Whether if it is found that assessee has made purchases at abnormally high prices from party that is not traceable, Revenue will have all legitimacy to reject books and tax gross profit on estimate basis - YES: ITAT

THE issue before the Bench is - Whether if it is found that the assessee has made purchases at abnormally high prices from a party that is not traceable, the Revenue will have all the legitimacy to reject the books and tax the gross profit on estimate basis. And the verdict goes against the assessee.

Facts of the case

Assessee is a registered firm engaged in the business as a wholesale dealer in Iron and Steel. During the course of assessment proceedings the AO observed that as against gross turnover of

Rs. 44.89 crores the assessee had declared gross profit of Rs. 1.31 crores only which worked out to 2.93%. Since the gross profit disclosed by the assessee was very low, the AO made enquiries to ascertain the genuineness of claim of purchases. From the addresses of all the suppliers given by the assessee, the AO called for information u/s 133(6) from 34 suppliers. Further enquiries were also conducted through the Ward Inspector. The AO noted that out of the 34 notices issued u/s 133(6) to the suppliers, 14 notices came back unserved for the reason that the said suppliers were not existing at the addresses given by the assessee. Enquiries conducted through the Inspector revealed that one M/s. Bharat Steel Company was not available at that address. Even the Telephone No mentioned in the invoice was found to be incorrect. The AO further noted that another supplier M/s. Hitesh Enterprises was not carrying on any business at the said address as reported by the Ward Inspector. The AO examined the purchase invoices and noted that the purchase invoice of M/s. Bharat Steel Company were prima facie not genuine.

He observed that the said invoices were different from genuine invoices in as much as they do not carry the features of a genuine purchase invoice. Further, those invoices were not supported by any other documents. He observed from the books of account that payments were made by the assessee to Bharat Steel Company from its bank account with Bank of India, Bhawanipeth Branch, Pune. He, therefore, conducted enquiries with the service branch of Bank of India, Mumbai to find out the details of bank account in which proceeds of cheques issued by the assessee were deposited. From the bank statement so obtained, the AO found that the cheques issued by the assessee were deposited in the said bank account of Bharat Steel Company. However, on the same date, cash was withdrawn through self cheques. He further noted that no cheques were issued by Bharat Steel Company for purchases. According to the AO, no one can sell without buying. In view of all these facts, he was of the opinion that the assessee had obtained accommodation entries from Bharat Steel Company and no purchases were actually made from Bharat Steel Company. He observed that in addition to Bharat Steel Company, there were many instances where assessee had claimed purchases but the said suppliers were not available at the addresses given by the assessee.

So far as the return back of 14 notices was concerned, it was claimed by the assessee that the suppliers had closed down their business. In view of the above, the AO came to the conclusion that the purchases of the assessee were not verifiable. He, therefore, carried out one more exercise to ascertain the cause of low gross profit. He compared the rates charged by M/s Bharat Steel Company (non-existing concern) with standard suppliers like M/s. Bhuleswar Steel and Alloys Pvt. Ltd., Jalna and M/s. Shri K.N.Mahalaxmi Ispat Pvt. Ltd., Kolhapur. For the above comparison, the AO selected the same size and same date. From the above exercise, he found that the purchase rates from Bharat Steel Company, Mumbai, were more than the rates charged by Bhuleswar Steel and Alloys Pvt. Ltd., and K.N.Mahalaxmi Ispat Pvt. Ltd. According to the AO, there was no reason as to why the assessee should buy the same product from a small trader when the same product was supplied at a lower rate by standard companies. He prepared a chart to find out the difference between rate paid to Bharat Steel Company and other supplier and noted that the excess rate paid to Bharat Steel Company varies from 19.14% to 32.25%.

In view of the above, the AO held that the assessee had boosted the purchases by taking accommodation entries from bogus concerns like Bharat Steel Company, Mumbai. Thus, AO held that the assessee had inflated purchases with an intention to evade tax. He held that the assessee had not kept and maintained books of account and other documents which may enable the AO to compute the total income in accordance with the provisions of the Act. He therefore held that the accounts of the assessee were not correct and complete. He, therefore, rejected the books of account u/s 145(3) and proceeded to determine the income by estimating the gross profit.

He noted that in a comparable case namely M/s. Asvee Trading Company which was a steel trader and assessed in Range-5, the gross profit had been disclosed at 9.15% on a turnover of Rs.45.52 crores. Asvee Trading Company also deals in the same products as dealt by the assessee. Since the turnover was comparable the AO gave an opportunity to the assessee for its comments. Rejecting the explanation given by the assessee the AO adopted the gross profit rate of 9% on the turnover of Rs.44.89 crores. After reducing the gross profit of Rs.1,31,55,168/- declared by the assessee from the gross profit of Rs.4,04,09,666/- determined by him, the AO calculated the suppressed gross profit at Rs.2,72,54,498/- and added the same to the total income of the assessee.
In appeal the CIT(A) upheld the action of the AO in rejecting the book results u/s 145(3). However, he directed the AO to adopt gross profit rate of 8% as against 9% adopted by the AO as fair and reasonable.

On appeals, the Tribunal held that,

++ there is no dispute to the fact that out of the 34 notices issued u/s 133(6) by the AO, 14 notices were returned unserved. There is also no dispute to the fact that in one case, i.e. M/s. Bharat Steel Company from whom the assessee has made substantial purchases it was reported by the Inspector that the said party is not available at that address. Even the Telephone number mentioned in the invoice was found to be incorrect. It is also a fact that the price paid to M/s. Bharat Steel Company is more than the price charged by other traders for purchase of identical products on same date. All these facts were brought to the notice of the assessee by the AO. Since the purchases from Bharat Steel Company were held to be non-genuine and it was brought to the notice of the assessee by the AO that the price paid to Bharat Steel Company is higher than price charged by other traders for the same product on the same date, the AO, in the opinion of ITAT, has discharged his onus and onus was on the assessee to prove the genuineness of purchases. The assessee has failed to do so. It has been held by the Mumbai Bench of the Tribunal in the case of M/s. Fortune Steel Industries Vs. ACIT vide ITA No.2894 & 2895 that in a case where the purchase prices are not verifiable as the parties were not found and in such cases the books should be rejected and the gross profit rate could be estimated. In view of the above decision which was relied on by the assessee himself, the CIT(A) was justified in upholding the action of the AO in rejecting the book results;

++ although the assessee has relied on a series of decisions, he has not answered the basic query raised by the AO as to why the assessee has paid higher price to Bharat Steel Company for purchase of the identical products which are available at lower rate from reputed companies on the same day. This shows that the activities of the assessee are not above board and the assessee is trying to just rely on various decisions without giving the reasons. Therefore, the various decisions relied on by the assessee are not applicable to the facts of the present case. Once the AO has established that the price paid to a party is higher as compared to similar products supplied by other parties on the same date and the party to whom higher price has been paid is not traceable and the assessee has not made any efforts to produce the party or give his present address, therefore, the so called purchases from the said party become suspicious and under these circumstances the AO is fully justified in rejecting the book results and going for estimation. In none of the cases relied on by the assessee, it has been held that books of accounts of an assessee who paid higher price to a party which is not traceable or which could not be produced has to be accepted as genuine. In this view of the matter, ITAT upheld the order of the CIT(A) on this issue;

++ now coming to the adoption of GP rate of 9% by the AO which has been reduced to 8% by the CIT(A), it was found that the assessee was not given enough opportunity to explain as to why the same rate of 9% be applied to it. The assessee has categorically explained before the lower authorities that M/s. Asvee Trading Company is not a comparable case since the assessee is a wholesaler whereas the said party is a retailer. No other comparable case was given by the AO. Further, the results of the preceding and succeeding years results were not considered by the AO so as to come to a definite conclusion as to the rate of gross profit in the case of the assessee, vis-a-vis other concerns. Considering the totality of the facts of the case, matter should be set-aside to the file of the AO with a direction to decide the rate of gross profit by comparing identical cases and not merely selecting cases of assessees trading in same line. If the assessee is a wholesaler the AO has to compare the cases of wholesalers and not retailers.