M/S. HEMANT ASSOCIATES, MUMBAI V. ITO WARD-27(1)(1), NAVI MUMBAI

ITA 1422/MUM/2023

AI Insights

M/s. Hemant Associates, a partnership firm engaged in trading iron and steel, appealed against the order of the Commissioner of Income Tax (Appeals), which confirmed the additions made by the Assessing Officer for the assessment year 2009-10. The additions were made on account of estimated gross profit from unverified purchases and capital introduced by a partner. The Tribunal heard arguments from both parties, considered the relevant documents and previous judgments, and made a determination on the appropriate rate of gross profit to be applied and the legitimacy of the capital introduced.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 301319 (ITAT-MUMBAI)
• Duration Of Justice: 3 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-07-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: SMC
• Next Hearing Date: 11-07-2023
• Assessment Year: 2009-2010
• Appeal Filed On: 25-04-2023
• Other Referred Cases: ITO V/S Nityasudha Combines V/s ITA Chennai, Rice Mills Vs CIT 218 ITR 508, Allahabad High Court, CIT VS M Venkatesh Road and Others (2015) 370 ITR 215 Tamil Nadu and Andhra Pradesh High Court, M/s Fancy Wear V/S ITO Ward 24(3)(1), ITA No. 1596/1597/Mum/2016 dt. 20/09/2017, Shri Hiralal Chunilal Jain V/S ITO Ward 14(1)(4), ITA No. 4547/1275/Mum/2014 dt. 01/01/2016, M/s Ramesh Kumar & Co. v/s ACIT Ward 21(1), ITA No. 2959/Mum/2014 dt. 28/11/2014, Shri Pranhat Gupta v/s ITO, ITAT Mumbai dt. 09/03/2018, M/s Paras Organic Pvt Ltd vs DCIT 10(2), ITA no. 2369/Mum/2014 dt26/02/2016, M/s Talco Marketing vs ITO 14(2)(3) ITA No. 3394/Mum/2014 dt 07/07/2016, Shree Ganpatraj A Sanghavi v/s ACIT 15(3), ITA No 2826/Mum/2013 dt 05/11/2014, ACIT 8(3) v/s Tristar Jewllery, ITA No 7593/2011 & 6435/Mum/2013 dt 31/04/2015, ACIT 25(2) v/s Tarla R Shah ITA No 5295/Mum/2013 dt 02/02/2016
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B. LAXMI KANTH
• Keywords: Bogus purchase; Set aside
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH “SMC”, MUMBAI BEFORE SHRI KULDIP SINGH, JUDICIAL MEMBER ITA No.1422/M/2023 Assessment Year: 2009-10 M/s. Hemant Associates, A/13, Yashwant Building, 90 Feet Road, Ghatkopar East, Mumbai – 400 077 PAN: AABFH 8441B Vs. CIT(A), NFAC, Delhi, Room No.4, 4 th Floor, Tower No.6, Vashi, Navi Mumbai – 400 703 (Appellant) (Respondent) Present for: Assessee by : Shri Hemant Shah, A.R. Revenue by : Shri B. Laxmi Kanth, D.R. Date of Hearing : 12 . 07 . 2023 Date of Pronouncement : 28 . 07 . 2023 O R D E R Per : Kuldip Singh, Judicial Member: The assessee by filing the present appeal, sought to set aside the impugned order dated 01.03.2023 passed by the National Faceless Appeal Centre(NFAC) [Commissioner of Income Tax (Appeals), Delhi] (hereinafter referred to as CIT(A)] qua the assessment year 2009-10 on the grounds inter-alia that :- “GOA No.1- Addition of purchases @ 5% less declared G.P worth Rs.10,42,852/- The Ld.CIT(A) not justified in confirming the disallowances on account of purchases affected from suspicious hawala dealer, which is unwarranted/unjustified. Final hearing of the appeal was completed on 29/12/2016 but the order was only passed on 01/03/2023 i.e. 2253 days after the final hearing. ITA No.1422/M/2023 M/s. Hemant Associates 2 As per the CBDT instruction the order is to be passed within 15 days of the final hearing. The assessing officer is not justified in rejecting the books of account. The books of accounts are audited by Chartered Accountant and no adverse remarks are mentioned in the Tax Audit Report as submitted by the Chartered Accountant. Books of the assessee were not maintained in Tally and there was difficulty for the AO to understand the same. All explanations and summaries were provided to the AO. No opportunity of cross examination of the alleged dealers was provided to the appellant. The Ld.CIT(A) not considered the facts that assessee is purely reseller in Iron & Steel and without purchases how can sales be affected in trading concern? The Ld. CIT(A) not considered the facts that the Hon,ble ITAT deleted the adhoc additions fully in similar cases. We relied on the following judgments of the higher forum:- ITO V/S Nityasudha Combines V/s ITA Chennai. Rice Mills Vs CIT 218 ITR 508, Allahabad High Court. CIT VS M Venkatesh Road and Others (2015) 370 ITR 215 Tamil Nadu and Andhra Pradesh High Court. M/s Fancy Wear V/S ITO Ward 24(3)(1), ITA No. 1596/1597/Mum/2016 dt. 20/09/2017. Shri Hiralal Chunilal Jain V/S ITO Ward 14(1)(4), ITA No. 4547/1275/Mum/2014 dt. 01/01/2016. M/s Ramesh Kumar & Co. v/s ACIT Ward 21(1), ITA No. 2959/Mum/2014 dt. 28/11/2014. •Shri Pranhat Gupta v/s ITO, ITAT Mumbai dt. 09/03/2018. M/s Paras Organic Pvt Ltd vs DCIT 10(2), ITA no. 2369/Mum/2014 dt26/02/2016. M/s Talco Marketing vs ITO 14(2)(3) ITA No. 3394/Mum/2014 dt 07/07/2016. Shree Ganpatraj A Sanghavi v/s ACIT 15(3), ITA No 2826/Mum/2013 dt 05/11/2014. •ACIT 8(3) v/s Tristar Jewllery, ITA No 7593/2011 & 6435/Mum/2013 dt 31/04/2015. •ACIT 25(2) v/s Tarla R Shah ITA No 5295/Mum/2013 dt 02/02/2016. GOA No 2: Addition of Capital Introduction of Rs 8.50,000/- During the concerned year one partner of the firm Late Smt Sharmishta Mehta has introduced capital worth Rs 6,00,000 in cheque and Rs.2,50,000/- in cash. The said amount was credited to partners capital account. ITA No.1422/M/2023 M/s. Hemant Associates 3 Smt Sharmishta Mehta and M/s Hemant Associates are two distinct entities. Capital was introduced in her personal capacity and the sources of the same was also proved. Further if there is any doubt, in that case AO should have inquired in the personal returns of Smt Sharmishta Mehta and thus the addition in the firm is unjustified and unwarranted. Late Smt Sharmishta Mehta was doing business as a partner in the firm since the last 20 years. The assessee had provided the copy of cash book and the bank statements to justify the sources of the capital introduction. The Ld. AO erred in disallowing the said capital introduction. GOA No 3: We reserve our rights to add, amend, alter anything stated herein above or may be stated herein after. Prayer/relief claim in the appeal 1. The Appellant hereby prays that 5% less G. P. addition on account of purchases to be deleted in full. 2. The Appellant hereby prays that addition on account of capital introduction may be deleted in full.” 2. Briefly stated facts necessary for consideration and adjudication of the issues at hand are : the assessee is a partnership firm engaged in the business of trading in iron and steel. The return of income filed by the assessee declaring total income at Nil was subjected to scrutiny. The Assessing Officer (AO) noticed that the assessee has declared Nil profit and gross profit at Rs.5,81,083/- on turnover of Rs.3,24,78,682/-. The assessee made purchases from various parties namely Deepali Enterprises, Renuka Sales, Deepak Trading Co., G.R. Tradelink & National Trading Co. who are registered VAT dealers. The AO noticed during the assessment proceedings that there was no supporting signed and stamped cash receipts for cash sales and also certain transactions were settled by book entries and as such certain purchases and sales made in cash ITA No.1422/M/2023 M/s. Hemant Associates 4 were not verifiable. So in the absence of supporting documents and vouchers the AO rejected the books of accounts and proceeded to determine gross profit @5% of the turnover and thereby estimated gross profit at Rs.16,23,934/- and thereby made an addition of Rs.10,45,852/- (Rs.16,23,934/- – Rs.5,81,082/- already gross profit declared by the assessee = Rs.10,42,852/-) to the total income of the assessee. The AO also made addition of Rs.8,50,000/- to the total income of the assessee under section 143(3) of the Act. 3. The assessee carried the matter before the Ld. CIT(A) by way of filing appeal who has confirmed the addition by dismissing the same. Feeling aggrieved with the impugned order passed by the Ld. CIT(A) the assessee has come up before the Tribunal by way of filing present appeal. 4. I have heard the Ld. Authorised Representatives of the parties to the appeal, perused the orders passed by the Ld. Lower Revenue Authorities and documents available on record in the light of the facts and circumstances of the case and law applicable thereto. 5. Undisputedly since the assessee has failed to get certain purchases/sales verified by producing the supporting documents and vouchers and even there was no supporting signed and stamped cash receipts for cash sales the AO has proceeded to reject the books of account of the assessee and estimated the gross profit @5% of the turnover. It is settled principle of law that in such circumstances where books of account have been rejected gross profit is to be estimated keeping in view the gross profit earned by ITA No.1422/M/2023 M/s. Hemant Associates 5 the assessee in the earlier years more particularly when sales by the assessee have not been disputed. 6. Hon’ble Bombay High Court in case of Pr. CIT vs. JK Surface Coatings Pvt. Ltd. in ITA No.1850 of 2017 order dated 28 October, 2021 upheld the view taken by the Tribunal that in such circumstances gross profit should be in the range of 5% to 12.5% as reasonable estimation of profit element embedded in the bogus purchases by returning following findings: “4. Having considered the memo of Appeal and the Orders passed by AO / CIT(A) and the Order of ITAT, the only issue that comes up for consideration is with respect to the extent of ad-hoc disallowance to be sustained with respect to bogus purchases. The AO has observed 100% of the purchase value to be added to the income of Assessee, the CIT(A) has said it should be 15% and ITAT has said it should be 10%. First of all, this would be an issue which requires evidence to be led to determine what would be the actual profit margin in the business that Assessee was carrying on and the matter of calculations by the concerned authority. According to the Tribunal, in all such similar cases, it is ranged between 5% to 12.5% as reasonable estimation of profit element embedded in the bogus purchase when material consumption factor do not show abnormal deviation. 5. Whether the purchases were bogus or whether the parties from whom such purchases were allegedly made were bogus was essentially a question of fact. When the Tribunal has concluded that the assessee did make the purchase, as a natural corollary not the entire amount covered by such purchase but the profit element embedded therein would be subject to tax.” 7. The Ld. A.R. for the assessee contended that in the assessee’s trade of iron and steel gross profit is not more than 2% but has failed to bring on record any assessments made in the earlier years assessing the gross profit @ 2%. In the given circumstances both the Ld. A.Rs for the parties to the appeal have stated that in such circumstances gross profit should be estimated @4% of the gross turnover which would be fair and reasonable. So in these ITA No.1422/M/2023 M/s. Hemant Associates 6 circumstances we restrict the addition on bogus purchases held by the AO by estimating the gross profit @4% of the gross turnover. The AO to make the addition accordingly. 8. So far as ground No.2 raised by the assessee that the Ld. CIT(A) has erred in confirming the addition of Rs.8,50,000/- on account of introduction of capital during the year under consideration is concerned the Ld. A.R. for the assessee contended that the capital has been introduced by one of the partners of the firm namely Smt Sharmishta Mehta by way of cheque to the tune of Rs.6,00,000/- and brought on record bank statements and remaining Rs.2,50,000/- was introduced in cash which was credited to the partner’s capital account. I have perused the bank statement pertaining to the assessee firm issued by Bank of India wherein amount of Rs.6,00,000/- is shown to have been credited in the firm account from the account of SA Mehta. 9. The Ld. A.R. for the assessee further contended that the cash amount of Rs.2,50,000/- was introduced by Smt Sharmishta Mehta out of her personal savings and Hemant Mehta has also introduced cash of Rs.1,50,000/- from his personal savings. Keeping in view the turnover of the assessee during the year under consideration which is to the tune of Rs.3,24,78,687/- on which gross profit of Rs.5,81,083/- has been shown by the assessee firm one of the partners namely Smt Sharmishta Mehta is proved to have the capacity of saving to the tune of Rs.2,50,000/- and remaining Rs.6,00,000/- was lying in bank account which she has stated to have introduced as capital in the firm. So I am of the opinion that the assessee has duly proved the introduction of the capital in the ITA No.1422/M/2023 M/s. Hemant Associates 7 firm to the tune of Rs.8,50,000/-. The AO to allow the same after due verification of the bank account. 10. Resultantly the appeal filed by the assessee is party allowed. Order pronounced in the open court on 28.07.2023. Sd/- (KULDIP SINGH) JUDICIAL MEMBER Mumbai, Dated: 28.07.2023. * Kishore, Sr. P.S. Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The DR Concerned Bench //True Copy// By Order Dy/Asstt. Registrar, ITAT, Mumbai.