Relevant portion of the order of the CIT (A) is extracted hereunder:- 2.7 From the perusal of the decisions of the Hon ble courts on this issue, specially the decision of the Hon ble Bombay High Court in the case of CIT Vs. Nikunj Eximp Enterprises Pvt. Ltd. (supra), it was clearly held that the A.O. and the CIT (A) had disallowed the amount of ₹ 1.33 crores on account of purchases merely on the basis of suspicion because the sellers and the canvassing agents have not been produced before them. The Hon ble Mumbai Tribunal in the case of Saroj Anil Steel Pvt. Ltd. Vs. ITO vide order dated 30-10-2012 has also decided this issue that only profit margin @ 1 % is to be added back. Similar view has been taken by the Hon ble Tribunal Mumbai in the case of Anil Goyal Exim (P) Ltd. Vs. ITO vide ord .....

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..... act that the gross profit of trading activity is lower than the manufacturing activity. The AR of the appellant has also offered that additional gross profit @ ½% of the turnover can be added back. But there is no reasonableness in adopting this ½% G.P. Keeping in view the principles of natural justice and the decision of the Hon ble Courts on this issue, only the reasonable profit has to be added back on the purchases made from the hawala parties. The gross profit has been reduced from 8.77 % to 5.71% during the year under consideration which is explained as major manufacturing activity in the last year and major part of the trading activity in the year under consideration. Keeping in view of these facts and circumstances, I am of the view that 2% of the purchases made from the hawala parties amounting to ₹ 65,65,30,470/- which works out at ₹ 1,31,30,609/- is fair and reasonable, hence, upheld and the balance addition made is deleted. Ground of appeal is partly allowed. 17. Before the Tribunal, Revenue expressed the grievance that CIT (A) had erred in disallowing bogus purchases at 2% being profit on purchases made by the assessee from the grey market. Tr .....

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..... the income on such basis. 19. On thorough consideration of the matter, we do not find any error or infirmity in the view taken by the Tribunal. The lower appellate authorities had enhanced the quantum of purchases much beyond that of the Assessing Officer i.e., from ₹ 24,18,06,385.00 to ₹ 65,65,30,470.00 but 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. We have also considered the two decisions relied upon by learned standing counsel and we find that facts of the present case are clearly distinguishable from the facts of those two cases to warrant application of the legal principles enunciated in the two cited decisions. 2 .....

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