2022 (11) TMI 1410 - AT - Income Tax

Tribunal Upholds Full Disallowance of Hawala Purchases for Contractor Due to Lack of Evidence, Citing Legal Precedents

The Tribunal upheld a 100% disallowance of alleged hawala purchases by the appellant, a Government Civil Contractor, due to insufficient evidence of the ... Bogus purchases - Estimation of income - CIT(Appeals) erred in restricting the disallowance to 17.96% of the alleged hawala purchases over & above the profit shown by the assessee even through the assessee could not produce primary evidences like octroi receipt, lorry receipt, delivery challans, stock register, weighing slips etc., to prove the genuineness of purchases - HELD THAT:- When it has been categorically established that, the amount of bogus purchases is debited to P&L by fictitious tax invoices and the respondent assessee failed to establish the consumption of such goods in the execution of civil contract by adducing such stock movement records to the satisfaction of AO., then taxing such bogus purchases GP rate of goes against the principles of taxation embedded in chapter VI of the Act and against the ratio laid down in“N K Proteins Ltd” [2017 (1) TMI 1090 - SC ORDER] and “PCIT Vs Pinaki D Pinani” [2020 (1) TMI 700 - BOMBAY HIGH COURT] for the reason, we are of the considered view that, the Ld. AO was right in making 100% disallowance towards bogus / hawala purchases, and thus we are inclined to uphold the order of assessment and reverse the order the Ld. FAA. Appeal of the appellant revenue is allowed. Issues:1. Disallowance of alleged hawala purchases without primary evidence.2. Adoption of Gross Profit ratio for disallowance.3. Consideration of relevant legal precedents.4. Assessment of genuineness of hawala transactions.Issue 1: Disallowance of alleged hawala purchases without primary evidenceThe case involved the disallowance of hawala purchases by the Assessing Officer (AO) due to lack of primary evidence such as octroi receipt, lorry receipt, delivery challans, stock register, and weighing slips. The Commissioner of Income Tax (Appeals) [CIT(A)] restricted the disallowance to a Gross Profit ratio of 17.96% based on the appellant's sales not being disputed. However, the Revenue contended that the disallowance should encompass the entire bogus purchases as per legal precedents. The Tribunal found that the appellant failed to prove the existence of hawala operators and the physical movement of goods, leading to a 100% disallowance of the hawala purchases.Issue 2: Adoption of Gross Profit ratio for disallowanceThe Revenue challenged the CIT(A)'s decision to restrict the disallowance to a Gross Profit ratio, arguing that it lacked justification and contradicted legal precedents like the decision in 'N.K. Proteins Ltd.' The Tribunal noted that the appellant, a Government Civil Contractor, did not provide sufficient evidence of hawala operators or physical movement of goods. The Tribunal held that the Gross Profit ratio approach was not suitable in this case, and the entire amount of bogus purchases should be disallowed based on the principles of taxation and legal precedents.Issue 3: Consideration of relevant legal precedentsThe Tribunal examined legal precedents such as the decision in 'Mohammad Haji Adam & Co.' and 'N. K. Proteins Ltd.' to determine the appropriate course of action regarding the disallowance of hawala purchases. It was emphasized that the facts of the case, including the nature of the appellant's business as a Civil Contractor and the absence of evidence regarding goods consumption, warranted a different approach than the cited legal precedents. The Tribunal ultimately relied on the principles established in 'N. K. Proteins Ltd.' to uphold the 100% disallowance of the hawala purchases.Issue 4: Assessment of genuineness of hawala transactionsThe case revolved around the assessment of the genuineness of hawala transactions conducted by the appellant. The AO disallowed the entire amount of hawala purchases due to the lack of evidence supporting their authenticity. The CIT(A) restricted the disallowance to a Gross Profit ratio, which was contested by the Revenue. The Tribunal concluded that the appellant's failure to substantiate the hawala transactions and consumption of goods justified the 100% disallowance, aligning with legal principles and precedents.This detailed analysis of the judgment highlights the key issues, arguments presented by the parties, legal precedents considered, and the Tribunal's final decision regarding the disallowance of hawala purchases in the case.