Pr. Commissioner Of Income Tax 32 vs Hitesh Mody (Huf)

2024:BHC-OS:2564-DB Digitally 1/5 47-ITXA-1278-2018.doc signed by PURTI PURTI PRASAD PRASAD PARAB Date: PARAB 2024.02.16 IN THE HIGH COURT OF JUDICATURE AT BOMBAY 13:54:46 ORDINARY ORIGINAL CIVIL JURISDICTION +0530

INCOME TAX APPEAL NO. 1278 OF 2018

The Principal Commissioner of Income Tax - 32, Mumbai ....Appellant V/s. Hitesh Mody (HUF) ...Respondent

---- Ms. Swapna Gokhale (through V.C.) a/w Mr. Vaibhav Date for Appellant. Mr. Atul K. Jasani for Respondent. ----

CORAM : K.R. SHRIRAM & DR. NEELA GOKHALE, JJ.

DATED : 7th FEBRUARY 2024

P.C. :

1. Appellant is impugning an order dated 24th May 2017 passed by

the Income Tax Appellate Tribunal (ITAT) allowing assessee's appeal and

dismissing Revenue's appeal.

2. The following substantial questions of law are proposed :

QUESTIONS OF LAW

I. Whether in law and on the facts and circumstances of the case, was the Tribunal order not perverse, wherein it was content to dismiss the Appeal, by merely excerpting a major part of the order of the CIT(A) without giving reasons for doing so?

II. Whether the Tribunal was right in upholding the orders of the CIT(A), that had held 8% of the purchases as non-genuine u/s 69C?

III. Whether in law, when purchases are not satisfactorily explained and added back u/s 69C, could the addition be limited to a certain percentage as held by the CIT(A) and upheld by the Tribunal in their perfunctory order?

3. Assessee was a trader in chemicals. During the assessment of

Purti Parab

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his returns filed for the Assessment Year 2011-12, the Assessing Officer

(A.O.) came to a conclusion that assessee had indulged in bogus purchases

and disallowed the entire purchases worth Rs.1.35 Crores holding it to be

unexplained expenditure under Section 69C of the Income Tax Act, 1961

(the Act). Aggrieved with the order, assessee filed an appeal to the

Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) held, relying

on the Commissioner of Income Tax v. Simit P. Sheth 1 that the entire

purchases could not have been disallowed but only the profit element and

proceeded to restrict the unexplained expenditure to only 8% of the total

purchases made. Against the said order both assessee as well as the

Revenue filed an appeal before the ITAT. The ITAT dismissed both the

appeals by the order impugned dated 24th May 2017. After perusing records

which we also go through with the assistance of the counsel, the ITAT found

that the A.O. has added the entire amount of purchases in assessee's income

under Section 69C of the Act on the basis that assessee has purchased goods

from bogus suppliers who only issued bills but do not effect any real

transaction. On the other hand, the CIT(A) restricted the addition to the

extent of 8% of the alleged purchases on arriving at a factual finding that

the A.O. has not doubted the genuineness of the payments being shown by

appellant through banking channels. The A.O. has also not questioned the

inventory that was subsequently sold. The fact that payments were being

made through cheque is also not something that was doubted. Therefore,

1. (2013) 356 ITR 451 (Guj) Purti Parab

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the CIT(A) came to the conclusion that when the A.O. himself has not

doubted the quantity of purchases which has been entered in the books of

accounts of appellant but only proceeds based on the information received

from Sales Tax authorities that the purchases were made through bogus

parties. The CIT(A) relying on Simit P. Sheth (supra) came to a conclusion

that when the total sale is accepted by the A.O., then the entire purchases

cannot be added to the income of assessee and what should be added is

only what can be termed a fair profit margin. On facts the CIT(A) came to a

conclusion that 8% of the purchases of Rs.1,35,46,250/- would a be fair

profit margin. This factual finding has been accepted by the ITAT. There are

many orders and judgments which also have taken the same stand.

4. Ms.Gokhale relied upon a judgment of the Gujarat High Court

in N.K. Industries Ltd. v. Deputy Commissioner of Income Tax 2 to submit

that when it was established that the purchases are bogus the entire amount

should have been added to the income of the assessee. There is no question

of granting any relief in the facts of the case. In the said judgment, the Court

observed as under :

The Tribunal in the case of Vijay Proteins Ltd. Vs. CIT had observed that it would be just and proper to direct the Assessing Officer to restrict the addition in respect of the undisclosed income relating to the purchases to 25 % of the total purchases. The said decision was confirmed by this Court as well. On consideration of the matter, we find that the facts of the present case are identical to those of M/s Indian Woolen Carpet Factory (supra) or M/s Vijay Proteins Ltd. In the present case the Tribunal has categorically observed that the assessee had shown bogus purchases amounting to Rs.2,92,93,288/- and taxing only 25 % of these bogus claim goes against the principles of Sections 68 and

2. (2016) 72 taxmann.com 289 (Gujarat) Purti Parab

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69C of the Income Tax Act. The entire purchases shown on the basis of fictitious invoices have been debited in the trading account since the transaction has been found to be bogus. The Tribunal having once come to a categorical finding that the amount of Rs.2,92,93,288/- represented alleged purchases from bogus suppliers it was not incumbent on it to restrict the disallowance to only Rs.73,23,322/-.

Ms.Gokhale submitted that one of the appeal that was disposed

by the Gujarat High Court had been filed by one N.K. Proteins Ltd. whose

SLP against the decision of the Gujarat High Court was dismissed by an

order dated 16th January 2017.

5. This court in PCIT v. Mohammad Haji Adam & Co.3 has earlier

distinguished N. K. Industries (supra) observing that the same cannot be

applied without reference to the facts.

6. Also, the Hon'ble Gujarat High Court in PCIT v. Jigisha

Satishkumar Mehta4 itself has distinguished N. K. Industries (supra) holding

that therein the material was available during the course of search which

exposed the falsity of entries made in regular books of accounts. The

unexplained expenditure that is bogus purchases were on the basis of

fictitious invoices debited in trading account.

Hence, the decision of the Hon'ble Gujarat High Court N. K.

Industries (supra) has no application to the facts of the present case

inasmuch as herein assessee could not have made sales (which are not

doubted), without making corresponding purchases.

3. (2019) 103 taxmann.com 459 (Bom)

4. (2023) 155 taxmann.com 279 (Guj) Purti Parab

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7. In fact paragraph 8 of N.K. Industries (supra) reads as under :

So far as the question regarding addition of Rs.3,70,78,125/- as gross profit on sales of Rs.37.08 Crores made by the Assessing Officer despite the fact that the said sales had admittedly been recorded in the regular books during Financial Year 1997-98 is concerned, we are of the view that the assessee cannot be punished since sale price is accepted by the revenue. Therefore, even if 6 % gross profit is taken into account, the corresponding cost price is required to be deducted and tax cannot be levied on the same price. We have to reduce the selling price accordingly as a result of which profit comes to 5.66 %. Therefore, considering 5.66 % of Rs.3,70,78,125/- which comes to Rs.20,98,621.88 we think it fit to direct the revenue to add Rs.20,98,621.88 as gross profit and make necessary deductions accordingly. Accordingly, the said question is answered partially in favour of the assessee and partially in favour of the revenue.

8. It is impossible in this appellate jurisdiction to investigate what

the product was and what should have been the profit margin. Moreover,

the CIT(A) and the ITAT have on facts come to a conclusion that 8% is the

reasonable figure. Therefore, in our view, the judgment of N.K. Industries

(supra) does not assist Ms.Gokhale's case.

9. Therefore, we do not find any reason to interfere.

10. Appeal dismissed.

(DR. NEELA GOKHALE, J.) (K.R. SHRIRAM, J.)

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