By Jagdish D. Shah
Jagdish T.Punjabi Chartered Accountants
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Section 69C – Addition made only on the basis of bogus parties identified by the Sales tax department deleted.
Facts
The assessee, an individual, runs a proprietary business of trading in ferrous and non-ferrous metals. During the assessment proceedings, the AO found that the assessee had purchased goods worth Rs.7.21 lakh from Shiv Sagar Steel whose name was appearing in the list of bogus parties forwarded by the sales tax authorities and the name of the assessee was appearing as a beneficiary in the list. The AO directed the assessee to produce the party. However, the supplier was not produced by the assessee. Summons issued to the party could not be served on the given address. The AO held the purchase transaction as bogus and treated the entire purchase of Rs.7.21 lakh as unexplained expenditure u/s.69C.
Aggrieved by the order of the AO, the assessee appealed before the CIT(A) and submitted that the AO had relied upon the information supplied by the investigation wing of the Sales Tax Department (STD) but he had not supplied the copy of the statement of the party recorded by the STD. Further, the assessee was also not allowed to cross examine the party. According to the assessee, he had discharged his obligation by submitting details of purchases, sales and bank transactions. He had also produced stock register before the AO. There was no evidence that payments for the so called bogus purchases had come back to the assessee. All purchases and sales were recorded in the books of accounts, quantitative details were also maintained and the AO had also accepted the sales.
The CIT(A) noted that the STD had treated the suppliers of goods as suspicious dealer since during the investigation, the supplier had admitted that they had issued accommodation bills. Further, he also noted that the assessee was not able to produce the party. According to the CIT(A),it was quite possible that the assessee purchased the goods from the grey market and took accommodation bills from the said party. Therefore, he held that an addition of 20% of the purchase would be justified in order to fulfil the gap difference of Gross Profit (GP) for the alleged purchase as well to plug any leakage of revenue.
Before the Tribunal, in addition to what was submitted before the CIT(A), the assessee pointed out that the CIT(A) had ignored the vital fact that the Net Profit ratio was 1.7% and the GP ratio was about 7%. He also relied upon the decisions of the Mumbai Tribunal in the cases of Deputy Commissioner of Income Tax vs. Rajeev G. Kalathil (67 SOT 52) and Asstt. Commissioner of Income Tax vs. Tristar Jewellery Exports Private Limited (ITA 8292/Mum/2011 dated 31.07.2015) and the Bombay High Court in the case of CIT vs. Nikunj Eximp Enterprises Pvt. Ltd. (372 ITR 619).
Held
The Tribunal noted that the AO had not rejected the sales made by the assessee and had made the addition only on the basis of the information received from the STD. The assessee was also maintaining the quantitative details and stock register. According to the Tribunal, the AO should have made an independent inquiry. He also did not follow the principles of natural justice before making the addition. It also noted that the CIT(A) had reduced the addition to 20%, but he had not given any justification, except stating that the same was done to plug the probable leakage of revenue. Considering the peculiar facts and circumstances of the case, the Tribunal reversed the order of the CIT(A) and allowed the appeal of the assessee.
