ACIT CIR. - 4(2), MUMBAI V. M/s. INDRAYANI EXPORTS P. LTD., MUMBAI

ITA 6564/MUM/2006

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1010 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 7 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-07-2010
• Appeal Filed By: Department
• Bench Allotted: I
• Next Hearing Date: 01-07-2010
• Assessment Year: 2003-2004
• Appeal Filed On: 06-12-2006
• Court: TRIBUNAL
• Department Lawyers: SUM EET KUMAR
• Keywords: Bogus purchase
• Section: 40A(3); 80HHC; 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH I BEFORE SHRI N.V. VASUDEVAN (JM) & RAJENDRA SINGH (A M) I.T.A.NO. 6564/MUM/2006 (ASSESSMENT YEAR : 2003-0 4) ACIT CIRCLE 4(2) ROOM NO. 642, 6 TH FLOOR AAYAKAR BHAVAN M.K. ROAD MUMBAI-400 020. M/S. INDRAYANI EXPORTS P. LTD. SINDH SWADESHI CLOTH MARKET 4 TH FLOOR, ROOM NO. 3 1 ST CROSS OLD HANUMAN LANE KALBADEVI MUMBAI-400 002. APPELLANT RESPONDENT I.T.A.NO. 6751/MUM/2006 (ASSESSMENT YEAR : 2003-0 4) M/S. INDRAYANI EXPORTS P. LTD. SINDH SWADESHI CLOTH MARKET 4 TH FLOOR, ROOM NO. 3 1 ST CROSS OLD HANUMAN LANE KALBADEVI MUMBAI-400 002. ACIT CIRCLE 4(2) ROOM NO. 642, 6 TH FLOOR AAYAKAR BHAVAN M.K. ROAD MUMBAI-400 020. APPELLANT RESPONDENT PAN/GIR NO. : AAAC18266P ASSESSEE BY : SHRI VIMAL PUNMIYA DEPARTMENT BY : SHRI SUMEET KUMAR ORDER PER N.V. VASUDEVAN, JM :- ITA NO. 6564/MUM/ IS AN APPEAL BY THE REVENUE WHIL E ITA NO. 6751/MUM/06 IS AN APPEAL BY THE ASSESSEE. BOTH THES E APPEALS ARE DIRECTED AGAINST THE ORDER DATED 26.9.2006 OF LEARN ED CIT(A)-IV, MUMBAI RELATING TO A.Y. 2003-04. 2. WE SHALL FIRST TAKE UP THE APPEAL BY THE ASSESSE E. 3. GROUND NO. 1 RAISED BY THE ASSESSEE READS AS FOL LOWS :- ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, LEARNED CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF RS. 1,33,49,772/- M/S. INDRAYANI EXPORTS P. LTD. 2 OUT OF A TOTAL DISALLOWANCE OF RS. 4,17,18,039/- MA DE BY THE ASSESSING OFFICER ON ACCOUNT OF BOGUS PURCHASES. 4. THIS GROUND OF APPEAL CAN BE CONVENIENTLY ADJUDI CATED ALONG WITH GROUND NO. 1 RAISED BY THE REVENUE, WHICH READS AS FOLLOWS :- ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, LEARNED CIT(A) ERRED IN RESTRICTING THE ADDITIONS AT 8% AS AGAINST THE ADDITION OF 25% MADE ON ACCOUNT OF BOGUS PURCHASES ACCORDINGLY RESTRICTING THE ADDITION TO RS. 1,33,49,772/- AS AG AINST THE ADDITION OF RS. 4,17,18,039/- WITHOUT MENTIONING CO GENT REASONS BASED ON FACTS. 5. FACTS AND CIRCUMSTANCES GIVING RISE TO THE AFORE SAID GROUNDS OF APPEAL ARE AS FOLLOWS :- THE ASSESSEE IS ENGAGED IN THE MANUFACTURE/EXPORT A ND TRADING IN/OF TEXTILE FABRICS. DURING THE PREVIOUS YEAR, TH E ASSESSEE HAD SHOWN EXPORT SALE OF RS. 11.3 CRORES. IT ALSO RECEIVED EX PORT INCENTIVE IN THE FORM OF DEPB RECEIPTS. THE ASSESSING OFFICER NOTICED THA T DURING THE PREVIOUS YEAR, THE ASSESSEE HAD MADE PURCHASE WORTH RS. 16,6 8,72,154/-. OUT OF THE AFORESAID PURCHASES, AN AMOUNT OF RS. 14,91,97, 661/- APPEARED AS SUNDRY CREDITORS AS ON 31.3.2003. THUS NEARLY 90% O F THE TOTAL PURCHASES HAD NOT BEEN PAID FOR BY THE ASSESSEE AS AT THE END OF THE PREVIOUS YEAR. THE ASSESSING OFFICER CALLED UPON TH E ASSESSEE TO FURNISH CONFIRMATION IN RESPECT OF PURCHASE EXCEEDING RS.10 LAKHS. THE ASSESSEE COULD NOT FURNISH CONFIRMATION BUT FURNISHED COPIES OF THE ACCOUNTS OF THE SOME OF THE PURCHASES, PURCHASE BILLS AND DETAI LS OF PAYMENT MADE. DETAILS SO FURNISHED WAS AS FOLLOWS :- SNO. NAME OF PARTY PERIOD PURCHASES MADE RS. PAYMENT MADE 1 AMJAY SYNTHETICS OCTOBER-FEBRUARY 35,30,141 -- 2 OMINI FABRICS OCTOBER-MARCH 28,72,175 -- 3 SAJID TEXTILES OCTOBER-FEBRUARY 36,21,468 -- 4 VAHAB TEXTILES OCTOBER-FEBRUARY 32,23,638 -- 5 JAVED TEXTILES OCTOBER-FEBRUARY 30,70,840 -- 6 NAKODA TEXTILES OCTOBER-MARCH 29,83,167 -- 7 BILIYARDS SYNTHETICS OCTOBER-FEBRUARY 29,00,952 -- 8 GUJAN TEXTILES OCTOBER-FEBRUARY 34,41,389 -- 9 SIMCO FABRICS OCTOBER-FEBRUARY 31,48,915 1,45,874 M/S. INDRAYANI EXPORTS P. LTD. 3 (31.03.03) 10 ZAFAR TEXTILES OCTOBER-MARCH 28,82,725 1,42,390 (31.03.03) 11 FIROZ TEXTILES OCTOBER-FEBRUARY 32,87,039 1,43,4 76 (31.03.03) 12 HEENA FABRICS OCTOBER-FEBRUARY 33,81,710 1,47,6 25 (31.03.03) THE PURCHASES HAD BEEN MADE FROM BHIWANDI. THE ASSE SSING OFFICER THEREFORE SENT AN INSPECTOR OF INCOME TAX TO BHIWAN DI TO VERIFY AS TO WHETHER THE AFORESAID PARTIES WERE AVAILABLE AT THE ADDRESS GIVEN ON THE PURCHASE BILL. THE INSPECTOR REPORTED THAT NONE OF THE PARTIES COULD BE LOCATED AT THE ADDRESS GIVEN. 6. THE ASSESSING OFFICER THEREUPON ISSUED A LETTER U/S. 133(6) TO IDBI BANK CALLING FOR INFORMATION ABOUT THE DETAILS OF T HE PARTIES IN WHOSE ACCOUNT CHEQUES ISSUED BY THE ASSESSEE TO THE PERSO N FROM WHOM, ASSESSEE PURCHASED THE GOODS HAD BEEN CREDITED. THE DETAILS FURNISHED BY THE IDBI BANK SHOWED THAT ALL THE CHEQUES RECEIV ED BY THE ASSESSEE HAD BEEN CREDITED IN THE ACCOUNT OF M/S. MINAL ENTE RPRISES IN BHARAT OVERSEAS BANK LTD., FORT BRANCH. THUS, ALL THE PAY MENTS MADE BY THE ASSESSEE IN RESPECT OF PURCHASES HAD GONE TO ONE AC COUNT NAMELY THAT OF M/S. MINAL ENTERPRISES. THEREUPON THE ASSESSEE WROT E A LETTER TO BHARAT OVERSEAS BANK, FORT BRANCH, MUMBAI AND CALLED FOR C OPY OF BANK STATEMENT AND DETAILS OF ACCOUNT HOLDER OF MINAL EN TERPRISES. FROM THE DETAILS FURNISHED FROM THE BANK, THE ASSESSING OFFI CER NOTICED THAT THE ACCOUNT IN THE NAME OF MINAL ENTERPRISES WAS OF ONE MR.ANIL PIPARA AS PROPRIETOR OF MINAL ENTERPRISES. ON PERUSAL OF THE BANK STATEMENT, THE ASSESSING OFFICER NOTICED A REGULAR PATTERN OF DEPO SIT OF CHEQUE AND IMMEDIATE WITHDRAWAL OF CASH FROM THE AFORESAID ACC OUNT. ACCORDING TO THE ASSESSING OFFICER, THE BANK ACCOUNT IN THE NAME OF MINAL ENTERPRISES HAD BEEN OPENED ONLY FOR THE PURPOSE OF PROVIDING E NTRIES TO THE ASSESSEE COMPANY. THE ASSESSING OFFICER ISSUED SUMMON MR. AN IL PIPARA AT THE ADDRESS MENTIONED IN THE BANK ACCOUNT. BUT IT TURNE D OUT THAT MR. ANIL PIPARA WAS NOT EXISTED AT THE SAID ADDRESS. M/S. INDRAYANI EXPORTS P. LTD. 4 7. ALL THE ABOVE ASPECTS WERE BROUGHT TO THE NOTIC E OF THE ASSESSEE. THE ASSESSING OFFICER CALLED UPON THE ASSESSEE TO SHOW- CAUSE AS TO WHY PURCHASES SHOWN BY THE ASSESSEE IN ITS BOOKS SHOULD NOT BE TREATED AS NOT GENUINE AND THE BOOKS NOT BE REJECTED. 8. THE ASSESSEE IN REPLY, SUBMITTED THAT IT BUYS GREY FABRICS FROM OPEN MARKET LIKE BHIWANDI, MALEGAON, SURAT ETC. FR OM THE AGENT, ARTIYAS ENGAGED IN THE BUSINESS OF SUPPLYING GREY FABRICS. THAT THE ASSESSEE WOULD PLACE ORDER THROUGH THE BROKERS VERBALLY. THE BROKERS ARRANGED DELIVERY AT THE PROCESS HOUSE WHERE GREY FABRICS IS PROCESSED. AFTER DELIVERY OF GREY FABRICS TO THE PROCESS HOUSE, THE BROKERS SEND INVOICE OF THE SUPPLIERS OF THE GREY FABRICS. THE ASSESSEE CLA IMED THAT IT MADE PAYMENT BY CHEQUE IN FAVOUR OF THE PERSON MENTIONED IN THE BILL GIVEN BY THE BROKER. SIMILAR FOR PROCESSING IT ISSUED CHEQU ES IN FAVOUR OF PERSONS REFERRED BY THE BROKERS. THE ASSESSEE SUBMITTED TH AT THIS IS THE TRADE PRACTICE AND THEY WERE NOT AWARE OF THE REAL SELLER TO THEM EXCEPT THE BROKERS. 9. THE ASSESSING OFFICER, HOWEVER, DID NOT ACCEPT THE SUBMISSION OF THE ASSESSEE. ACCORDING TO THE ASSESSING OFFICER, IT WA S NOT POSSIBLE TO BUY FROM BHIWANDI MARKET ON CREDIT. IN THIS REGARD ASS ESSING OFFICER REFERRED TO THE FACT THAT 90% OF THE VALUE OF PURCH ASES REMAINED OUTSTANDING AS ON THE LAST DATE OF THE PREVIOUS YEA R. SECONDLY, THE ASSESSING OFFICER NOTICED THAT NEITHER BROKERAGE EX PENSES HAVE BEEN CLAIMED BY THE ASSESSEE NOR DETAILS OF BROKERS WERE FURNISHED BY THE ASSESSEE. EVEN IN RESPECT OF TRANSPORTATION AND DEL IVERY TO THE PROCESS HOUSE BY THE BROKERS, NO EVIDENCE HAD BEEN FILED BY THE ASSESSEE. THE ASSESSING OFFICER THEREFORE TREATED PURCHASE SHOWN BY THE ASSESSEE AS NOT GENUINE FOR THE FOLLOWING REASONS : (I) THE PURCHASES HAVE BEEN MADE FROM BHIWANDI. TH EY ARE CREDIT PURCHASES OF SUBSTANTIAL AMOUNT. IT IS COMMO N KNOWLEDGE THAT THE TRADERS IN BHIWANDI DO NOT MAKE CREDIT SALES. THEIR MODUS OPERANDI IS TO MAKE SALES AND CO LLECT PAYMENT ON ACCOUNT OF SALE IMMEDIATELY. M/S. INDRAYANI EXPORTS P. LTD. 5 (II) NONE OF THE PURCHASES COULD BE SUBSTANTIATED B Y THE ASSESSEE BY WAY OF CONFIRMATION OF THE SELLER. (III) THE INSPECTOR COULD NOT LOCATE ANY OF THE SELLERS A T THE ADDRESS MENTIONED IN THE SALE INVOICE. MANY ADDRESS ES WERE ALSO INCOMPLETE. (IV) VERIFICATION WITH THE BANK SHOWS THAT THE PAYMENTS IN RESPECT OF THE PURCHASES FROM DIFFERENT PARTIES HAV E BEEN MADE TO ONE CONCERN ONLY. THIS FINDING MAKES THE BO GUS NATURE OF THE PURCHASES RECORDED IN THE BOOKS VERY CLEAR. 10. THEREAFTER THE ASSESSING OFFICER HELD THAT SINC E PURCHASES ARE NOT VERIFIABLE, CORRECTNESS AND COMPLETENESS OF THE BOO KS OF ACCOUNT OF THE ASSESSEE CANNOT BE ACCEPTED. THE ASSESSING OFFICER THEREFORE REJECTED BOOK RESULT SHOWN BY THE ASSESSEE. THE ASSESSING OF FICER WAS HOWEVER OF THE VIEW THAT SINCE THE ASSESSEE HAS SHOWN SALES OF RS. 11,53,77,450/-, ASSESSEE MUST HAVE PURCHASED GOODS FROM SOME OTHER PARTY AND BOOKED BILLS IN THE NAME OF FICTITIOUS PARTIES. THE REASON S FOR DOING SO WAS TO INFLATE ITS PURCHASES AND REDUCE THE PROFITS. THE ASSESSING OFFICER THEREFORE RESORTED TO AN ESTIMATION AND CONCLUDED A S FOLLOWS :- AFTER COMPARISON WITH THE MARKET RATES, IT IS ESTI MATED THAT THE ASSESSEE HAS INFLATED ITS PURCHASES BY 15% OF THE P URCHASES SHOWN BY IT. THE SAME WORKS OUT TO RS. 4,17,18,039/ - (25% OF RS. 16,68,72,154/-). THE SAME IS ADDED BACK TO THE TOTA L INCOME OF THE ASSESSEE BEING BOGUS PURCHASES BOOKED BY THE AS SESSEE. THE ASSESSING OFFICER THUS MADE THE ADDITION OF RS. 4,17,18,039/- TOWARDS BOGUS PURCHASES SHOWN BY THE ASSESSEE. 11. BEFORE LEARNED CIT(A), THE ASSESSEE REITERATED HIS SUBMISSION WITH REGARD TO MODUS OPERANDI OF PURCHASE OF GREAY CLOTH . IT WAS ALSO SUBMITTED THAT THE ASSESSEE IS A 100% EXPORTER AND THE ENTIRE INCOME IS EXEMPT U/S. 80HHC OF THE ACT. THEREFORE THERE IS NO REASON FOR THE ASSESSEE TO MANIPULATE THE PROFITS. THE ASSESSEE AL SO RELIED ON THE FACT THAT IT HAD GIVEN CONFIRMATION FROM ALL THE PROCESS ORS REGARDING THE FACT THAT QUANTITY OF GREY FABRIC WAS RECEIVED BY THEM F OR PROCESSING. THE ASSESSEE ALSO POINTED OUT THAT THERE WAS NO DISCREP ANCY IN STOCK OF RAW M/S. INDRAYANI EXPORTS P. LTD. 6 MATERIAL AS WELL AS EXPORTED GOODS. WITHOUT PREJUDI CE TO THE ABOVE, THE ASSESSEE ALSO SUBMITTED THAT THE ADDITION MADE BY T HE ASSESSING OFFICER WAS EXORBITANT. THE ASSESSEE POINTED OUT THAT IF TH E ADDITION MADE BY THE ASSESSING OFFICER, IF SUSTAINED, NET PROFIT OF THE ASSESSEE WOULD BE 39.63%. THE ASSESSEE GAVE COMPARATIVE PROFIT FOR T HE PRESENT ASSESSMENT YEAR AS WELL AS ASSESSMENT YEAR 2004-05 & 2005-06, WHICH WAS FOLLOWS :- SALES G.P. N.P. PERCENTAGE 2003-04 11,53,77,450 46,61,280 4.04% 2004-05 6,45,54,050/- 19,47,304 3.02% 2005-06 3,84,51,498 7,73,613 3.01% ALTERNATIVELY IT WAS ALSO PLEADED THAT ONLY THE PRO FIT ELEMENT IN THE NON- GENUINE PURCHASES SHOULD BE ADDED. IT WAS ALSO SUBM ITTED THAT WHAT THE ASSESSEE WOULD GAIN BY SUCH A MODUS OPERANDI WOULD ONLY BE TO SAVE SALES TAX AND OTHER TAX; THEREFORE 6% OF THE TURNOV ER SHOULD ALONE BE CONSIDERED AS INCOME TO BE ADDED. IN THIS REGARD, T HE ASSESSEE PLACED RELIANCE ON THE DECISION OF HON'BLE ITAT MUMBAI IN THE CASE OF M/S. SUNWAYS (INDIA) PVT. LTD. VS. ACIT, ITA NO. 3954 TO 3958/MUM/03 DATED 20.7.2006. RELIANCE WAS ALSO PLACED ON THE FOLLOWIN G DECISIONS :- VIJAY PROTEINS LTD. VS. ACIT, 58 ITD 428 (AHD) BALAJI TEXTILES INDUSTRIES (P) LTD. VS. THIRD ITO, 49 ITD 177 (MUM) 12. ON CONSIDERATION OF THE ABOVE SUBMISSIONS LEAR NED CIT(A) RESTRICTED THE ADDITION TO 8% OF THE TOTAL PURCHASES AS AGAINS T 25% MADE BY THE ASSESSING OFFICER. THE REASONS IN THIS REGARD ARE G IVEN AT PARA NO. 3.7 & 3.8 WHICH READS AS FOLLOWS :- I HAVE CONSIDERED THE SUBMISSIONS MADE BY THE APPE LLANT AND PERUSED THE ASSESSMENT ORDER. IN FACT, DESPITE AMPL E OPPORTUNITY GRANTED TO THE APPELLANT EVEN DURING THE APPELLATE PROCEEDINGS, IT COULD NOT FURNISH ANY EVIDENCE TO PROVE THE SUPPLIE RS OF RAW MATERIAL AS GENUINE. IT HAS BROUGHT NOTHING ON RECO RD TO CONTROVERT THE FINDINGS OF THE ASSESSING OFFICER. T HE APPELLANT ALSO M/S. INDRAYANI EXPORTS P. LTD. 7 FAILED TO PROVE THE FACT THAT THE AMOUNT OF PURCHAS ES ACTUALLY FLOWED DOWN TO THE SUPPLIERS. THUS, EVERY ASPECT OF TRANSACTION IN GREY REMAINED IN GRAY AREA IMPREGNABLE TO THE DEPAR TMENT. THE ASSESSING OFFICER WAS ABLE TO PIN POINT THE DEFECTS IN THE BOOKS OF ACCOUNT BY TAKING THE INVESTIGATION TO THE LOGICAL CONCLUSION THAT THE PURCHASES SHOWN BY THE APPELLANT WERE NOT GENUI NE AND ACTUALLY THE FACT THAT THE APPELLANT SHOWED CORRECT RESULTS OF TRADING WAS NOT PROVED BEYOND DOUBT. UNDER THE CIRC UMSTANCES, THE ASSESSING OFFICER WAS RIGHT IN REJECTING THE BO OKS OF ACCOUNT OF THE APPELLANT U/S. 145(3) AS UNRELIABLE AND TREATIN G THE PURCHASES MADE FROM PARTIES AT BHIWANDI AS NON-GENUINE. HOWEV ER, THE ALTERNATE PLEA OF THE APPELLANT THAT THE ASSESSING OFFICER ARBITRARILY APPLIED THE RATE OF 25% OF THE TOTAL PU RCHASES AS BOGUS PURCHASES MERITS CONSIDERATION. THE COURTS HAVE HEL D IN SEVERAL JUDGEMENTS THAT ONCE THE BOOKS OF ACCOUNT ARE REJEC TED U/S. 145, THE ASSESSING OFFICER SHOULD ESTIMATE THE INCOME BY JUDICIOUS APPLICATION OF MINED. NO ARBITRARY ACTION ON THE PA RT OF THE ASSESSING OFFICER IS BROOKED IN ANY COURT OF LAW. A LTHOUGH THE ASSESSING OFFICER, WHILE APPLYING THE RATE OF 25% H AS MENTIONED THAT SHE WAS DOING THE SAME KEEPING IN VIEW THE MAR KET RATE, SHE HAS NOT GIVEN A SINGLE COMPARABLE CASE. ON PAGE 7 O F THE ASSESSMENT ORDER, SHE HAS MENTIONED THAT THE INFLAT ION IN PURCHASES WAS BEING ESTIMATED @ 15%, WHILE WORKING OUT THE ADDITION SHE HAS APPLIED THE RATE OF 25% WITHOUT GI VING ANY REASONS. AS PER SETTLED LAW, THE ESTIMATE MUST BE N EAREST TO THE ACTUAL. THE COMPARISON WITH THE SIMILAR CASES OR IN THE ABSENCE OF SIMILAR CASES, WITH THE OTHER ASSESSMENT YEARS IN T HE CASE OF THE ASSESSEE ITSELF IS THE BEST GUIDE IN SUCH CASES. AS HAS BEEN EXPLAINED BY THE APPELLANT ABOVE, THE TOTAL NET PRO FIT ON THE LINES OF THE WORKING OF THE ASSESSING OFFICER WOULD COME TO AROUND 40% WHICH COULD BY NO MEANS BE CONSIDERED ANYWHERE NEAR THE ACTUAL POSITION IN THE FACE OF NET PROFIT SHOWN IN THE SUB SEQUENT YEARS WHICH HOVERED AROUND 4%. AS HAS BEEN MENTIONED BY T HE APPELLANT ABOVE, UNDER SIMILAR CIRCUMSTANCES, HON'B LE ITAT HAS HELD THAT A NET PROFIT RATE OF 6% IS JUSTIFIED. HOW EVER, AS THE FACTS OF ALL THE CASES CANNOT BE EXACTLY SIMILAR AND IN T HE CASE OF THE APPELLANT THE DEFECTS WERE STARK, TAKING INTO CONSI DERATION ALL THE CONTENTIONS OF THE APPELLANT AS DISCUSSED ABOVE, I BELIEVE THAT IT WILL BE FAIR AND WILL MEET THE ENDS OF JUSTICE IF T HE NET RATE OF INFLATION IS RESTRICTED TO 8% OF THE TOTAL PURCHASE S OF RS. 16,68,72,154/-. THUS, THE ADDITION IS RESTRICTED TO RS. 1,33,49,772/-. THE APPELLANT THUS GETS A RELIEF OF RS. 2,83,68,267/-. 13. AGGRIEVED BY THE AFORESAID ORDER OF LEARNED CIT (A), BOTH THE ASSESSEE AS WELL AS REVENUE HAVE PREFERRED THE AFOR ESAID GROUNDS BEFORE THE TRIBUNAL. M/S. INDRAYANI EXPORTS P. LTD. 8 14. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE LEARNE D COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS AS WERE MADE BE FORE THE LOWER AUTHORITIES AND FURTHER SUBMITTED THAT ADDITION TO THE EXTENT OF 8% OF THE TOTAL PURCHASES WOULD BE EXORBITANT AND A FAIR ESTI MATE HAS TO BE MADE. THE LEARNED DR ON THE OTHER HAND RELIED ON THE DECI SION OF HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. LA MEDICA, 250 IT R 575 (DEL) WHERIN IT WAS HELD THAT ONCE PURCHASES ARE FOUND TO BE NOT EF FECTED FROM THE PERSON SHOWN BY THE ASSESSEE IN ITS BOOKS OF ACCOUN TS, THE FACT THAT HE COULD NOT HAVE EFFECTED SALES WITHOUT PURCHASE FROM SOMEBODY ELSE WAS NOT A RELEVANT CONSIDERATION. IT WAS ALSO SUBMITTED THAT IN A SCENARIO, WHERE PAYMENTS FOR PURCHASES ARE CONSIDERED AS HAV ING BEEN MADE IN CASH, DISALLOWANCE OF 20% OF SUCH CASH PAYMENTS COU LD HAVE BEEN MADE BY THE ASSESSING OFFICER INVOKING SECTION 40A(3) OF THE ACT. ACCORDING TO HIM, IF SUCH YARDSTICK IS APPLIED, THEN ADDITION OF 20% OF THE VALUE OF BOGUS PURCHASE WOULD BE JUSTIFIED. HE THEREFORE SUB MITTED THAT DISALLOWANCE MADE BY THE ASSESSING OFFICER WAS APPR OPRIATE AND SHOULD BE RESTORED. 15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE F ACTS IN THE PRESENT CASE ARE THAT THE ASSESSEE BUYS GREY CLOTH. THE ASS ESSEE GETS IT PROCESSED. GREY CLOTH IS BASICALLY RAW MATERIAL AFT ER WEAVING YARN. PROCUREMENT OF GREY CLOTH IS DONE BY AN AGENT THROU GH BROKERS. PAYMENTS WERE MADE TO SUCH AGENTS/BROKERS BY CROSSE D CHEQUES IN FAVOUR OF SELLERS/PROCESSORS. THOUGH THE PAYMENT I S MADE TO THE AGENT BY CROSSED CHEQUES, THE ASSESSEE HAS NO MEANS OF KN OWING WHO WILL EVENTUALLY DEPOSIT THE CHEQUE AFTER ENDORSEMENT. TH ERE IS NO DISPUTE THAT THIS PRACTICE IS PREVALENT IN THE TRADE. FURTH ER GREY CLOTH PURCHASED IS DELIVERED DIRECTLY TO THE PROCESSOR. AFTER PROCE SSING, SAME ARE DELIVERED AT THE WAREHOUSE. THE ASSESSEE AFTER TAKING INTO CO NSIDERATION THE REQUIREMENT OF THE CLIENTS AFTER CUTTING AND PACKIN G FORWARDS THE FINISHED PRODUCT TO C&F AGENT FOR EXPORT OUT OF INDIA. THE ASSESSEE HAD FURNISHED :- M/S. INDRAYANI EXPORTS P. LTD. 9 A) ABSTRACT OF STOCK REGISTER SHOWING MOVEMENT OF GOODS VIZ., PURCHASES, PROCESSES AND EXPORT. B) QUANTITATIVE SUMMARY OF GREY FABRICS PURCHASES, FINISHED FABRICS PROCESSED AND EXPORT DURING THE PREVIOUS YE AR. C) COMPARATIVE STATEMENT OF GROSS PROFIT AND NET P ROFIT FOR 3 YEARS. D) COPIES OF THE INVOICES OF THE SUPPLIERS AS AVAI LABLE WITH THE ASSESSEE AND AS PROVIDED BY THE BROKERS. E) COPIES OF VARIOUS LEDGER ACCOUNTS OF ALL THE PARTIES F) COPIES OF BANK ACCOUNTS TO JUSTIFY PURCHASES G) COPIES OF EXPORT BILLS H) CONFIRMATION OF DYEING AND PRINTING OF FABRIC S. THE ABOVE DOCUMENTS ARE VAILABLE AT PAGES 42 TO PAG E 370 OF THE ASSESSEES PAPER BOOK-I AND II FILED BY THE ASSESSE E. IT IS IN THIS BACKGROUND THAT WE HAVE TO EXAMINE THE PLEA OF THE ASSESSEE BEFORE US. THE SALES SHOWN BY THE ASSESSEE HAS BEEN ACCEPTED A ND ONLY PURCHASES HAVE BEEN DISPUTED. 16. IN THE CASE OF LA MEDICA (SUPRA), A DECISION O F THE HONBLE DELHI HIGH COURT ON WHICH RELIANCE WAS PLACED BY THE LEARNED D .R., THE FACTS WERE AS FOLLOWS. THE ASSESSEE WAS MANUFACTURER OF ALLOP ATHIC MEDICINES AND HAD CLAIMED TO HAVE MADE PURCHASES OF RAW MATERIAL FROM ONE K. ON THE DATE OF PURCHASE, K DID NOT EXIST. ON INQUIRY , THE ASSESSING OFFICER FOUND THAT THE PAYMENTS WERE MADE FOR PURCHASES THR OUGH BANK ACCOUNT WHICH WAS HELD BY FICTITIOUS PERSONS. IT WAS IN THO SE CIRCUMSTANCES, HON'BLE DELHI HIGH COURT HELD THAT THE VALUE OF THE PURCHASE HAD TO BE TREATED AS UNDISCLOSED INCOME OF THE ASSESSEE. THE HONBLE COURT HELD THAT THE FACT THAT THE ASSESSEE COULD HAVE MADE PUR CHASE FROM SOME OTHER CONCERNS FOR EFFECTING SALES CANNOT BE A FACT OR NOT TO MAKE IMPUGNED ADDITION. WE, HOWEVER, FIND THAT IN THE PR ESENT CASE, THE ASSESSEE HAD DEALT WITH THE PURCHASERS THROUGH AGEN T AND HE DID NOT KNOW THE IDENTITY OF THE PERSON SELLING GOODS TO TH EM. HE HAD RELIED ON BROKERS AND GIVEN CHEQUES AS PER THEIR DIRECTIONS. FURTHER QUANTITY OF GREY CLOTH WAS PURCHASES HAD BEEN DELIVERED TO PROC ESSOR WHO CARRIED OUT PROCESSING ON THOSE GOODS. THE QUANTITY OF GOOD S PURCHASED, SALE VALUE AS WELL CLOSING STOCK HAVE NOT BEEN DISPUTED BY THE ASSESSING M/S. INDRAYANI EXPORTS P. LTD. 10 OFFICER. THUS, ON FACTS THE PRESENT CASE IS DISTING UISHABLE FROM THE FACTS AS IT PREVAILED IN THE CASE BEFORE HON'BLE DELHI HI GH COURT. IN THE PRESENT CASE, THE ENTIRE PURCHASES HAVE NOT BEEN REJECTED B Y THE AO BUT ONLY THE BOOKS OF ACCOUNT HAVE BEEN HELD TO BE NOT RELIABLE. IN OTHER WORDS EVEN THE AO ACCEPTS THAT PURCHASES WERE EFFECTED BUT HE WAS OF THE VIEW THAT THEIR VALUES WERE INFLATED TO SHOW LESS PROFITS. W E ARE OF THE VIEW THAT IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE, AN ESTIMATION OF ADDITION ON ACCOUNT OF INFLATED VALUE OF PURCHASES IS REQUIRED TO BE MADE. THE ASSESSEE HAS NOT BEEN ABLE TO SUBSTANTIA TE PURCHASES BY IDENTIFYING THE PERSON FROM WHOM THE PURCHASES WERE MADE. HOWEVER CIRCUMSTANCES PREVAILING IN THE CASE OF THE ASSESSE E AND THE DOCUMENTS FILED BY THE ASSESSEE SUFFICIENTLY INDICATE THAT PU RCHASES WERE MADE BY THE ASSESSEE. THE ASSESSEE COULD NOT IDENTIFY THE PERSONS WHOM THE PURCHASES WERE MADE. THE QUESTION IN THE PRESENT CASE BEFORE US IS THEREFORE AS TO WHETHER THE ESTIMATION OF INCOME AS DONE BY THE AO AND AS MODIFIED BY THE CIT(A) IS PROPER. 17. THE COMPARATIVE GROSS PROFIT, NET PROFIT STAT EMENT FOR THE EARLIER A.Y AND THE SUBSEQUENT A.Y. IS AS FOLLOWS: A.Y. A.Y. A.Y 02-03 03-04 04-05 GROSS PROFIT/TURNOVER 4.04% 3.02% 2.01% NET PROFIT/TURNOVER 3.48% 0.99% NA STOCK IN TRADE/TURNOVER 43.88% 13.09% NA MATERIAL CONSUMED/FG.PRODUCED 84% 72.90% 60 .73% THE AO ESTIMATED THAT THE ASSESSEE HAS INFLATED IT S PURCHASES BY 15% OF THE PURCHASES SHOWN BY IT. BUT WHILE MAKING THE ADD ITION THE AO APPLIED 25% RATE ON TOTAL PURCHASES AND ARRIVED AT A SUM OF RS. 4,17,18,039/- (25% OF RS. 16,68,72,154/- BEING THE TOTAL PURCHASE S DURING THE PREVIOUS YEAR). THE SAME WAS ADDED BACK TO THE TOTA L INCOME OF THE ASSESSEE BEING BOGUS PURCHASES BOOKED BY THE ASSESS EE. THE CIT(A) FOUND THAT IF THE ADDITION MADE BY THE AO IS SUSTAI NED THAT WOULD GIVE A M/S. INDRAYANI EXPORTS P. LTD. 11 NET PROFIT OF AROUND 40% WHICH COULD BY NO MEANS BE CONSIDERED ANYWHERE NEAR THE ACTUAL POSITION IN THE FACE OF NE T PROFIT SHOWN IN THE SUBSEQUENT YEARS WHICH HOVERED AROUND 4%. HE HOWE VER RESTRICTED THE ADDITION, TO 8% OF THE TOTAL PURCHASES WHICH ACCORD ING TO HIM WILL MEET THE ENDS OF JUSTICE. THE ADDITION WAS THUS RESTRIC TED TO RS.1,33,49,772/. WE ARE OF THE VIEW THAT HAVING ACCEPTED THAT VALUE OF PURCHASES WERE INFLATED, THE PROPER COURSE THAT WOULD HAVE BEEN OP EN WAS TO MAKE AN ADDITION TO THE PROFITS BY COMPARING THE GROSS PROF IT OF THE ASSESSEE IN THE PAST. THE G.P. IN A.Y. 2002-03 AS A PERCENTAGE OF THE TURNOVER HAS ONLY BEEN GIVEN (AT 4.04%) AND THE QUANTUM OF TURNO VER HAS NOT BEEN GIVEN BY THE ASSESSEE. IN THE PRESENT A.Y. 3-04, T HE TURNOVER OF THE ASSESSEE WAS RS.11,53,77,450 ON WHICH THE G.P. EARN ED WAS RS.46,61,280/- GIVING A G.P. RATE OF 3.02%. IN THE DECISION OF THE TRIBUNAL MUMBAI IN THE CASE OF M/S. SUNWAYS (INDIA) PVT. LTD. VS. ACIT ITA NO.3954 TO 3958MUM/03, ORDER DATED 20-7-2006 IT HAS BEEN HELD ON IDENTICAL FACTS WHERE PURCHASES COULD NOT BE SUBSTA NTIATED THAT BY ADOPTING A MODUS OPERANDI THE ASSESSEE WOULD GAIN 6 % IN THE FORM OF SALES TAX AND OTHER TAXES AND WHAT SHOULD BE ADDED WAS ONLY 6% OF THE VALUE OF PURCHASES. THE ABOVE DECISION WAS CITED B EFORE THE CIT(A) WHO HAS ALSO TAKEN DUE NOTE OF THE SAME IN RESTRICTING THE ADDITION TO THE TOTAL INCOME OF THE ASSESSEE BY 8% OF THE TOTAL VAL UE OF PURCHASES. WE ARE OF THE VIEW THAT ON THE FACTS AND CIRCUMSTANCES PREVAILING IN THE CASE OF THE ASSESSEE, WE ARE OF THE VIEW THAT AN ADDITIO N OF 4% OF THE TOTAL PURCHASE WOULD BE JUST AND PROPER. WE HAVE ARRIVED AT THE ABOVE PERCENTAGE ON THE BASIS OF THE RATIO LAID DOWN IN T HE DECISIONS RELIED UPON BY THE ASSESSEE BEFORE LEARNED CIT(A) AND ALSO TAKING INTO CONSIDERATION INCOME DECLARED IN THE SUBSEQUENT YEA R. WE HAVE ALSO TAKEN INTO CONSIDERATION THE CIRCUMSTANCE PREVAILIN G IN THE CASE OF THE ASSESSEE, VIZ., THE ASSESSEE IS A 100% EXPORTER WHO SE INCOME IS EXEMPT U/S.80-HHC OF THE ACT AND THEREFORE THERE CANNOT BE ANY STRONG REASON FOR THE ASSESSEE TO MAKE ANY SUBSTANTIAL GAIN BY AD OPTING SUCH MODUS OPERANDI. IN GROUND NO.2 WE WILL DEAL WITH THE CLA IM OF THE ASSESSEE FOR DEDUCTION U/S.80-HHC OF THE ACT, WHICH WAS REJECTED BY THE REVENUE. IF M/S. INDRAYANI EXPORTS P. LTD. 12 ULTIMATELY THE ASSESSEE SUCCEEDS IN GETTING RELIEF U/S.80-HHC OF THE ACT, THE ADDITION MADE BY THE AO, WILL NOT BE OF ANY USE AS ULTIMATELY THE PROFITS OF EXPORT BUSINESS WOULD GO UP BUT SUCH PRO FITS WOULD BE EXEMPT U/S.80-HHC OF THE ACT. FOR ALL THE ABOVE REASONS, WE DISMISS THE GROUND OF APPEAL OF THE REVENUE ON THE ISSUE AND PARTLY AL LOW THE GROUND OF APPEAL OF THE ASSESSEE. 18. GROUND NO. 2 RAISED BY THE ASSESSEE IN ITS APPE AL IS WITH REGARD TO ACTION OF LEARNED CIT(A) IN REFUSING DEDUCTION U/S. 80HHC OF THE ACT. AS ALREADY NOTICED, THE ASSESSEE WAS ENGAGED IN THE BU SINESS OF EXPORT OF GARMENTS AND WAS ENTITLED TO CLAIM DEDUCTION U/S. 8 0HHC OF THE ACT. THE ASSESSEE HAD SHOWN EXPORT SALES OF RS. 11.53 CR ORES AND RECEIPT ON ACCOUNT OF EXPORTS INCENTIVE NAMELY DEPB RECEIPTS O F RS. 2.44 CRORES. THE ASSESSING OFFICER EXCLUDED THE VALUE OF EXPORT INCENTIVE AND FOUND THAT THE ASSESSEE HAD INCURRED A LOSS FROM EXPORT B USINESS AND IN VIEW OF THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF IPCA LABORATORIES, 266 ITR 521 (SC), THE ASSESSING OFFICER DENIED THE CLAIM OF THE ASSESSEE FOR DEDUCTION U/S. 80HHC OF THE ACT. BEFORE THE ASS ESSING OFFICER, THE ASSESSEE POINTED OUT THAT IN VIEW OF THE RETROSPECT IVE AMENDMENT OF THE PROVISIONS OF SECTION 80HHC OF THE ACT BY TAXATION LAWS (AMENDMENT) ACT, 2005, THE ASSESSEE WOULD BE ENTITLED TO CLAIM DEDUCTION U/S. 80HHC EVEN IN RESPECT OF DEPB RECEIPTS. THE ASSESSING OFF ICER, HOWEVER, DID NOT CONSIDER THIS PLEA OF THE ASSESSEE ON THE GROUND TH AT NO DETAILS WERE FILED BEFORE THE ASSESSING OFFICER TILL DATE. 19. THE ASSESSEE RAISED THIS SPECIFIC GROUND BEFORE LEARNED CIT(A) ON THIS ISSUE, WHICH IS GROUND NO. 1 BEFORE THE CIT(A) . THE LEARNED CIT(A), HOWEVER, DISMISSED THIS GROUND FOR THE REASON THE S AME WAS NOT PRESSED BEFORE HIM. 20. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD PLEADED BEFORE LEARNED CIT(A) THAT THE ISSUE MA Y BE DECIDED IN ACCORDANCE WITH LAW AND DID NOT GIVE UP THE GROUND. WE ARE OF THE VIEW THAT A LEGAL CLAIM HAS TO BE ADJUDICATED. THE LEGAL CLAIM IN THIS CASE M/S. INDRAYANI EXPORTS P. LTD. 13 WHETHER DEPB RECEIPTS CAN BE CONSIDERED AS PART OF PROFIT ELIGIBLE FOR DEDUCTION U/S. 80HHC OF THE ACT BY TREATING THE SAM E AS PART OF BUSINESS PROFIT. IN OUR VIEW, RETROSPECTIVE AMENDME NT TO THE LAW AS POINTED OUT BY THE ASSESSEE BEFORE THE ASSESSING OF FICER WAS RELEVANT TO DECIDE THE ISSUE. THE LAW IS SETTLED THAT AN ASSESE E, NOTWITHSTANDING THE FACT THAT A GROUND WAS NOT PRESSED BEFORE CIT(A), C AN STILL AGITATE THE SAME BEFORE THE TRIBUNAL. SINCE, THE ISSUE HAS NOT BEEN CONSIDERED BY THE ASSESSING OFFICER OR LEARNED CIT(A), WE DEEM IT APPROPRIATE TO SET ASIDE THE ORDER OF THE LEARNED CIT(A) ON THIS ISSUE AND REMAND THE ISSUE FOR FRESH CONSIDERATION BY THE ASSESSING OFFICER. T HE ASSESSING OFFICER WILL DECIDE THE ISSUE AFTER AFFORDING OPPORTUNITY O F BEING HEARD IN ACCORDANCE WITH LAW. 21. IN THE RESULT THE APPEAL OF THE ASSESSEE IS THU S PARTLY ALLOWED. 22. ITA NO. 6564/MUM/06 : REVENUES APPEAL 23. WHAT REMAINS TO BE CONSIDERED IN REVENUES APPE AL IS GROUND NO. 2 WHICH READS AS FOLLOWS :- ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, LEARNED CIT(A) ERRED IN DELETING THE ADDITIONS MADE U/S. 68 OF THE I.T. ACT, 1961 HOLDING THE CREDITORS GENUINE WITHOUT APPRECIA TING THE FACT THAT THE ASSESSEE COULD NOT DISCHARGE THE ONUS TO P ROVE THE CREDITORS AS GENUINE AT THE TIME OF ASSESSMENT. 24. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, TH E AO CALLED UPON THE ASSESSEE TO FURNISH CONFIRMATIONS IN RESPECT OF SUNDRY CREDITORS EXCEEDING RS. 10 LAKHS. THE ORDER OF ASSESSMENT SAY S THAT THE ASSESSEE DID NOT FURNISH CONFIRMATIONS IN RESPECT OF THE FOL LOWING SUNDRY CREDITORS FOR EXPENSES :- NAME OF CREDITORS RS. PANNALAL SILK MILLS 11,39,551/- RAGHUNANDAN DYES 10,30,329/- ------------------- RS. 21,69,880/- ------------------- M/S. INDRAYANI EXPORTS P. LTD. 14 SINCE NO CONFIRMATIONS WERE FILED BY THE ASSESSEE, THE AMOUNT OF RS. 21,69,880/- WAS BEING BROUGHT TO TAX IN THE HANDS O F THE ASSESSEE U/S. 68 OF THE I.T. ACT, 1961. 25. BEFORE LEARNED CIT(A), THE ASSESSEE CLAIMED THA T CONFIRMATIONS WERE FILED BEFORE THE ASSESSING OFFICER. IT WAS FUR THER SUBMITTED THAT THE CREDIT IN QUESTION WERE IN RELATION TO JOB WORK AND WERE NOT CASH CREDIT. COPIES OF CONFIRMATIONS WERE ALSO FILED BEFORE LEAR NED CIT(A). LEARNED CIT(A) DELETED THE ADDITION MADE BY THE ASSESSING O FFICER FOR THE FOLLOWING REASONS :- I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLANT AND PERUSED THE ASSESSMENT ORDER. THE ASSESSING OFFICER APPEARS TO HAVE MADE THE ADDITION SUMMARILY. BOTH THE PARTIES WERE INCOM E TAX ASSESSEES HAVING PANS. EVEN, TDS WAS DEDUCTED BY TH E APPELLANT ON THE PAYMENTS OF CONTRACT WORK. THERE WAS NOTHING TO HOLD THESE PARTIES AS NON-GENUINE. WITH A LITTLE BIT MOR E EFFORT, THE ASSESSING OFFICER COULD HAVE ASCERTAINED THE TRUTH IF SHE WAS NOT SATISFIED WITH THE EXPLANATION OF THE APPELLANT. IN MAY VIEW, THE ADDITION MADE IS UNJUSTIFIED AND THE SAME IS THEREF ORE DELETED. 26. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE ASSESS ING OFFICER HAS HELD THAT COPIES OF CONFIRMATION WERE NOT FILED BEF ORE HIM. LEARNED CIT(A) HAS HOWEVER NOT GIVEN ANY FINDINGS WITH REGARD TO F ILING OF CONFIRMATION BY THE ASSESSEE BEFORE THE ASSESSING OFFICER. NOR H AS THE CIT(A) AFFORDED OPPORTUNITY TO THE ASSESSING OFFICER TO EXAMINE THE CREDITORS IN THE LIGHT OF THE CONFIRMATION. WE ARE OF THE VIEW THAT THE I SSUE REQUIRES FRESH EXAMINATION BY THE ASSESSING OFFICER. THE ASSESSING OFFICER WILL CONSIDER THE CONFIRMATION FILED BY THE ASSESSEE AND THEREAFT ER DECIDE THE ISSUE IN ACCORDANCE WITH LAW. WE REMAND THE ISSUE TO THE ASS ESSING OFFICER FOR THE REASON THAT LEARNED CIT(A) DID NOT GIVE ANY OPP ORTUNITY TO THE ASSESSING OFFICER TO MAKE VERIFICATION WITH REGARD TO CLAIM MADE BY THE ASSESSEE BEFORE LEARNED CIT(A). THUS GROUND NO. 2 I S PARTLY ALLOWED. 27. GROUND NO. 3 IS GENERAL IN NATURE AND CALLS FOR NO ADJUDICATION. 28. IN THE RESULT, APPEAL BY THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. M/S. INDRAYANI EXPORTS P. LTD. 15 29. IN THE RESULT THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED AND THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPO SES. ORDER WAS PRONOUNCED ON 23 RD DAY OF JULY, 2010. SD/- (RAJENDRA SINGH) ACCOUNTANT MEMBER SD/- (N.V. VASUDEVAN) JUDICIAL MEMBER DATED : 23 RD JULY, 2010 COPY TO : 1. THE ASSESSEE 2. THE RESPONDENT 3. THE CIT(A)-CONCERNED. 4. THE CIT, CONCERNED. 5. THE DR CONCERNED, MUMBAI 6. GUARD FILE BY ORDER TRUE COPY ASSTT. REGISTRAR, ITAT, MUMBAI PS