Court Upholds Tax Tribunal's Decision on Bogus Purchases, Affirms Net Profit Calculation

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Case Name: 

Principal Commissioner of Income Tax Vs Pinaki D. Panani (High Court of Bombay)

Income Tax Appeal No.1543 of 2017

Date: 8th January 2020

Key Takeaways:

1. The court affirmed that even if purchases are deemed bogus, the entire amount shouldn't necessarily be disallowed.

2. The importance of considering the consumption of materials and completion of work in tax assessments was emphasized.

3. The court supported the use of a net profit percentage method for calculating taxable income in certain circumstances.

Issue: 

Was the Income Tax Appellate Tribunal justified in allowing unsubstantiated purchases of Rs.1,69,48,368/- and upholding the order of CIT(A) in applying a net profit of 5.76% on the total Contract amount?

Facts:

1. Pinaki D. Panani, the Respondent-Assessee, is a civil contractor who filed a return for the Assessment Year 2009-10 declaring a total income of Rs.48,65,060/-. 

2. The assessment was reopened under Section 147 (of Income Tax Act, 1961) based on information from the Sales Tax Department about bogus purchase entries of Rs.1,69,48,368/-. 

3. A reassessment order was passed, determining the total income as Rs.2,18,13,430/-. 

4. The Respondent-Assessee appealed to the Commissioner of Income Tax (Appeals), who partly allowed the appeal. 

5. The case was then brought before the Income Tax Appellate Tribunal, which dismissed the Revenue's appeal. 

Arguments:

Revenue's Arguments:

1. The purchases in question were from Hawala dealers, and the Respondent-Assessee couldn't produce confirmations from these parties. 

2. Payment by crossed cheque alone doesn't establish the genuineness of purchases. 

3. Only a portion of the purchases (Rs.1,69,48,368/-) was questioned, suggesting the business could have been carried out with other unquestioned purchases. 

Respondent-Assessee's Arguments:

1. Even if purchases are treated as bogus, it doesn't mean the entire amount should be disallowed. 

2. The work was completed and verified by the Municipal Corporation engineers, indicating actual consumption of materials. 

Key Legal Precedents:

1. Principal Commissioner of Income Tax-17 vs. M/s. Mohommad Haji Adam & Co. (Income Tax Appeal No.1004/16) 

2. Principal Commissioner of Income Tax, Central-4 vs. M/s. Paramshakti Distributors Pvt. Ltd. (Income Tax Appeal No.413/17) 

3. N.K. Industries Ltd. case (specific details not provided in the judgment) 

Judgement:

The High Court dismissed the appeal, finding no substantial question of law. Key points in the judgment include:

1. The court acknowledged that even if purchases were from bogus dealers, the material was consumed, and the work was completed and verified. 

2. The court agreed with the Tribunal's approach of extending the percentage of net profit on total turnover for calculations. 

3. The court found no irregularity or illegality in the CIT(A) and Tribunal following the percentage arrived at by the Settlement Commission for other years of the same assessee. 

FAQs:

Q1: What was the main issue in this case?

A1: The main issue was whether the Income Tax Appellate Tribunal was justified in allowing certain purchases deemed unsubstantiated and applying a specific net profit percentage on the total contract amount.

Q2: Why did the court dismiss the appeal?

A2: The court found no substantial question of law arising from the case and agreed with the lower authorities' approach to calculating the assessee's income.

Q3: What principle did the court establish regarding bogus purchases?

A3: The court affirmed that even if purchases are deemed bogus, it doesn't necessarily mean the entire amount should be disallowed, especially if there's evidence of material consumption and work completion.

Q4: How did the court view the use of net profit percentage for calculations?

A4: The court supported the use of net profit percentage on total turnover for calculations, especially when backed by precedent (like the Settlement Commission's decision for the same assessee in other years).

Q5: What role did the Municipal Corporation play in this case?

A5: The Municipal Corporation's engineers verified the quality and quantity of the work done by the assessee, which was seen as evidence that the materials were actually consumed, regardless of the source of purchase.

The Appellant challenges the order passed by the Income Tax Appellate Tribunal dated 19.12.2016 in Income Tax Appeal No.119/Mum/2015 and C.O. No.117/Mum/2015 for Assessment Year 2009-10.

2. The Appeal pertains to the Assessment Year 2009-10.

3. The Appellant-Revenue has raised following question of law as a substantial question of law for consideration in this Appeal :-

“A. Whether, on the facts and in the circumstances of the case and in law, the Hon’ble Tribunal is justified in allowing unsubstantiated purchases of Rs.1,69,48,368/- and upholding the order of CIT(A) in applying net profit of 5.76% on total Contract amount ?”

4. The Respondent-Assessee carried on business as a Civil Contractor. The Respondent-Assessee filed return of income for the Assessment Year 2009-10 on 29 September, 2009 declaring total income of Rs.48,65,060/-. The assessment was completed under Section 143(3) (of Income Tax Act, 1961) on 7 December, 2011. Thereafter the assessment was reopened under Section 147 (of Income Tax Act, 1961). Information was received from the Sales Tax Department that Respondent-Assessee had taken bogus purchase entries of Rs.1,69,48,368/- from the different parties. The reassessment order was accordingly passed on 17 February, 2014 determining the total income of Rs.2,18,13,430/-.

5. Appeal was filed by the Respondent-Assessee to the Commissioner of Income Tax (Appeals) who partly allowed the Appeal by order dated 21 October, 2014 and sustained addition of Rs.50,44,947/- and deleted Rs.1,19,03,421/- out of addition of Rs.1,69,48,368/-. The Commissioner of Income Tax (Appeals) also observed that the Respondent-Assessee had approached the Settlement Commission for the subsequent years and the case was settled accepting the additional income offered by the Respondent-Assessee based on the net profit @ 5.76% on total Revenue filed an Appeal to the Income Tax Appellate Tribunal. By the impugned order the same has been dismissed.

6. In support of the question of law Mr. Mohanty, the learned counsel for the Appellant submitted that an information was received from the Sales Tax Department that certain parties from whom the Respondent-Assessee had purchased material were Hawala dealers and when the Respondent-Assessee was confronted with the same he could not produce the confirmation from the said parties. He submitted that merely because payment was made by crossed cheque was not enough to establish that the purchases were genuine. Mr. Mohanty also submitted that out of various purchases made by the Reapondent-Assesee the Appellant- Revenue had questioned only purchases to the tune of Rs.1,69,48,368/- and that business could have been carried out by the other purchases which has not been questioned.

7. Mr. Hakani, the learned counsel for the Respondent placed reliance on the decisions of this Court in the case of The Principal Commissioner of Income Tax-17 vs. M/s. Mohommad Haji Adam & Co. in Income Tax Appeal No.1004/16 and Principal Commissioner of Income Tax, Central-4 vs. M/s. Paramshakti Distributors Pvt. Ltd. in Income Tax Appeal No.413/17. He submitted that even if the purchases made from the parties in question are to be treated as bogus, it does not necessarily mean that entire amount should be disallowed and that no benefit should be given to the Respondent-Assessee. Mr. Hakani submitted that bifurcation of purchases of Rs.1,69,48,368/- and the contention that genuine material purchased in question is not the case urged before the authorities.

8. We have perused the orders passed by the Commissioner of Income Tax (Appeals) and the Tribunal. The Commissioner of Income Tax (Appeals) has observed that the Respondent-Assessee was doing work on contract basis with the Municipal Corporation of Greater Mumbai. He submitted the bills to the Corporation which were verified by the Engineers of the Corporation. It is upon the acceptance of quality and quantity of the work that the payment was released. It is also noted by the Commissioner that the Assessing Officer did not doubt about the completion of the contract work and that the consumption of the material by the Respondent-Assessee which was duly verified by the Engineers of the Municipal Corporation. The Commissioner of Income Tax (Appeals) and the Tribunal opined that without actually consuming the raw materials, the work done by the Appellant could not have been possible.

9. It is in this context, the observations of the Division Bench in the case of the Principal Commissioner of Income Tax- 17 vs. M/s. Mohommad Haji Adam & Co. need to be referred :-

“8. In the present case, as noted above, the assessee was a trader of fabrics. The A.O. found three entities who were indulging in bogus billing activities. A.O. found that the purchases made by the assessee from these entities were bogus. This being a finding of fact, we have proceeded on such basis. Despite this, the question arises whether the Revenue is correct in contending that the entire purchase amount should be added by way of assessee's additional income or the assessee is correct in contending that such logic cannot be applied. The finding of the CIT(A) and the Tribunal would suggest that the department had not disputed the assessee's sales. There was no discrepancy between the purchases shown by the assessee and the sales declared. That being the position, the Tribunal was correct in coming to the conclusion that the purchases cannot be rejected without disturbing the sales in case of a trader. The Tribunal, therefore, correctly restricted the additions limited to the extent of bringing the G.P. rate on purchases at the same rate of other genuine purchases. The decision of the Gujarat High Court in the case of N.K. Industries Ltd. (supra) cannot be applied without reference to the facts. In fact in paragraph 8 of the same Judgment the Court held and observed as under -

“So far as the question regarding addition of Rs.3,70,78,125/- as gross profit on sales of Rs.37.08 Crores made by the Assessing Officer despite the fact that the said sales had admittedly been recorded in the regular books during Financial Year 1997-98 is concerned, we are of the view that the assessee cannot be punished since sale price is accepted by the revenue. Therefore, even if 6 % gross profit is taken into account, the corresponding cost price is required to be deducted and tax cannot be levied on the same price. We have to reduce the selling price accordingly as a result of which profit comes to 5.66 %. Therefore, considering 5.66 % of Rs.3,70,78,125/- which comes to Rs.20,98,621.88 we think it fit to direct the revenue to add Rs.20,98,621.88 as gross profit and make necessary deductions accordingly. Accordingly, the said question is answered partially in favour of the assessee and partially in favour of the revenue.”

10. Assuming that the Respondent-Assesssee the purchasers from whom the purchases were made were bogus, in view of the finding of fact that the material was consumed, the question would be of extending the percentage of net profit on total turnover. This would be a matter of calculations by the concerned authority. In this context, if the Commissioner of Income Tax (Appeals) and the Tribunal chose to follow the percentage arrived by the Settlement Commission in the Respondent-Assessee’s own case for the other years, this exercise cannot be considered as irregular or illegal.

11. In the circumstances, no substantial question of law arises in this Appeal.

12. The Appeal is accordingly dismissed.

(M.S.KARNIK, J.) (NITIN JAMDAR, J.)