Submission in cases of Alleged Bogus Purchases

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New Income Tax Slab for AY 2020 21

In many instances, there are allegations from Income Tax Department that the tax payer has made BOGUS PURCHASES in order to reduce the Income Tax Liability although the assessee has furnished the invoices which is even supported by payment through A/C Payee cheque. In some instance due to unorganized market the purchases are made actually genuine & stock has actually entered Stock Register. However, the purchaser may have given bill of any other bogus entity because of which assessee is unnecessary fastened with tax liability treating the said purchases as bogus. With the advent of GST, the modus operandi of bogus purchases is relatively reduced but still in many unorganized sector it is still prevailing. Where there is addition on account of alleged Bogus Purchases the assessee may take benefit of following submission where he can pick & choose depending on the peculiar case.

Addition of Rs. 47,77,994/- on account of bogus purchases:
      1. In the course of appellate proceedings, it is submitted that even on merits the assessing officer erred in disallowing purchases of Rs. 47,77,994/- made from M/s ABC and the following submissions are made:
        • The assessee had made purchase of cut and polished diamonds to the tune of Rs. 47,77,994/- from M/s. ABC and had submitted the relevant documents before Assessing Officer viz purchase bills, purchase register, day to day stock register, ledger account of creditors etc.
        • Assessee also submitted the confirmation of ledger account duly signed by the parties to the Assessing Officer, which proves that they have confirmed the transaction with us with regard to purchase of diamonds.
        • The said parties have bank account through which they have received payment by cheque/RTGS. There is no instance that the said money paid to them has ever ploughed back to the assessee. No withdrawal of cash was also found in the bank statement of the said party and there was no evidence that assessee received any cash against payment made for impugned purchases. Bank Statement of the M/s. ABC (Alleged Party) is filed in paperbook.
        • In support of the same, the assessee maintained day-to-day stock register showing inward and outward of goods as and when purchase and sale takes place. The stock register shows that purchases from the said parties have been sold subsequently and is included in the audited accounts and income earned thereon has been offered for taxation in the relevant assessment year.
        • Further, it was contended by the assessee that the main material, very heavily relied upon by the Assessing Officer was the statement recorded u/s. 132(4) of Shri Gautam Jain at the back of the assessee firm without allowing any opportunity to the assessee firm to cross-examine them. Thus, it was submitted that merely on the basis of the third party statement which is general in nature, the impugned purchase can’t be held to be bogus.
        • Moreover, the assessee had also mentioned all the quantitative details of purchases and sales and had got his books of accounts audited u/s 44AB of the Income Tax Act, 1961. Copy of audited statements of accounts along with computation of income and acknowledgement of return of income is filled in the Paper Book.
      2. Infact, the Assessing Officer has appreciated the documents filed during the scrutiny and while dealing with rebuttal of reply filed by the assessee against show-cause notice, the Assessing Officer in Para no. 10 (pg. no. 7) of Assessment Order has stated that “I have carefully gone through all the materials in the form of bills and vouchers, bank statement, PAN No., details of the sellers, mode of payments of cheques etc., have been carefully considered by me. This documentary evidences and proof are sufficient and acceptable if it is a matter of normal scrutiny assessment…”
      3. The above finding of the Assessing Officer shows that he was satisfied with the documentary evidence filed during the course of assessment proceedings. However, he has formed a biased opinion against the assessee solely because there was a search action u/s 132 in the case of Gautam Jain group who has given a statement that they were in the business of providing accommodation entries. However it is relevant to mention that in the said statement, nowhere the name of the assessee is said to be mentioned nor there is any evidence that assessee has received any cash against payment for purchase. Thus, it is submitted that addition cannot be made on the basis of mere statement of third party which is general in nature. The assessee had requested the Assessing Officer to provide him the full copy of statement u/s 131 recorded of Shri Gautam Jain and other materials relied upon by him but the request was not accorded to. In this regard, it is submitted that the principle of natural justice requires that before any adverse inference based on third party statement or documents is to be taken, then either the documents which has been relied on by the authority or the persons on whose statements authority is relying, must provide the assessee with the relied documents and an opportunity of cross examination of such person before making any addition.
      4. The Honorable Supreme Court in the case of Kishancand Chellaram v/s CIT [125 ITR 713] has held that evidence which is not shown to the assessee cannot be admitted. The opportunity to controvert should be given to the assessee.
      5. In any case, mere bald statement, that too self-serving, without any corroborative evidence cannot be made a ground to make huge additions. Reliance is placed on the decision of Hon’ble jurisdictional Gujarat High Court in the case of DCIT vs. Mahendra Ambalal Patel – Tax Appeal No. 462 of 1999 dated 13th April 2010 [ 40 DTR 243 ] wherein the Honourable High Court held as under

Though the AO has placed reliance upon the statements of Shri Manoj Vadodaria and Shri G.C. Patel for the purpose of taxing the amount in the hands of the assessee, despite specific request being made by the assessee for cross-examining both the said persons, the AO has not permitted the assessee to cross-examine them. In the circumstances, no reliance could be placed upon the statements of the said persons as the respondent assessee had no opportunity to cross-examine them. The statements made by the aforesaid persons would have no evidentiary value and as such, would not be admissible in evidence”

      1. In case of Andaman Timber Industries vs. CICE (2015) 281 CTR 0241(SC), it was held that held that not allowing Assessee to cross-examine witnesses by Adjudicating Authority though statements of those witnesses were made as basis of impugned order, amounted in serious flaw which make impugned order nullity as it amounted to violation of principles of natural justice.
      2. Further, the Assessing Officer himself has stated that on the basis of documentary evidence that no addition should be made but however, the disallowance is made solely on statement of third party and hence it proves that the purchase party were the witness of Revenue and thus, the onus is on Revenue to produce said parties.
      3. In nut shell, it is submitted that the purchases to M/s. ABC are supported by a copy of purchase register as well as copy of ledger accounts. The creditor is assessed to tax and the payments in respect of purchases are made through account payee cheques and the payments are reflected in assessee’s bank statement as well as Bank Statement of creditor. The assessee is in the business of trading in diamonds and complete Quantitative details were submitted in the course of assessment proceedings and the books of accounts of assessee are also audited u/s 44AB of the Act & the quantitative details also form part of the Audit Report. There is no evidence that the money paid to the creditor has been returned back to the assessee in cash or any other manner and hence no adverse inference should be drawn
      4. The case is squarely covered by the decision of ITAT Mumbai in the case of Ramesh Kumar & Co. V/s. The ACIT [ITA No. 2959/Mum/2014] wherein it was held that “We have carefully perused the orders of the lower authorities and the relevant documentary evidences brought before us. We find that the AO has made the addition as some of the suppliers of the assessee were declared Hawala dealers by the Sales Tax Department. This may be a good reason for making further investigation but the AO did not make any further investigation and merely completed the assessment on suspicion. Once the assessee has brought on record the details of payments by account payee cheque, it was incumbent on the AO to have verified the payment details from the bank of the assessee and also from the bank of the suppliers to verify whether there was any immediate cash withdrawal from their account. No such exercise has been done. The Ld. CIT (A) has also confirmed the addition made by the AO by going on the suspicion and the belief that the suppliers of the assessee are Hawala traders. We also find that no effort has been made to verify the work done by the assessee from the Municipal Corporation of Greater Mumbai. We agree with the submissions of the Ld. Counsel that if there were no purchases, the assessee would not have been in a position to complete the civil work.
      5. Reliance is also placed upon the decision of Hon’ble Gujarat High Court in the case of CIT V/s. Nangalia Fabrics Pvt. Ltd. 40 taxmann.com 206 (Gujarat) wherein it was held that We have considered the rival submissions and the materials placed on record. The purchases are supported by bills, entries in the books of account, payment by cheque and quantitative details Assessing Officer did not find any inflation in purchase price or inflation in consumption or suppression the production. The addition had been made only on the ground that the parties are not traceable. Assessee had made payment through crossed cheques and assessing officer did not find that payment made came back to assessee.
        Assessing Officer has made addition in respect to the outstanding amount as on 31.3.2001 which has been cleared in the succeeding years. The ratio of the creditor to the purchases is normal considering the past records of the assessee. The creditors were outstanding owing to liquidity as assessee is also required to get credit in respect of sales also. Even otherwise provision of section 68 is not attracted to amounts representing purchases made on credit as held in the case of Panchan Dass Jain cited supra. The addition for bogus purchases cannot also be sustained in full or in part in view of the various cases laws cited by the assessee and in view of the facts that the decision of Vijay Proteins Ltd. and Sanjay Oil Cake Industries are not applicable to the facts of the assessee’s case. Assessee’s case is covered by the decision of Hon’ble Gujarat High Court in case of Kashiram Textile Mills. In view of the matter, addition made by the assessing officer is deleted. Ground No.1 of Assessee’s appeal is allowed and ground No.1 of Revenue’s appeal is dismissed.

        • Infact the facts in the present case are favourable, because the creditors are not non-traceble but they have complied with notice u/s 133(6) and have also filed an affidavit confirming the transaction. Mobile Number of the Proprietor was also provided to the Assessing Officer.
      6. Reliance is placed on the case of Tejua Kapadia in ITA No. 691/Ahd/2017 dated 18.09.2017, wherein the total addition made on account of alleged bogus purchase was deleted. The said decision is confirmed by Gujarat High Court in tax Appeal No Tax Appeal No. 691 of 2017 and the SLP filed by Revenue was dismissed by Apex Court vide SLP No. 12670/2018 dated 04.05.2018
      7. In view of the above, it is submitted that the total addition should be deleted and without prejudice to the above contention of the assessee, it is submitted that even if any addition is made, it should be made on estimated basis. This is more so because the payment to supplier is paid by account payee cheque and it may be appreciated here that the quantity purchased from M/s. ABC has gone into Sales & accordingly the same stands included in the figure of sales and closing stock. The quantitative details including Day to day Stock Register is also filed before the AO and the audited financial statements reflect the quantitative details for the year. On perusal of same, it can seen that the purchases are made on 08.10.2007 and 11.10.2007 of 249.83 carats and 581.57 carats respectively from M/s. ABC and the same is sold to various parties on respective date as given below. If just for the sake of assumption in case, if we exclude the purchase made from M/s. ABC, then the closing stock would be negative as (-) 433.35 carats, as per quantitative details in the table below:
        Description Polished Diamond [Mumbai Branch] (Wt. In Carats)
        Opening Stock as on 01.04.2007 Nil
        Purchase during the year (Excluding purchases allegedly held as bogus by  Assessing Officer)  

        6799.96

        Sales during the year (7233.31)
        Closing Stock as at 31.03.2008 (433.35)
      1. This clearly shows that impugned stock of purchases made is actually sold and hence, when the sales are accepted, disallowance of total purchase should not be made. Therefore in such case, the total purchases cannot be treated as bogus. Reliance is placed on the case of Sun Steel in ITA 147/Ahd/2006, the Honourable Tribunal only made lump sum addition of Rs. 50,000/- to cover the discrepancy in purchase.
      2. The facts of the present case are favorable because in this case, the assessee has also proved a direct co-relation between alleged bogus purchase from M/s. ABC and corresponding sales and in fact the assessee has already filed the ledger account before the Assessing Officer and same is attached herewith and it should be appreciated that the exact carats of purchase is entered in stock register and sold to third parties. The following table shows the details of the sale in respect of purchase made from M/s. ABC and the same may be considered.
        Purchase from M/s. ABC Sale
        Date Weight (In carats) Amount

        (In Rs.)

        [A]

        Date Party Name Weight (In carats) Amount

        (In Rs.)

        [B]

        08.10.2007 249.83 15,59,283 19.10.2007 M/s. XYZ 228.69 14,97,139
        20.10.2007 M/s. PQR 21.14 78,218
        11.10.2007 581.57 30,21,256 22.10.2007 M/s. HIJ 230.69 12,11,122
        23.10.2007 M/s. LMO 350.88 18,42,120
      1. Further, regarding the estimation of profits in such cases, there is binding decision of Gujarat High Court in the case of M/s. Mayank Diamonds Pvt. Ltd. Vs. ITO in Tax appeal no. 200 of 2003 (Gujarat High Court) dated 07.11.2014. The said entity was engaged in the business of trading of polished diamonds. The ld. Assessing officer came to conclusion that purchases amounting to Rs. 1,86,36,447/- are bogus and disallowed the same. The ld. Commissioner of Income Tax (Appeals) dismissed the appeal, however Honourable Tribunal gave the partial relief to assessee by directing the ld. Assessing officer to make addition @ 12.5%. On appeal, the Honourable High court of Gujarat has held that “the gross profit rate of 5% is the average rate of the industry and we think it fit to make addition of 5% of gross profit” Hence the base of 5% is taken in many subsequent decisions of Honourable ITAT.
      2. This is more so because in this case the Assessing Officer has already rejected the books of accounts u/s 145(2) and hence it is submitted that the estimation of profits has to be made in a judicious manner. Further, there is binding decision of Gujarat High Court in the case of M/s. Mayank Diamonds Pvt. Ltd. Vs. ITO in Tax appeal no. 200 of 2003 (Gujarat High Court) dated 07.11.2014. The said entity was engaged in the business of trading of polished diamonds. The ld. Assessing officer came to conclusion that purchases amounting to Rs. 1,86,36,447/- are bogus and disallowed the same. The ld. Commissioner of Income Tax (Appeals) dismissed the appeal, however Honourable Tribunal gave the partial relief to assessee by directing the ld. Assessing officer to make addition @ 12.5%. On appeal, the Honourable High court of Gujarat has held that “the gross profit rate of 5% is the average rate of the industry and we think it fit to make addition of 5% of gross profit” Hence the base of 5% is taken in many subsequent decisions of Honourable ITAT.
      3. Recently, on similar facts of the case, the Honourable Income Tax Appellate Tribunal, Surat Bench has taken a view that 5% disallowance of impugned purchase is reasonable in following cases:
        Sr. No Name of Assessee Reference No. Addition restricted to % of impugned purchase
        1. Deluxe Diamonds ITA No. 1396/Ahd/2017 5%
        2. J.B. Brothers ITA No. 3661/Ahd/2015/Srt 5%
        3. Sudeep M Shah ITA No. 2423/Ahd/2016/Srt 5%
        4.  M/s. Krunal Enterprise ITA No. 2262/Ahd/2015/Srt 5%
        5. Gangani Impex ITA No. 353/Ahd/2017 5%
        6. Bhavna Automobiles ITA No. 2760, 2761  Ahd/2015 & 239/Ahd/2017 5%
      1. The CIT(A)-3 has respectfully followed the above referred decision of jurisdictional ITAT Surat Bench in case of Pavan Jain vide Appeal Order No. CIT(A) -1/10550/2016-17 dated 19.12.2018, wherein the addition was restricted to 5% of impugned purchase.
      2. In view of the above your Honour is requested to quash the assessment and/or delete or reduce the disallowance made by the assessing officer on merits.

We hope that above piece of drafting would help the tax payer to argue with the case in a favorable manner. If there is any pending litigation, tax payer may also take an advantage of our premium service for further reference at itatorder.in with our package “INCOME TAX CUSTOMISED RESEARCH SERVICE” wherein you can find our deliverables in form of  ‘A file containing gist of all the cases in the favor of assessee along with details about the cases which are in the favor of the revenue.’

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