SHREE SUNDHA STEELS PVT. LTD., MUMBAI v. ITO - 5(3)(2), MUMBAI

PER R.C.SHARMA (A.M): This is an appeal filed by assessee against the order of CIT(A)-10, Mumbai dated 25/07/2016 for A.Y.2011-12 in the matter of order passed u/s.143(3) of the IT Act.

2. Following grounds have been taken by the assessee:-

1. The Hon'ble Commissioner of Income Tax (Appeal) - 10 [CIT(A)] erred in enhancing the disallowance at Rs. 11,04,76,728/- being estimated gross profit @ 12.5% on alleged bogus purchases as against the addition of Rs. 1,89,39,167/- made by the AO. ITA No.5919/Mum/2016 M/s. Shree Sundha Steels Pvt. Ltd., The Appellant submits that the alleged bogus purchases and its corresponding sales have been duly recorded in the books of account and resultant gross profit have been shown in its audited Financial statement; hence, the addition made by the AO and enhanced by the CIT (A) shall be deleted. The Appellant craves leave to add, amend and modify the above grounds of appeal.

3. Rival contentions have been heard and record perused. Facts in brief are that assessee is carrying business of trading of stainless steels and consignee agent and business of trading of ferrous and non ferrous metal. Assessee usually purchases goods from well known concerns of Jindal Group named JSL Limited and Remi Edelstahi Tubalars Limited. Jindal Stainless Limited is one of the largest integrated manufacturers of stainless steel in India.

4. The department got information regarding bogus supplier, therefore, a survey was also conducted u/s.133A by Income Tax Department on assessee where no adverse documents found at assessee premises. Assessing officer send notices to those defaulter which shown as not served. Further during the assessment Ld. A.O. further wanted to verify all other supplier purchases other than Jindal Group amount to Rs.48,39,52,303/-. Assessee submitted all details in respect of those purchases but Assessing officer was still unsatisfied with the submissions so filed by assessee. Hence for peace of mind, assessee agreed for addition of 0.10%-0.15% of alleged purchases. However, the AO added ITA No.5919/Mum/2016 M/s. Shree Sundha Steels Pvt. Ltd., 1.83% of entire purchases which is Rs.103,49,27,162/- i.e. amount of Rs. 1,89,39,167/-

5. By the impugned order, CIT(A) after relying on the decision of Gujarat High Court in case of Smith P Seth enhanced income up to 12.50% of entire purchases amounting to 103,49,27,162/-.

6. With respect to the decision in the case of Simith Sheth, it was contended by learned AR that the judgment in the case of Simit Sheth is relevant to assessment year AY 2006-07 whereas the assessee's case pertains to AY 2011-12. Simit Sheth was carrying out his business operation in state of Gujarat whereas the present assessee is operating in South Mumbai, Maharashtra where competition is very high. In the case of M/s. Simit Sheth, the suppliers made their statements on oath to the effect that they had not supplied the steel to the assessee but in the case of the assessee company no such statement was given by the supplier. In that case the AO had rejected the books of accounts, whereas in the case of assessee, the ld. AO has not rejected the books of accounts. He further argued that assessee submitted all bills of purchases which was supported by delivery challan. Most of the Goods delivered though handcart and it is also mentioned in bills as well as delivery Challan at page 150,152,153 which is clearly mentioned that goods came through handcart. Most of time these goods are delivered by suppliers and sometime delivery is taken by assessee. Assessee also debited Rs. 28,74,387 as carriage inwards.( Page 17 of Paper Book). Sample copy of ITA No.5919/Mum/2016 M/s. Shree Sundha Steels Pvt. Ltd., confirmation of Vandana Metal Corporation was also placed at page no. 160-161 and Maanibhdara Metal Corporation at page 185-188. All payment made thought account payee cheque and it was duly reflected in bank statement of assessee. Both the lower authority did not dispute the payment to suppliers. Supplier provided all identity to bank following KYC Norms and Banks also verified person records and premises to open Bank Accounts. Assessee has stock register and all quantity is recorded in stock register. Each Item of stock duly recorded in stock register which was duly audited by Tax Auditors and Tax Auditors also mentioned in his Audit report that Assessee Stock register was properly maintained. (Page

33 and 42 of Paper Book). Quantity record is not doubted by A.O. as well CIT(A). The Trading of goods is not covered under Excise duty hence where in local Purchases no Excise Duty are levied hence there is not Excise duty invoices in remaining purchases of goods. As per learned AR making comparison between two bills which is incomparable itself is bad in Laws. All sales of assessee were accepted and corresponding sales is not doubted by Assessing Officer.

7. With regard to the bogus purchases, it was contended by learned AR that the assessee was using the company for the purpose of providing sale bills for which he was collecting some margin. At the time of survey no evidence was found to suggest that the assessee was engaged in real commission business. No other source of income was also found. ITA No.5919/Mum/2016 M/s. Shree Sundha Steels Pvt. Ltd.,

8. As per learned AR, this issue of determination of rate of commission in case of accommodation transaction arose before the ITAT in case of San jay Kumar Garg vs. ACIT [2011] 12 taxmann.com 294 (Delhi) wherein Tribunal held as under:-

49. The next issue arises for estimation of commission income. In the statement the assessee at the time of survey under section 133A had stated that he charged 25p as commission for providing accommodation entries and out of that 25p he paid to others in whose name bank accounts were maintained and 15p was spent on expenses incurred in relation such business and hence, net commission earned was lO p i.e., 0.10 per cent. The Id. CIT (A) had taken the commission at 1 per cent as against 1.75 per cent applied by the Assessing Officer for which no evidence during the course of survey was found. The Id. CIT(A) has also noted that there was no clear standard rate of commission for accommodation activities. According to him the people who are engaged in this type of business would not charge less than 1 per cent on the bill amount as done in the case of brokerage on real estate business. He further observed that the rate of 1 per cent commission is very reasonable. Now the issue arises as to whether the commission should be estimated at the rate of .01 per cent or 1.75 per cent or 1 per cent. The Id. CIT (A) for arriving at the rate of commission earned has relied on rate of commission normally charged in case of real estate transactions. In real estate transactions the broker has to identify/ the suitable butler/ purchaser, inspection of property, visit of interested parties, negotiations of rates, registration of sale deeds etc. whereas in case of bogus entries providers no such activities are involved. Interested party gives cash to entry provider which is deposited in bank account and the entry provider issues cheque. Hence the transactions of bogus entry providers cannot be compared with the transactions of real estate business transactions. He has to ensure the nature of the property and has to satisfy both seller and purchaser. The services rendered by the brokers in real estate transactions are more than the entry providers. Hence both the transactions are not comparable. Therefore, the comparison of commission earned on a real estate transaction, which in fact takes place and commission on transaction which does not at all occur, are not comparable. In accommodation entries the transaction does not take place and, therefore, commission will be certainly lower than the commission in the case of real estate or real transactions. Moreover, neither the Id. CIT{A) nor the Assessing Officer had given any comparable case wherein commission at the rate of 1.75 per cent as taken by the Assessing Officer or 1 per cent adopted by the Id. CIT(A) has been ITA No.5919/Mum/2016 M/s. Shree Sundha Steels Pvt. Ltd., admitted by other assessees engaged in business of bogus provider. Therefore, in the absence of any such material on record, the statement given by the assessee on oath during the course of survey proceedings has to be given credence. The assessee has floated the bogus concerns and has controlled the accounts. During the course of survey, no material was found on the basis of which it could be said that the assessee had passed on. 1 per cent commission to the persons in whose names the bank accounts were maintained. In the absence of any evidence having brought on record, we are unable to agree with the assessee that the assessee had passed on commission of 10 Ps. to the persons in whose names dummy concerns were floated. However, in the business of entry provider certain expenditure has to be incurred which has been stated to be 5p during the course of survey. Therefore, credit of 5p out of 25p received as commission has to be allowed. Therefore, the Assessing Officer is directed to estimate commission income by applying 0.2 per cent net commission on turnover determined by the Ld. CIT (A) for both the assessment years as against 1 per cent taken by Him.

10. Reliance was also placed on the jurisdictional Mumbai Tribunal in case of Gold Star Finvest [P.] Ltd Vs. ITO [20131 33 taxmann.com 129 (Mumbai Trib) wherein Tribunal held as under:

12. Having carefully examined the various Orders in the case of different assessees it has become amply clear that in these type of activities brokers are only concerned with their commission on the value of the transactions. Now the question comes what would be the reasonable percentage of the commission on the total turnover? The assessee has also made out a case that the customers do not come directly to him and they come through a sub-broker who also charge a particular share of commission. In all the judgments what has been stated is that an average percentage of commission is between .15% to .25%. In the cases of Palresha & Co. (supra) and Kiran & Co. (supra), the Tribunal has considered reasonableness of percentage of commission to be earned on turnover was at .1 %. The assessee himself has offered the percentage of commission at 0.15%, which is more than the percentage of commission considered to be reasonable by the Tribunal in the cases of Palresha & Co. (supra) and Kiran & Co. (supra), in similar type of transactions. The theory of the Assessing Officer to treat the entire deposit as "unexplained cash credits, cannot be accepted in the light of assessment orders in the case of beneficiaries and also in the light of the fact that assessee is only concern with the commission earned on providing accommodation entries. We, therefore, of the view that since the assessee itself has declared the commission on turnover at 0.15% which is more than the ITA No.5919/Mum/2016 M/s. Shree Sundha Steels Pvt. Ltd., percentage considered to be reasonable by the Tribunal in the cases of Palresha & Co. (supra) and Kiran & Co. (supra), the same should be accepted. We, accordingly, accept the commission declared by the assessee and set aside the Order of the CIT (A) in this regard.

11. As per learned AR in respect of purchases made from parties which were not found but the sales against such purchases is accepted, then no addition can be made. For this purpose reliance was placed on the following judicial pronouncements. Rajesh P Soni V/s ACIT 100 TTJ 892 (Ahd) CIT V/s Nikunj Eximp Enterprises (P.) Ltd.* [2013] 35 taxmann.com 384 (Bombay HC)

12. Learned AR also relied on the following judicial pronouncements in support of the contention that no addition can be made without evidence. ITO V/s Permanand [2008 25 SOT 11] IT V/s M K Bros. [163 ITR 249] CIT V. Kashiram Textile Mills P Ltd. [2006] ITR 61 (GUJ) Saraswathi Oil Traders V. CIT [2000] 284

13. As per learned AR merely on the information of third party without providing opportunity of cross examination, no addition can be made. For this purpose, reliance was placed on the following judicial pronouncements. Kishan Chand Chella Ram v. CIT [1980] T25ITR713 (SC) Marneedi Satyam V/s Masimukkula Venkataswami [ AIR 1949 Mad 689] ITO V/s Permanand [2008 25 SOT 11]

14. As per learned AR since all the payments were made through account payee cheque, this fact would overshadow all other short comings. For this purpose reliance was placed on the following judicial pronouncements. ITA No.5919/Mum/2016 M/s. Shree Sundha Steels Pvt. Ltd., Mather & Platt (India) Ltd. vs CIT 168 ITR 493 Cal ITO V/s Kashmir Ind. Palace 99 Taxmann (Chd) (Mag) RamanandSagar V/s DCIT 256 ITR 134 (Bom) CIT-I v.Nangalia Fabrics (P.) Ltd. [2013] 40 taxmann.com 206(Gujarat) CIT V. Korlay Trading Co. Ltd. [1998] 232 ITR 820 (CAL) CIT V/s Basant Investment Corporation (1999) 238 ITR 680 (Cal).

15. As per learned AR the transactions were duly supported by the evidences and no evidence was found in respect of cash back, no addition can be made. For this purpose, reliance was placed on the following judicial pronouncements. CIT V/s M K Bros. [163 ITR 249] ITO V/s Kanchanwala Gems 122 TTJ 854

16. After inviting our attention, learned AR contended that no evidences were found in the accounts, hence, addition cannot be made on mere statement basis. For this purpose reliance was placed on the decision of R K Synthetics 81 TTJ 909. As per learned AR, fact is that suppliers names appear in the list of hawala dealers of the sales-tax dept and that assessee is unable to produce them does not mean that the purchases are bogus if the payment is through banking channels & GP ratio becomes abnormally high. For this purpose, reliance was placed on the decision of Mumbai Tribunal in the case of Shri Ramila Pravin Shah, ITA No.5246/Mum/2013.

17. As per learned AR, without finding any discrepancy in books of account, transaction cannot be doubted.

I. DY.CIT V. BRAHMAPUTRA STEELS (P) LTD. [2002] 122 TAXMAN 32 (IATA - GAUHATI): - ITA No.5919/Mum/2016 M/s. Shree Sundha Steels Pvt. Ltd., Assessee had maintained daily stock register in respect of purchase of raw materials and production of finished goods as required by the Central Excise Act and also furnished weekly, fortnightly and quarterly returns before authorities, factum of purchase of raw materials could not be disputed. Therefore, transactions of purchase of raw materials were genuine and accepted.

II. ITO VS. SURANA TRADERS C/O S.G. SALECHA AND CO. No mistake was pointed out by the AO in the stock register and quantitative tally furnished by the assessee and genuineness of the transactions was verified from the books of account

18. In view of the above it was argued that there should not be any further addition and addition made by A.O. and enhanced by CIT(A) should be deleted.

19. On the other hand, learned DR relied on the order of the AO and CIT(A) and contended that lower authorities had made the addition with respect to the bogus purchases found, accordingly, the order passed by CIT(A) was to be confirmed.

20. We have considered rival contentions and carefully gone through the orders of the authorities below. We had also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by learned AR and DR during the course of hearing before us. From the record, we found that there was a survey at the assessees premises with respect to the information regarding bogus ITA No.5919/Mum/2016 M/s. Shree Sundha Steels Pvt. Ltd., purchase bill. The AO found that assessee has taken bogus purchase bill as per the information of the Sales Tax Department. Assessing officer send notices to those defaulter which shown as not served. Further during the assessment Ld. A.O. further wanted to verify all other supplier purchases other than Jindal Group amount to Rs.48,39,52,303/-. Assessee submitted all details in respect of those purchases but Assessing officer was still unsatisfied with the submissions so filed by assessee. Hence for peace of mind, assessee agreed for addition of 0.10%-0.15% of alleged purchases. However, the AO added 1.83% of entire purchases which is Rs.103,49,27,162/- i.e. amount of Rs. 1,89,39,167/-. However, CIT(A) after relying on the decision of Gujarat High Court in case of Smith P Seth enhanced income up to 12.50% of entire purchases amounting to 103,49,27,162/-.

21. From the record we found the following details of purchases: Purchases from Supplier who did not paid sales Tax (Hawala Dealers as per Income Tax Department) 55,09,74,859/- Purchases From Other than Hawala Dealers as per Income Tax Department 48,39,52,303 Total Purchases where the estimation made by A.O. 103,49,27,162

22. Our attention was also invited on page 9 of assessment order where at para 3 of assessment order, which is as under: "In this regard, a survey action u/s. 133A was also carried out by the Investigation Wing, Mumbai in your case on 22.11.2012 and various new facts have emerged out of the same. During the survey your Books ITA No.5919/Mum/2016 M/s. Shree Sundha Steels Pvt. Ltd., of Accounts and Original Bills and Vouchers were examined and it has been noted that: The genuine purchase hill cum delivery Challan were supported i with proper details such as description and item code, excise tariff number, quantity, rate , value . it also contains bill no., time of removal, date of removal, order no., vehicle no. name of transporter, etc however in respect of alleged purchases there were no such details on invoices/ delivery Challan.

23. In reply, assessee submitted that there is big difference between excise invoice and non excise invoice, we cannot compare both invoice. Excise invoice must follow standard prescribed in Excise Rule hence in trading there is no standard format of invoice. Assessee had purchased goods from trading concerns. Trading of goods not require following standard rule, Hence all purchases should treated as genuine.

24. During the course of hearing, learned AR relied on the following judicial pronouncements in support of the contention that suspicious cannot take place the evidence. DCIT v. Shri Rajeev G. Kalathil, (Mum) (Trib) (ITA No. 6727/M/2012 dt.20/8/2014) K.P. Varghese v. ITO, (1981) 131 ITR 579 (SC); CIT v. Roman & Co., (1968) : 67 ITR 11 (SC); CIT v. Calcutta Discount Co. Ltd.', (1973) 91 ITR 8(SC); Umacharan Shaw & Bros v. CIT, (1959) 37 ITR 271 (SC)

25. As per learned AR observation of the third party cannot be basis of addition and satisfaction of AO is must. For this purpose, reliance was placed on the following judicial pronouncements. ITO V/s Permanand [2008 25 SOT 11] ITO v. Vinod Kumar, Prop., Vinod Brothers, Sriganganagar, [ITA No. 623/Jodh. of ITA No.5919/Mum/2016 M/s. Shree Sundha Steels Pvt. Ltd., 2005 ITO V/s Arora Alloys Ltd. [2012] [12 ITR(trib) 263]

26. As per learned AR when there is a quantity tallied with regard to purchase and sales, no addition is warranted. For this purpose, reliance was placed on the following judicial pronouncements. Balaji Textile Industries (P) Ltd v. ITO(1994) 49 ITD 177 (Bom) DCIT v. Adinath Industires (2001) : 252 ITR 476 (Guj) CIT v. M K Brothers (1987) : 163 ITR 249 (Guj DCIT v. Adinath Industries (2001) : 247 ITR 35 DY.CITV. BRAHMAPUTRA STEELS (P) LTD. [20O2] 122 TAXMAN 32 IATA Gauhati)

27. From the record we found that before AO, assessee has filed following details with documentary evidence. Comparative Trading Account with GP Ratio Purchases from suppliers whose name is not appearing in list of Hawala Dealers Corresponding Sales of suppliers whose name is not appearing in list of Hawala Dealers ; Purchases from suppliers whose name is appearing in list of Sales Tax Department as they was VAT defaulter Corresponding Sales of suppliers whose name is appearing in list of Sales Tax Department as they was VAT defaulter Sales Tax Order under Mahavat Act Affidavit by Director before Sales Tax Authorities Details of Purchases with name, address, item, quantity and amount for the AY 2011-12 Details of Sales with name, address, item, quantity and amount for the AY 2011-12 Chart Showing GP ratio Sample Bills cum Delivery Challan of Suppliers whose name' was not in list of Sales Tax Department ITA No.5919/Mum/2016 M/s. Shree Sundha Steels Pvt. Ltd.,

28. Break-up of purchases and sales, where department has not made any addition, details of sales and purchases whose name is not appearing in VAT (hawala dealer).

29. Details of purchase and sales on which sellers have not paid VAT as per Mahavat Act and as per Income Tax Department they are hawala parties. Following details of purchases were filed before the lower authorities and the respective GP shown on these purchases were as under:- Trading Account F.Y. 2010-11 A. Y. 2011-12 Particulars Qty ( M.T.) Amount Particulars Qty(M.T.) Amount To Opening Stock 5,693,242. By Sales 5,832 1,240,684,302 To Purchases 5792 1,210,177,693 By Closing Stock 4,806,506 To Gross Profit 29,619,873 5S50 1,245,490,808 5,8,50 1,245,490,808 2.39 Shree Sundha Steels Private Limited F.Y. 2010-11 A. Y. 2011-12 Trading Account where Genuine Purchases and Sales as per Assessee/ Department where no addition made Particulars Qty ( M.T.) Amount Particulars Qty ( M.T,} Amount To Opening Stock 5,693,242 By Sales 176,355,533 To Purchases 175,250,531 By Closing Stock 4,806,506 To Gross Profit 218,266 181,162,039 181,162,039 0.12 ITA No.5919/Mum/2016 M/s. Shree Sundha Steels Pvt. Ltd., Shree Sundha Steels Private Limited F.Y. 2010-11 A. Y. 2011-12 Trading Account on the basis of Genine Purchases grid Sales as per Assessee whose name is not appearing in VAT ( hawala Dealer of Mahavat but addition made by A.O. Particulars Qty. (M.T.) Amount Particulars Qty (M.T.) Amount To Opening Stock By Sales 2,513 497,196,347 To Purchases 2,513 548,943,313 By Closing Stock Less: Purchases Return 64,991,010 483,952,303 To Gross Profit 13,244,044 2512.601 497,196,347 2,513 497,196,347 2.66 Shree Sundha Steels Private Limited F.Y. 2010-11 A. Y. 2011-12 Trading Account on the basis of Purchases and sales on which sellers have not paid VAT as per Mahavat site and as per income Tax Department they are hawala dealers Particulars (M.T.) Amount Particulars Qty (M.T.) Amount To Opening Stock By Sales 2,604 567,132,422 To Purchases 2,604 554,525,794 By Closing Stock Less: Purchases Return 3,550,935 550,974,859 To Gross Profit 16,157,563 2603.865 567,132,422 2,604 567,132,422

30. We also observe that AO has not rejected the books of accounts. In respect of total sales, assessee had shown GP of 2.39%. However, GP shown in respect of genuine purchases was 0.12%. However, the GP shown on the purchases made through hawala dealers was at 2.66%, ITA No.5919/Mum/2016 M/s. Shree Sundha Steels Pvt. Ltd., whereas GP on the purchases made from the parties who have not paid VAT as per Mahavat Act at 2.85%. Thus, it is very clear that assessee had declared much more GP on the purchases alleged to be made through hawala parties, thus, assessee had not shown lower profit in respect of alleged bogus purchases. The CIT(A) after relying on the decision of Gujarat High Court in the case of Simit P Seth(supra) estimated profit at 12.50%.

31. During the course of hearing, learned AR has clearly demonstrated that facts in the case of Simit P Seth were entirely different, therefore, reliance placed by CIT(A) on the decision of Simit P Seth for making addition by computing profit at 12.5% is not justified. So far as genuine purchases are concerned, there is no justification at all for making any addition by estimating extra profit there on to the extent of purchase of Rs.48.39 Crores. As per the record, the assessee has made purchase of Rs.48.39 Crores from other than hawala dealers, no further addition is warranted on such purchases. However, purchases to the extent of Rs.55.09 Crores were made from suppliers who did not pay sales tax. Even though the profit declared by the assessee on such purchases was much more than the profit shown on the genuine purchases, but keeping in view the totality of facts and circumstances of the case and the fact that quantitative statement of purchases and sales so filed by the assessee was not disputed by any of the lower authorities, we deem it fit to restrict the addition to the extent of 2% of alleged bogus purchases ITA No.5919/Mum/2016 M/s. Shree Sundha Steels Pvt. Ltd., amounting to Rs.55.09 Crores. Thus, we restrict the addition to the extent of Rs.11.01 lakhs. We direct accordingly.

32. In the result, appeal of the assessee is allowed in part in terms indicated hereinabove. Order pronounced in the open court on this 31/07/2018 Sd/- (RAM LAL NEGI) Sd/- (R.C.SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated 31/07/2018 Karuna Sr.PS Copy of the Order forwarded to : BY ORDER, (Asstt. Registrar) ITAT, Mumbai

1. The Appellant

2. The Respondent.

3. The CIT(A), Mumbai.

4. CIT

5. DR, ITAT, Mumbai

6. Guard file. //True Copy//