Mobile View
Main Search Forums Advanced Search Disclaimer
Cites 7 docs - [View All]
The Taxation Laws (Amendment) Act, 2001
N.C. John & Sons Ltd. vs Cit on 22 January, 2003
Supreme Industries Ltd. vs Dy. Cit on 5 September, 2007
K.K. Doshi And Co. vs Cit on 25 October, 2007
Cit, Gujarat Iii vs Cadila Chemicals on 23 February, 1999

User Queries
View the actual judgment from court
Income Tax Appellate Tribunal - Mumbai
Fortune Steel Industries , Mumbai vs Department Of Income Tax

IN THE INCOME TAX APPELLATE TRIBUNAL,

MUMBAI BENCH "B",MUMBAI

BEFORE S/SHRI R.V. EASWAR (PRESIDENT) & RAJENDRA SINGH (AM)

I.T.A.Nos.2894 & 2895/Mum/2007

(A.Y. 2003-04)

Asst.Commr. of Income-tax,

Cir. 18(2), Room No.115, 1st floor,

Piramal Chambers, Patel,

Mumbai-400 012.

Vs.

M/s. Fortune Steel Industries,

Raghuvanshi Mills Compound,

No.25, 2nd floor,

11/12, Senapati Bapat Marg,

Lower Parel, Mumbai-400 013.

PAN: AAAFF0278M

Appellant

Respondent

C.O.No. 29/Mum/2009

(Arising out of ITA No.2894/Mum/2007)

(A.Y. 2003-04)

M/s. Fortune Steel Industries,

Raghuvanshi Mills Compound,

No.25, 2nd floor,

11/12, Senapati Bapat Marg,

Lower Parel, Mumbai-400 013.

PAN: AAAFF0278M

Vs.

Asst.Commr. of Income-tax,

Cir. 18(2), Room No.115, 1st floor,

Piramal Chambers, Patel,

Mumbai-400 012.

Cross objector

Respondent

Department by

Smt. Reena Jha Tripathi.

Assessee by

Shri K.B. Karia.

O R D E R

PER RAJENDRA SINGH, AM :

These appeals by the Revenue and the cross objection by the assessee are directed against the order of CIT(A) dated 08-12-2006 in relation to the assessment u/s. 143(3) and order dated 13-12-2006 in relation to the order u/s. 154 of the I.T. Act for asstt. year 2003-04. These appeals by the Revenue and the cross objection by the assessee were heard together as they involve some connected issues and, therefore, these are being disposed of by a single consolidated order for the sake of convenience. ITA No.2894/Mum/07 (By Revenue):

2. In this appeal, the Revenue has raised on two different grounds which relate to addition on account of non-genuine purchases and reduction of indirect cost while computing the deduction u/s.80HHC.

3. The first dispute is regarding an addition of Rs.2,09,05,947/- on account of purchases held by the AO as non-genuine. The AO, during the assessment proceedings, noted that the assessee had declared gross profit of Rs.4,56,44,561/- on a total turnover of Rs.28,28,88,493/- which gave a gross profit rate of 16.13% against gross profit rate of 10.81 on total turnover of Rs.26,44,25,962/- in the immediately preceding year. The AO asked the assessee to submit details of purchases exceeding Rs.2,00,000/- in each case with names and addresses, which were given by the assessee vide letter dated 19-10-2005. The AO, thereafter, issued notices u/s.133(6) of the I.T. Act to the said parties with a view to verify the genuineness of the purchases but the same were returned by the postal authorities with the remark "not known" or "left". The AO, therefore, asked the assessee vide letter dated 25-01-2006 to produce the parties for verification. As per the AO, the assessee sought adjournment to 10-02-2006 vide letter dated 03-02-2006, which was allowed. But, there was no compliance by the assessee and the parties were not produced for verification. The AO, therefore, listed 10 parties in which cases there were discrepancies or the assessee had failed to produce the parties/give the latest addresses. The AO, vide letter dated 24-03-2006, communicated the said discrepancies to the assessee and asked it to explain as to why the purchases from the said parties should not be treated as non-genuine. The discrepancies pointed out by the AO in respect of 10 parties are reproduced below for ready reference : S.

No.

Name of the person

Amount

Remarks

1

M/s.Malu Steel

Rs,13,56,250/-

In this case the assessee shows that Rs.13,56,250/- worth of goods were purchased whereas the ledger account submitted by the parties shows purchases of Rs.15,04,100/-. Thus the assessee has understated the transactions to the extent of1,47,850/-. 2

Master Utensils (P) Ltd.

Rs.31,90,650/-

The purchases shown by the assessee is Rs.31,90,650/- during the year, whereas the party has filed a copy of the ledger account of the assessee which does not show any transaction other than payments for purchases of the earlier year. 3

Sheetal Enterprise

Rs.22,64,851/-

Notice u/s. 133(6) issued on 13.12.2005 was returned unserved with the remark "not known". A letter dated 25.01.2006 was issued to the assessee highlighting the list of parties to whom the notices could not be served and requesting them to produce the said parties for verification. But the assessee failed to produce and/or to provide the present address of many of these parties including M/s. Sheetal Enterprise. 4

Venus Enterprise

Rs.2,48,400/-

Notice u/s.133(6) issued on 13.12.2005 was returned unserved with the remark "not known". A letter dated 25.01.2006 was issued to the assessee highlighting the list of parties to whom the said notices could to produce the said parties for verification. But the assessee failed to produce and/or to provide the present address of many of these parties including M/s. Venus Enterprise. 5

Komal Enterprises

Rs.5,00,500/-

Notice u/s. 133(6) issued on 13.12.2005 was returned unserved with the remark "left". A letter dated 25.01.2006 was issued to the assessee highlighting the list of parties to whom the notices could not be served and requesting them to produce the said parties for verification. But the assessee failed to produce and/or to provide the present address of many of these parties including M/s. Komal Enterprise. A summons was issued to the party's banker HDFC Bank who by their letter dated 13.03.2006 replied enclosing copy of the account opening form. The proprietor of M/s. Komal Enterprise was shown as Shri Pradeep S. Sharma of 50/56, Sutar Chawl, 2nd floor, Zaveri Bazar, Mumbai-2 and the introducer was Shri P.S. Sharma (i.e. the same party) who is also proprietor of M/s.Venus Enterprises and the accounting opening form shows that cheque of Rs.40,000/- was drawn on Venus Enterprises and deposited to open this account. 6

Amar Corporation

Rs.5,00,500/-

Notice u/s.133(6) issued on 13.12.2005 was returned unserved with the remark "not known". A letter dated 25.01.2006 was issued to the assessee highlighting the list of parties to whom the notices could not be served and requesting them to produce the said parties for verification. But the assessee failed to produce and/or to provide the present address of many of these parties including M/s. Amar Corporation. 7

M/s.Royal Enterprises

Rs.5,00,500/-

Notice u/s.133(6) issued on 13.12.2005 was returned unserved with the remark "not known". A letter dated 25.01.2006 was issued to the assessee highlighting the list of parties to whom the notices could not be served and requesting them to produce the said parties for verification. But the assessee failed to produce the party. A summons was issued to the party's banker i.e. HDFC Bank who by their letter dated 13.03.2006 replied by enclosing the account opening forms. The proprietor is Shri Balkrishna V.Shah, 50/56, Sutar Chawl, 2nd floor, Zaveri Bazar, Mumbai-2. A curious common request made by the party at Sr. No.5, 6 and 7 is that a monthly statement should be sent by mail while opening the a/c. a sum of Rs.40,000/- from Standard Chartered Bank, Chowpatty Branch. 8

Poonam Enterprises

Rs.61,00,803

Notice u/s. 133(6) issued on 13.12.2005 was returned unserved with the remark "not known". A letter dated 25.01.2006 was issued to the assessee highlighting the list of parties to whom the notices could not be served and requesting them to produce the said parties for verification. But the assessee failed to produce and/or to provide the present address of many of these parties including M/s. Poonam Enterprise is one Shri Narendra D. Vyas. The account opening form procured from the bank shows him to be a manufacturer and trader with a gross annual turnover of Rs.6 cores. The account was closed on 07.06.03. The sales tax certificate shows him a as reseller in electronic, electrical and engg. parts, but the letter head for closure of bank account shows him as dealer in stainless steel articles. The assessee held 2 accounts in the bank and both were closed simultaneously and the reason given was closure of proprietory firm. 9

M/s.Veera Mercantile (P) Ltd.

Rs.107,89,943

Notice u/s.133(6) issued on 13.12.2005 was returned unserved with the remark "not known". A letter dated 25.01.2006 was issued to the assessee highlighting the list of parties to whom the notices could not be served and requesting them to produce the said parties for verification. But the assessee failed to produce and/or to provide the present address of many of these parties including M/s. Veena Mercantile (P) Ltd. Shri N.D. Vyas (proprietor of Poonam Enterprises) is a Director of this company along with Mr. R.K. Shah. This office requested the bank to supply copy of the bank account and the same was verified with certain transactions of this party with the assessee. It is seen that in most of the cases, the money is withdrawn immediately after deposit. Also some of the transactions of the assessee are not reflected in the bank account which means that bearer cheques were issued and encashed. 10

M/s.Dimple Metal Corporation

Rs.19,07,595/-

Despite issuing notice as per the new address furnished by the assessee, none appeared. As per the opening form obtained from the banker of the party it is seen that th sole proprietor of the firm is Shri P.C. Jain. But the account has instructions that it will be operated by Shri N.C. Jain only. As in the earlier case some of the cheques have been deposited and cash equivalent has been immediately withdrawn. There are also huge cash deposits. 3.1 In reply to the letter dated 24-03-2006, the assessee vide letter dated 28-03-2006 reconciled the purchase figure in the case of M/s. Malu Steels with supporting evidence. The discrepancy in the case of M/s. Master Steel Utensils P.Ltd. was also reconciled with confirmation from the said party. In respect of the remaining parties, the AO observed that neither their identify was established by the assessee nor their creditworthiness. The AO, therefore, treated the purchases of Rs.2,09,05,947/- from the 7 parties from Serial Nos.3 to 9 as not genuine and added the same as income of the assessee. 3.2. The assessee disputed the decision of the AO and submitted before the CIT(A) that the AO vide letter dated 25-01-2006 had asked the assessee to produce 13 parties, in which cases letters issued to the parties had been returned unserved. The assessee had given the current addresses of 5 parties. Thereafter, the assessee had been asked to submit the copies of ledger accounts of the various parties and copy of the bank statement. The assessee had submitted the details along with quantitative reconciliation of purchases/sales and closing stocks as desired by the AO. The AO had made necessary verification of the information given and nothing adverse was found by him. The ld. A.R. also submitted that the AO had also made verification of comparative position of purchases vis-à-vis marker price. The assessee had made payments by account payee cheques which were debited in its bank account. It was accordingly argued that there was no case for any addition. 3.3 The CIT(A) was satisfied with the above explanation. It was observed by him that the assessee had not only given the ledger copy of accounts but also provided quantitywise details of purchases and subsequent sales in each and every case. All purchases were invariably reflected in the sales disclosed by the assessee in the books of account. The AO had also undertaken the exercise of comparison of purchase price vis-a-vis market price. Therefore, there could not be any case for suppression of profit. As regards the finding of the AO that some of the transactions of the assessee such as those in the case of M/s. Veera Mercantile P.Ltd. were not reflected in the bank account of supplier, the assessee explained that the account payee cheques need not necessarily be deposited in the same account and might have been deposited in some other account for unauthorisedly encashing the account payee cheques. This, therefore, did not prove that the assessee had not made any purchases. The CIT(A) also observed that in case the AO thought that the cheques were not account payee, he could make direct enquiries from the bank, and in case some adverse things were noticed, the AO could always take action u/s.147/148 of the I.T. Act. But, there was no case made out against the assessee on the basis of the enquiries made. The CIT(A), therefore, held that no addition could be made on account of non-genuine purchases and deleted the addition made by the assessee, aggrieved by which the Revenue is in appeal before the Tribunal. 3.4. Before us, the ld. D.R. appearing for the Revenue assailed the order of CIT(A). It was argued that the burden was on the assessee to prove the genuineness of the purchases which had not been discharged by the assessee. The purchases had, therefore, been rightly held as non-genuine. She placed reliance on the following decisions in support of her case : (i) 214 ITR 801 (SC) in the case of Sumati Dayal vs. CIT.

(ii) 213 ITR 805 (Bom.) in the case of Smt. Vasantibai N. Shah vs. CIT.

(iii) 236 ITR 269 (Madras) in the case of Traders and Traders vs. CIT.

3.5. The learned counsel for the assessee, on the other hand, supported the order of CIT(A). It was argued that all the purchases were accounted along with corresponding sales and, therefore, there could not be any case for concealment of profit. It was also submitted that the AO was not correct in stating in the assessment order that there was no compliance by the assessee in response to letter dated 03-10-2006 regarding verification of purchases. It was pointed out that the AO vide letter dated 25-01-2006 (copy placed at page 135 of the paper book) had asked the assessee to produce 13 parties in respect of which the letters issued were returned by the postal authorities. The assessee, vide letter dated 10-02-20076 (copy placed at pages 125-126 of paper book), had given the new addresses of 5 parties. The assessee, vide letter dated 13-02-2006 (copy placed at page 127 of paper book), had also submitted copy of the ledger account as well as bank statement in respect of 10 parties in respect of which information was desired by the AO. Payments in the cases of all the parties were debited in the bank account of the assessee. Further, the assessee vide letter dated 22-03-2006 had given quantitywise purchases and corresponding exports in relation to the purchases made from 8 parties appearing in the list of the AO, copy of which was placed at pages 115-123 of the paper book. It was thus argued that it was not correct to say that the assessee had not made compliance. The assessee had filed complete details and reconciliation, and since the corresponding sales were reflected in the accounts, there could not be any suppression of profits. The AO had not given any adverse finding in respect of the various details given by the assessee. All the cheques were cleared in the bank account of the assessee and the assessee could not be held responsible to give details of account in which the concerned parties had deposited their cheques. It was also pointed out that the gross profit rate declared by the assessee was better than that in the immediate preceding year. There was thus no justification for making any addition in the case of the assessee. The learned A.R. placed reliance on the following decisions in support of his case : (i) 297 ITR 441 (SC) in the case of Anis Ahmed & Sons vs. CIT.

(ii) 163 ITR 249 (Guj.) in the case of M.K. Brokers.

(iii) 49 ITD 177 (Bom.) in the case of Balaji Textile Industries P.Ltd. v.

ITO.

3.6 We have perused the records and considered the rival contentions carefully. The dispute is regarding the addition made by the AO on account of certain purchases held as non-genuine. The parties in respect of which the purchases were held as non-genuine are listed at serial nos. 3 to 10 in para 3 earlier. The reason given by the AO for the disallowance of purchases as non-genuine was that the letters issued to the parties had returned unserved and the assessee could not provide the current addresses nor produce the parties. In the cases of serial nos.9 and 10, the AO also noted that the amounts deposited in the bank account of the sellers had been immediately withdrawn in cash and that some of the transactions with the assessee were not reflected in the bank account of the party at serial no. 9. It may be noted here that though the AO had found the purchases in respect of 8 parties at serial nos.3 to 10 as non-genuine but the disallowance had been made only in respect of parties nos.3 to 9 and later the assessment was rectified to make disallowance in respect of party at serial no. 10 also. The CIT(A) has deleted the addition made by the AO on the ground hat the assessee had maintained proper books of account including stock register and the purchases from the said parties were duly entered in the books. The assessee had also given complete quantitative tally to show that the purchases from these parties were duly reflected export proceeds which were found in the books. The payments had been made by the assessee by cheque which were duly debited in the bank account of the assessee. 3.7 On careful consideration of the various aspects, we see no infirmity in the order of the CIT(A). Since the purchases from the said parties were duly reflected in the sales and quantitative tally had also been given, the purchases could not be considered as bogus because there could not be any sales without purchases. This view is supported by the decision of the Mumbai Bench of Tribunal in the case of Balaji Textile Industries Pvt. Ltd. vs. CIT (49 ITD 177) on which the ld. A.R. has placed reliance. The judgment of Hon'ble High Court of Gujarat in the case of M.K. Bros. vs. CIT (163 ITR 249) also supports the case of the assessee. In that case, the sellers had even admitted before the STO that they had issued bogus vouchers. The Tribunal, however, found that there was no evidence to show that the vouchers were bogus and there was also no material to show that the payments made by the assessee by cheque had been returned to it. The Tribunal deleted the addition which was upheld by the Hon'ble High Court. The case of the assessee stands on a better footing as in this case none of the sellers had stated that the sales to the assessee were bogus. Merely because the parties were not found at the addresses given which may be due to the fact that they may have changed addressed over a period of time, no adverse inference could be drawn against the assessee. This view is supported by the judgment of the Hon'ble Supreme Court in the case of Anis Ahmed & Sons vs. CIT (297 ITR 431) relied upon by the ld. A.R. In that case, the case of the assessee was that it was a commission agent and not a trader. To verify the matter, the AO had issued summons to 10 parties, 5 of which confirmed that the assessee was a commission agent. The remaining 5 parties did not appear as the summons could not be served on them. The AO, therefore, treated the transactions in respect of these 5 parties as traders. But, this was not upheld by the Hon'ble Supreme Court on the ground that no adverse inference can be drawn against the assessee due to non-appearance of 5 parties as summons had not been served on them. 3.8 The ld. D.R. has relied on certain judgments which, in our view, are distinguishable. The judgment of Hon'ble Supreme Court in the case of Sumati Dayal (214 ITR 801) and the judgment ot Hon'ble Bombay High Court in the case of Smt.Vasantibai N. Shah (213 ITR 805) were in a different context and related to cash credits. The said assessees had declared jackpot winnings in races which, considering the facts and circumstances and applying the test of human probabilities, were not found genuine. In the case of Traders & Traders vs. CIT (236 ITR 269), the creditors had denied the cash credits and no convincing explanation had been given by the assessee and therefore the cash credits were treated as unexplained. The case of the assessee is not a case of cash credit per se. It is a case of trading purchases and sales corresponding to these purchases had been declared by the assessee. Therefore, the purchases could not be said to be bogus. At the most, it could be considered as a case where the purchase prices are not verifiable as the parties were not found and in such cases the books could be rejected and gross profit rate could be estimated. But, the gross profit has to be estimated based on some material. In this case, the assessee has shown a gross profit rate of 16.13% on turnover of Rs.28.38 crores compared to gross profit rate of 10.81% on turnover of Rs.26.44 crores in the immediate preceding year. The gross profit rate being more and there being no other comparable cases placed on record by the Revenue, no addition could be made on account of purchase prices being not verifiable. Moreover, in this case, the CIT(A) has given a finding that the AO had made verification of purchase prices with respect to other parties and no adverse material had been placed on record. Nothing has been produced before us by the department to controvert these findings. On the facts and circumstances of the case, in our view, no addition can be made on account of disallowance of purchases. The order of CIT(A) is accordingly upheld.

4. The second dispute is regarding reduction of indirect cost by 10% of export incentives while computing the profit derived from exports in case of trading goods. The AO noted that while computing the profits derived from the export of trading goods, the assessee had reduced the indirect cost by 10% of export incentives. The AO held that no such deduction was permissible under the Act. In appeal, the CIT(A) observed that the issue was covered by the decision of the Special Bench of the Tribunal in the case of Surendra Engg. Corporation vs. ACIT [268 ITR (AT) 118], as per which the indirect cost was required to be reduced by 10% of export incentives. The CIT(A), therefore, directed the AO to allow the deduction @ 10% of export incentives. Aggrieved by the said decision, the Revenue is in appeal before the Tribunal. 4.1. We have heard both the parties, perused the records and considered the matter carefully. The dispute is regarding reduction of indirect cost attributable to export incentives while computing deduction u/s. 80HHC. Under the provisions of sec. 80HHC(3)(b), the profit derived from export of goods/merchandise in respect of trading goods is the export turnover in respect of such goods as reduced by direct cost and indirect cost. Since the profit & loss account also included export incentives, the issue was whether part of the indirect cost could be attributed to the export incentives and should be deducted from the indirect cost while computing the profits. The assessee had reduced the indirect cost by 10% of export incentives. The issue is now settled by the judgment of the Hon'ble Supreme Court in the case of Hiro Exports (295 ITR 454) in which attribution of 10% of export incentives towards indirect cost has been upheld. We, therefore, find no infirmity in the order of CIT(A) and the same is, therefore, confirmed. C.O.No.29/Mum/09 (By assessee):

5. In the cross objection, the main dispute raised by the assessee is in respect of allowability of deduction u/s.80HHC in respect of DEPB income. The assessee has also mentioned that it had raised certain grounds being ground nos.2.3 to 2.10 (7 grounds) before CIT(A) which were not adjudicated by the latter and, therefore, has requested the Tribunal for adjudication of these grounds also.

6. We first take up the main ground regarding allowability of deduction u/s.80HHC in respect of DEPB income. The AO noted that the export turnover of the assessee during the year was Rs.26.70 crores. The assessee had also shown DEPB income of Rs.5,43,20,294/-. The AO further noted that there was loss from the export of goods. The AO, therefore, held that no deduction u/s.80HHC could be allowed as there were no profits from export business. The AO also referred to the Taxation Laws (Amendment) Act, 2005, as per which even if there was loss, deduction u/s. 80HHC had to be allowed in respect of export incentives. The AO, however, observed that the assessee was having export turnover exceeding Rs.10 crores and therefore the assessee was required to fulfil two conditions mentioned in the third proviso to sec. 80HHC(3) in order to become eligible for deduction u/s.80HHC. The AO further observed that the assessee had not fulfilled the two conditions and, therefore, no deduction could be allowed in respect of DEPB income. In appeal, the assessee submitted that only the profit on sale of DEPB licences and not the entire income had to be considered u/s. 28(iiid) and, therefore, the third proviso to sec. 80HHC(3) could be applied only in relation to the profit earned. The CIT(A), however, did not accept the contentions raised and upheld the order of AO denying the deduction u/s.80HHC.

7. We have heard both the parties, perused the records and considered the materials carefully. The dispute is regarding allowability of deduction u/s.80HHC in respect of DEPB income. The issue is whether only the profit on transfer of DEPB licences or the entire DEPB income including the face value has to be treated as income u/s. 28(iiid). The ld. A.R. for the assessee fairly conceded that the issue was covered by the judgment of Hon'ble Bombay High Court in the case of CIT vs. Kalpataru Colours & Chemicals (233 CTR 313) in which it has been held that the entire DEPB including the face value has to be treated as income u/s.28(iiid). Therefore, in view of the third proviso to sec. 80HHC(3), the deduction in respect of DEPB income will be admissible only if the two conditions mentioned therein are satisfied. The AO was of the view that the two conditions were not satisfied. The CIT(A) has, however, not given any clear finding on this aspect. The ld. A.R. for the assessee also pointed out that one of the conditions mentioned in the third proviso to sec. 80HHC was that the assessee should have an option to choose either the duty drawback or the DEPB scheme but the goods exported by the assessee were not eligible for duty draw back credit and, therefore, those conditions were not relevant in the case of the assessee and the third proviso would apply. In our view, the matter is required to be examined by the CIT(A) who has given no finding on this aspect. We, therefore, set aside the order of CIT(A) and restore the matter back to him for passing a fresh order after necessary examination in the light of the judgment of Hon'ble Bombay High Court in the case of Kalpataru Colours & Chemicals (supra) and after allowing an opportunity of being heard to the assessee.

8. As regards the grounds being ground nos.2.3 to 2.10 before the CIT(A), which were not adjudicated by the latter, the ld. A.R. submitted that the effective grounds were only ground nos. 2.3, 2.7, 2.9 and 2.10 which related to entitlement of deduction u/s.80HHC even when there was no export profit, entitlement of deduction u/s.80HHC in respect of additions/disallowances made by AO while computing the business income, fulfillment of the twin conditions mentioned in the third proviso to sec. 80HHC(3) and the nature of interest income of Rs.4,02,440/- while computing deduction u/s.80HHC. The other ground was not pressed. The ld. A.R. for the assessee also did not press the ground no.2.10 regarding interest income which has been treated by the authorities below as "income from other sources". This ground is, therefore, also dismissed as not pressed.

9. As regards entitlement of deduction u/s.80HHC even if there is no export profit, the issue is covered by the Taxation Laws (Amendment) Act, 2005, in view of which the assessee is entitled to deduction u/s.80HHC even if there is business loss as per the fifth proviso to sec. 80HHC. We, therefore, hold that the assessee would be entitled for deduction even in case of loss as per the fifth proviso to sec. 80HHC(3). We also hold that additions/disallowances made while computing the business income will have to be considered as a part of profits of business while computing deduction u/s.80HHC. The ground relating to fulfillment of the two conditions in the third proviso to sec. 80HHC has already been restored by us to the file of the CIT(A) while dealing with the main ground of the assessee vide para 7 of this order. This ground is thus restored to CIT(A).

10. The next ground raised by the assessee is regarding charging of interest u/s.234B. The charge of interest admittedly is only consequential. The AO, therefore, will recompute the interest at the time of giving effect to this order. ITA No.2895/Mum/07 (By Revenue) :

11. This appeal by the Revenue is directed against the order dated 13-12-2006 of CIT(A) for the asstt. year 2003-04 in relation to the order of rectification passed by the AO u/s.154 of the I.T. Act.

12. Briefly stated, the facts of the case are that the AO had asked the assessee to explain as to why the purchases from third parties as listed in para 3 of this order should not be considered as non-genuine. As per the AO, the assessee had explained the purchases satisfactorily in respect of parties at serial nos.1 & 2 and the remaining were not explained. The AO, however, made addition on account of purchases only in respect of the 7 parties from serial nos.3 to 9. The AO, therefore, issued notice u/s.154 of the I.T. Act to the assessee for rectifying the order for making addition on account of purchases from M/s. Dimple Metal Corporation amounting to Rs.19,07,595/-. After hearing the assessee, the AO held that there was apparent mistake in the assessment order as the purchases on account of M/s. Dimple Metal Corporation were omitted to be added. He, therefore, amended the order by making addition of Rs.19,07,595/-. In appeal, the CIT(A) held that since he had already deleted the entire addition on account of purchases while dealing with the appeal of the assessee in the quantum order, the addition made u/s.154 could not be sustained. He, therefore, deleted the addition made by the AO u/s.154 of the I.T. Act, aggrieved by which the department is in appeal.

13. We have heard both the parties, perused the records and considered the material carefully. The dispute is regarding the rectification order passed by the AO u/s. 154. The AO in the assessment gave finding that purchases from 8 parties were not explained but in the computation he made addition only on account of purchases from 7 parties and the addition in respect of the 8th party, i.e., M/s. Dimple Metal Corporation, was omitted to be added. The AO, therefore, rectified the order and made addition on account of the said party. The CIT(A) has cancelled the addition on the ground that in the quantum appeal he had held that no addition could be made on account of purchases. We have already upheld the order of CIT(A) vide para 3.8 of this order holding that no addition is required to be made on account of bogus purchases. Therefore, we find no infirmity in the order of CIT(A) cancelling the addition u/s.154. The same is, therefore, upheld.

14. In the result, both the appeals of the Revenue are dismissed and the cross objection of the assessee is partly allowed.

Order pronounced on the 3rd day of December, 2010.

Sd/- Sd/-

(R.V. EASWAR) (RAJENDRA SINGH)

PRESIDENT ACCOUNTANT MEMBER

Mumbai: 3rd December , 2010.

NG:

Copy to :

1. Department.

2.Assessee.

3 CIT(A)-XXVII,,Mumbai.

4 CIT,City-3,Mumbai.

5.DR,"B" Bench,Mumbai.

6.Master file.

(TRUE COPY)

BY ORDER,

Asst.Registrar, ITAT, Mumbai.

Details

Date

Initials

Designation

1

Draft dictated on

25-11-2010

Sr.PS/

2

Draft Placed before author

29-11-2010

Sr.PS/

3

Draft proposed & placed before the Second Member

JM/AM

4

Draft discussed/approved by Second Member

JM/AM

5.

Approved Draft comes to the Sr.PS/PS

Sr.PS/

6.

Kept for pronouncement on

Sr.PS/

7.

File sent to the Bench Clerk

Sr.PS/

8

Date on which the file goes to the Head clerk

9

Date of Dispatch of order

3.6 We have perused the records and considered the rival contentions carefully. The dispute is regarding the addition made by the AO on account of certain purchases held as non-genuine. The parties in respect of which the purchases were held as non-genuine are listed at serial nos. 3 to 10 in para 3 earlier. The reason given by the AO for the disallowance of purchases as non-genuine was that the letters issued to the parties had returned unserved and the assessee could not provide the current addresses nor produce the parties. In the cases of serial nos.9 and 10, the AO also noted that the amounts deposited in the bank account of the sellers had been immediately withdrawn in cash and that some of the transactions with the assessee were not reflected in the bank account of the party at serial no. 9. It may be noted here that though the AO had found the purchases in respect of 8 parties at serial nos.3 to 10 as non-genuine but the disallowance had been made only in respect of parties nos.3 to 9 and later the assessment was rectified to make disallowance in respect of party at serial no. 10 also. The CIT(A) has deleted the addition made by the AO on the ground hat the assessee had maintained proper books of account including stock register and the purchases from the said parties were duly entered in the books. The assessee had also given complete quantitative tally to show that the purchases from these parties were duly reflected export proceeds which were found in the books. The payments had been made by the assessee by cheque which were duly debited in the bank account of the assessee. 3.7 On careful consideration of the various aspects, we see no infirmity in the order of the CIT(A). Since the purchases from the said parties were duly reflected in the sales and quantitative tally had also been given, the purchases could not be considered as bogus because there could not be any sales without purchases. This view is supported by the decision of the Mumbai Bench of Tribunal in the case of Balaji Textile Industries Pvt. Ltd. vs. CIT (49 ITD 177) on which the ld. A.R. has placed reliance. The judgment of Hon'ble High Court of Gujarat in the case of M.K. Bros. vs. CIT (163 ITR 249) also supports the case of the assessee. In that case, the sellers had even admitted before the STO that they had issued bogus vouchers. The Tribunal, however, found that there was no evidence to show that the vouchers were bogus and there was also no material to show that the payments made by the assessee by cheque had been returned to it. The Tribunal deleted the addition which was upheld by the Hon'ble High Court. The case of the assessee stands on a better footing as in this case none of the sellers had stated that the sales to the assessee were bogus. Merely because the parties were not found at the addresses given which may be due to the fact that they may have changed addressed over a period of time, no adverse inference could be drawn against the assessee. This view is supported by the judgment of the Hon'ble Supreme Court in the case of Anis Ahmed & Sons vs. CIT (297 ITR 431) which by the ld. A.R. In that case, the case of the assessee was that it was a commission agent and not a trader. To verify the matter, the AO had issued summons to 10 parties, 5 of which confirmed that the assessee was a commission agent. The remaining 5 parties did not appear as the summons could not be served on them. The AO, therefore, treated the transactions in respect of these 5 parties as traders. But, this was not upheld by the Hon'ble Supreme Court on the ground that no adverse inference can be drawn against the assessee due to non-appearance of 5 parties as summons had not been served on them. 3.8 The ld. D.R. has relied on certain judgments which, in our view, are distinguishable. The judgment of Hon'ble Supreme Court in the case of Sumati Dayal (214 ITR 801) and the judgment ot Hon'ble Bombay High Court in the case of Smt.Vasantibai N. Shah (213 ITR 805) were in a different context and related to cash credits. The said assessees had declared jackpot winnings in races which, considering the facts and circumstances and applying the test of human probabilities, were not found genuine. In the case of Traders & Traders vs. CIT (236 ITR 269), the creditors had denied the cash credits and no convincing explanation had been given by the assessee and therefore the cash credits were treated as unexplained. The case of the assessee is not a case of cash credit per se. It is a case of trading purchases and sales corresponding to these purchases had been declared by the assessee. Therefore, the purchases could not be said to be bogus. At the most, it could be considered as a case where the purchase prices are not verifiable as the parties were not found and in such cases the books could be rejected and gross profit rate could be estimated. But, the gross profit has to be estimated based on some material. In this case, the assessee has shown a gross profit rate of 16.13% on turnover of Rs.28.38 crores compared to gross profit rate of 10.81% on turnover of Rs.26.44 crores in the immediate preceding year. The gross profit rate being more and there being no other comparable cases placed on record by the Revenue, no addition could be made on account of purchase prices being not verifiable. Moreover, in this case, the CIT(A) has given a finding that the AO had made verification of purchase prices with respect to other parties and no adverse material had been placed on record. Nothing has been produced before us by the department to controvert these findings. On the facts and circumstances of the case, in our view, no addition can be made on account of disallowance of purchases. The order of CIT(A) is accordingly upheld. Order pronounced on the day of November, 2010.

( ) ()

JUDICIAL MEMBER ACCOUNTANT MEMBER

Mumbai: November , 2010.

NG:

Copy to :

1. Department.

2.Assessee.

3 CIT(A)-XXVII,,Mumbai.

4 CIT,City-3,Mumbai.

5.DR,"B" Bench,Mumbai.

6.Master file.

(TRUE COPY)

BY ORDER,

Asst.Registrar, ITAT, Mumbai.

Details

Date

Initials

Designation

1

Draft dictated on

1-11-2010

Sr.PS/

2

Draft Placed before author

1-11-2010

Sr.PS/

3

Draft proposed & placed before the Second Member

JM/AM

4

Draft discussed/approved by Second Member

JM/AM

5.

Approved Draft comes to the Sr.PS/PS

Sr.PS/

6.

Kept for pronouncement on

Sr.PS/

7.

File sent to the Bench Clerk

Sr.PS/

8

Date on which the file goes to the Head clerk

9

Date of Dispatch of order

PAGE 18

ITA 2894-2895/M/07 & CO 29/M/09

Fortune Steel Industries

.