• Tuesday, 24 Dec 2024, 07:00:18 am

Income Tax Act, 1961 – Sections 145, 147, 143(3) and 68 – The assessee, engaged in manufacturing craft paper, was assessed based on information from the VAT Department that purchases made from M/s Chauhan Suppliers were bogus. The supplier's TIN was canceled ab initio. The AO disallowed purchases totaling Rs.1.05 crores for A.Y. 2014-15, treating them as bogus. The CIT(A) reduced the addition, estimating profit at 7.5% of the disallowed amount, and the Tribunal upheld this decision - Whether the entire amount of alleged bogus purchases should be disallowed - Whether estimating profit at 7.5% of the purchases was justified – HELD - The Court observed that the AO did not reject the books of accounts under Section 145 or find discrepancies in production, sales, or yield ratios. Thus, it was inappropriate to disallow the entire purchase amount - Relying on precedents such as CIT v. Simit P. Sheth, the Court upheld the CIT(A)'s and Tribunal’s decision to restrict the addition to 7.5% of the alleged bogus purchases, considering probable savings in VAT and other costs – Appeals by the revenue dismissed. No substantial question of law arises; profit determination at 7.5% upheld

 

2024-VIL-233-BOM-DT

 

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

 

R/TAX APPEAL NO. 545 of 2024

With

R/TAX APPEAL NO. 270 of 2024

 

Date: 25.11.2024

 

THE PRINCIPAL COMMISSIONER OF INCOME TAX -1

 

Vs

 

M/s DHRUV CRAFT MILL PVT LTD

 

For the Appellant No. 1: KARAN G SANGHANI (7945)

 

CORAM

HONOURABLE MR. JUSTICE BHARGAV D. KARIA

HONOURABLE MR. JUSTICE D.N. RAY

 

(PER: HONOURABLE MR. JUSTICE BHARGAV D. KARIA)

 

1. Both these appeals are filed under Section 260A of the Income Tax Act, 1961 (for short “the Act”) by the Appellant proposing the following substantial questions of law arising out from the common order dated 03.11.2023 passed by the Income Tax Appellate Tribunal (for short “the Tribunal”), Rajkot in ITA No. 206/Rjt/2022 and ITA No. 207/Rjt./2022 for the Assessment Year 2014-15 and Assessment Year 2015-16.

 

Tax Appeal No. 545 of 2024

“(A) Whether on the facts of the case as well as in law, the Income Tax Appellate Tribunal was justified in confirming the order passed by Ld. CIT(A) reducing the disallowance of bogus purchase from Rs. 1,05,43,183/- to Rs. 7,90,739/-?

 

(B) Whether the Appellate Tribunal was justified in inferring the purchase of waste paper from grey market when supporting evidence in this regard was not produced before him?

 

(C) Whether the Appellate Tribunal was justified in confirming the order passed by Ld. CIT(A) reducing the addition made on account of bogus purchase when there was finding by the Gujarat Commercial Tax department that sales of M/s. Chauhan Supplier are bogus and its TIN was cancelled ab-initio?

 

Tax Appeal No. 270 of 2024

(A) Whether on the facts of the case as well as in law, the Income Tax Appellate Tribunal was justified in confirming the order passed by Ld. CIT(A) reducing the disallowance of bogus purchase from Rs. 2,29,21,710 to Rs. 17,19,128/- ?

 

(B) Whether the Appellate Tribunal was justified in inferring the purchase of waste paper from grey market when supporting evidence in this regard was not produced before him?

 

(C) Whether the Appellate Tribunal was justified in confirming the order passed by Ld. CIT(A) reducing the addition made on account of bogus purchase when there was finding by the Gujarat Commercial Tax department that sales of M/s. Chauhan Supplier are bogus and its TIN was cancelled ab-initio?

 

2. The brief facts of the case are that the respondent-assessee was engaged in manufacturing of all types of craft papers. The assessee filed its return of income declaring the total income of Rs.1,90,633/- for the Assessment Year 2014-15. The same was processed under Section 143(1) of the Act on 24.07.2015.

 

2.1 Thereafter, the assessment was reopened issuing notice under Section 148 of the Act on information received from DGCEI in respect of the persons/parties who purchased the goods from M/s. Chauhan Suppliers who was alleged to be the bogus supplier and whose TIN number was cancelled ab initio.

 

2.2 The respondent-assessee agreed before the VAT Authorities about the bogus purchases made from M/s. Chauhan Suppliers and paid the tax liability under the provisions of the VAT Act. Therefore, the Assessing Officer disallowed the bogus purchases of Rs. 1.05 crores by passing order under Section 147 read with Section 143(3) of the Act.

 

3. Being aggrieved, the respondent-assessee preferred the appeal before the Commissioner (Appeals) who by order dated 31.05.2022 partly allowed the appeal filed by the respondent assessee and estimated profit @ 7.5% on the bogus purchase and restricted the addition to Rs.7,90,739/- as against the addition made by the Assessing Officer of Rs. 97,52,444/-.

 

4. The CIT (Appeals) while partly allowing the appeal of the assessee observed as under: -

 

“8.2 I have perused the above contentions raised by the appellant. In this case, the Commercial Tax Department found that, one of the suppliers of wastepaper, M/s. Chouhan Suppliers was not engaged in the regular business and engaged in issuing bogus bills. This led to their search at the premises of M/s. Chouhan Suppliers, who was found to be engaged in issuing bogus bills. The Department accordingly cancelled his registration (TIN) number on 12.10.2015 with retrospective effect from 08.01.2014. Since the appellant had carried out purchase transactions with M/s Chouhan Supplier in F.Y. 2013-14, the VAT Department also carried out spot enquiry at the business premise of the appellant on 04.04.2016. During the course of spot enquiry, nothing abnormal was found except the fact that the appellant has made purchase of waste papers from M/s. Chouhan Suppliers in the year under consideration i.e. Α.Υ.2014-15 of Rs. 1,05,43,183/-, whose tax registration (TIN) has been cancelled ab initio. This fact is verifiable from the Panchnama and statement of the director recorded by the VAT Department in spot enquiry and the same is submitted by the appellant during the course of appellate proceedings.

 

8.3 From the above, it is clear that, the VAT Department did not find anything incriminating from the premises of the appellant. In fact, statement of the director recorded by the VAT authorities in presence of Panchas clearly reveals that the officers of VAT Department have verified the financial records, statutory returns and physical cash balance etc. and they did not find any issue in that matter.

 

8.4 I also find that another vital fact addressed by the appellant is that the appellant company had made purchase of waste papers from M/s. Chouhan Suppliers during the month of March, 2014. The appellant's premises was subjected to search action under Central Excise Act, 1944 on 08/08/2014, and during the search, officers of the Excise Department had made physical verification of stock including purchases, bills and vouchers and compared the same with the books of account. After verification they have not made any adverse remarks about the same. In this regard, the appellant also submitted copy of Panchnama drawn on conclusion of search of Central Excise Department.

 

8.5 I further find that the AO has pointed out many discrepancies in the purchase made from the alleged vendor, and also found that certain documents were not produced for verification by the appellant. On the other hand, the appellant has also submitted detailed pointwise reply against the observations made by the AO as reproduced in the earlier paras.

 

8.6 I find that the AO nowhere in the assessment order doubted the production, Sales, Yield Ratio, and other financial ratios declared by the appellant. The AO has also not rejected the book results. In view of the above, it is clear that the appellant did make purchases of raw materials (waste paper) albeit from some other source as there cannot be sales in absence of relevant purchase of raw materials.

8.7 Though, the purchase of waste papers made by the appellant is not doubted, it cannot be said that the appellant has actually made purchase from the supplier M/s. Chouhan Supplier only. The search action carried out by the VAT Department at the premises of M/s. Chouhan Supplier and cancellation of his tax registration number shows that the vendor was not in the actual business of trading in waste paper. Such type of practice is prevailing in some industry, where the actual purchase of goods is made from grey market and subsequently, to justify such purchase, the purchaser obtains purchase bills from the parties engaged in accommodation entries i.e. M/s. Chouhan Supplier. In view of these facts and also the discrepancies mentioned by the AO in the Assessment order, it is established that purchase from M/s Chouhan Supplier was not genuine”

 

8.11 Accordingly, respectfully following the above stated decision of the Hon'ble Jurisdictional High Court of Gujarat, and particularly looking to the fact that the stock as on the date of verification by Excise Department was tallied, it is concluded that the appellant might have purchased the raw-material from any other sources and not from M/s. Chouhan Supplier. Under such circumstances, entire purchase should not be added to the income of the appellant but only profit element embedded therein it to be added.

 

8.12 Therefore, considering the appellant's GP of 9.52% and NP of 2.09% and also probable saving in the cost of purchase by avoiding burden of VAT of 5% and some other savings and discrepancies noticed by the AO in the assessment order, It is reasonable to estimate the probable benefit derived by the appellant at 7.5% of the total purchase made from M/s Chouhan Suppliers, which works out to Rs 7,90,739/- Hence, the addition is restricted to the tune of Rs. 7,90,739/- and thus, the AO is directed to delete the balance amount of addition of Rs. 97,52,444/- . Thus, the grounds of appeal No.3 and 4 are partly allowed”.

 

5. Being aggrieved, the appellant-revenue preferred an appeal before the Tribunal. The Tribunal considering the facts of the case and the submissions made by both the parties upheld the order passed by the CIT (Appeals) by observing as under:-

 

“7. We have given our thoughtful consideration and perused the materials available on record. The Commercial Tax (VAT) Department had carried out spot inspection at the business premises of the assessee on 04.04.2016 wherein nothing abnormal was found except the fact, the supplier M/s. Chauhan Supplier had not deposited VAT collected by it from the assessee there by assessee is not entitled for input credit of tax on the so called purchases. However, the assessee in order to avoid long turn litigation and to buy peace of mind, paid the VAT liability of Rs.7,13,779/- on account of reversal of input tax credit availed by it. In fact, the Commercial Tax Department accepted the payment of tax and interest and not levied penalty to the assessee. Thus the input tax credit availed on purchases if it is inadmissible the entire purchases cannot be disallowed. The A.O. has not pointed out any defect in the stocks nor in the books of account maintained by the assessee.

 

8. The Ld. CIT(A) considered the assessee's Gross Profit rate at 9.52 % and Net Profit at 2.09% and considering the probable savings in the cost of purchase of goods in grey market by avoiding burden of VAT at 5% and then determined the profit made by the assessee at 7.5% on the purchase from M/s. Chauhan Suppliers. This decision arrived by Ld. CIT(A) by following Tribunals decision in the case of Sandeep Kumar Chandak and ITO Vs. Sun Steel reported in 92 TTJ 1126 which were later confirmed by the High Court of Gujarat in Tax Appeal No. 210 of 2020 in the case of PCIT Vs. Sandeep Kumar Chandak. Thus the finding arrived by the Ld. CIT(A) does not require any interference and Revenue could not produce before us any document in support of its claim to sustain the entire addition made by the Assessing Officer. The Case law relied by Ld. D.R. is clearly distinguishable. Further Jurisdictional High Court held that only profit element embedded in purchases could be added as assessee's income in the following cases.”

 

6. The Tribunal relied upon the following decisions of this Court to confirm the order passed by the CIT (Appeals):

 

(1) CIT Vs. Simit P.Sheth reported in [2013] 356 ITR 451.

 

(2) CIT Vs/. Satyanarayan P.Rathi reported in [2013] 38 taxmann.com.402.

 

(3) CIT Vs. Bholanath Poly Fab (P.) Ltd reported in (2013) 355 ITR 290.

 

7. Learned Senior Standing Counsel Mr.Karan Sanghani submitted that the Tribunal has committed an error in upholding the order passed by the CIT(Appeals), more particularly, when the respondent-assessee has admitted that the purchases made from M/s. Chauhan Suppliers were bogus purchases and accordingly, the same has been rightly added by the Assessing Officer as income of the assessee under Section 68 of the Act. It was further submitted that on the basis of the information made available from DGCEI, the case of the respondent-assessee was reopened on the ground that to prove the purchases, the respondent-assessee failed to produce the relevant documents to show that the purchases made from M/s. Chauhan Suppliers was genuine purchase and assessee did not produce the purchase invoices, contra ledger/confirmation from the supplier, Inward Register kept at business premises, Transport/Lorry receipt etc. It was therefore, submitted that the assessee has rightly disallowed the entire purchases made by the respondent-assessee being bogus purchases. It was therefore submitted that the CIT (Appeals) and Tribunal have arrived at perverse findings of the fact contrary to the records.

 

7.1 It was further submitted that inspite of the fact being proved that the respondent-assessee made bogus purchases, the entire purchases ought to have been disallowed and no profit element embedded in sales which was disclosed by the assessee and therefore, the CIT (Appeals) and the Tribunal were not justified in confirming the purchase of raw material made by the assessee from grey market in absence of any evidence.

 

7.2 It was therefore submitted that the appeals require consideration on merits on the proposed substantial questions of law.

 

8. Considering the submissions made by learned Senior Standing Counsel Mr. Karan Sanghani for the appellant and on perusal of the findings of fact arrived at by the CIT (Appeals) and the Tribunal, it is pertinent to note that the Tribunal has rightly come to the conclusion that merely because the input tax credit availed on purchases made by the assessee was not admissible and the assessee paid the tax under the provisions of the Value Added Tax Act, the entire purchases cannot be disallowed more particularly when, the Assessing Officer never doubted the production, sales, yield ratio and other financial ratios declared by the respondent - assessee and books of account were also not rejected under Section 145 of the Act and in absence of any defect being pointed out by the Assessing Officer in the stocks or in the books of accounts maintained by the assessee, it cannot be said that the CIT (Appeals) has committed any error by determining the profit made by the assessee @ 7.5% of the the purchases from M/s. Chauhan Suppliers.

 

9. The Tribunal and the CIT (Appeals) have relied upon the decision of this Court in the case of PCIT Vs. Sandeep Kumar Chandak rendered in Tax Appeal No. 210 of 2020 as well as the decisions referred by the Tribunal in its order wherein, it is held that in absence of any finding arrived at by the Assessing Officer to doubt the sales made by the assessee, the purchases cannot be disallowed as probable profit in the facts of the case can only be sustained. In the facts of the case, as such, the CIT (Appeals) after considering the Gross Profit rate @ 9.52% and Net Profit at 2.09% in the facts of the case has determined the profit made by the assessee @ 7.5% on the purchases from M/s. Chauhan Suppliers considering the probable savings in the cost of purchase of goods in grey market by avoiding burden of VAT @ 5% . Hence, we are of the opinion that there is no infirmity in the impugned orders passed by the CIT (Appeals) and the Tribunal, considering the fact that the Assessing Officer has not invoked the provision of Section 145 of the Act to reject the books of account and therefore, the estimate profit determined on the bogus purchases made by the assessee at the rate of 7.5% requires no interference.

 

10. Similarly, for the Assessment Year 2015-16, similar additions are made which is restricted to 7.5% of the profit on the bogus purchase. Therefore, both these appeals are accordingly dismissed as no question of law much less any substantial question of law would arise from the impugned orders passed by the Tribunal.

 

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