TaxTMI 
TaxTMI 
2025 (9) TMI 899
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.....1266/Chny/2025 for AY 2014-15 as the lead case. Ground Nos. 1 to 3 of the appeal are in relation to the disallowance of purchases of Rs. 2,22,77,459/-. Briefly stated, the facts as noted are that, the assessee is an individual and the proprietor of M/s Pacific Exports, involved in the business of export of textiles. The assessee purchases yarn and cloth, which is converted into fabrics and mainly exported outside India. During the relevant AY 2014-15, the assessee is noted to have reported total turnover of Rs. 9.8 crores, out of which export sales was Rs. 9.63 crores and local yarn sales was Rs. 17.79 lakhs. In relation thereto, the assessee is noted to have made purchases of yarn and cloth and has reported gross profit of 18.83% of the total sales. 4. It is noted that, a survey u/s 133A of the Act was carried out at the business premises of the assesse on 21.09.2017, in the course of which purchase ledgers were impounded vide Annexure-GS/PE/S/IMP/ANN 1 to 7. The AO is noted to have extensively reproduced sample purchase ledgers in the assessment order and observed that, there are entries for payments through cheques and there are entries of equivalent amounts received back in....
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....reed with the AO's action of disallowing 100% of the bogus purchases. The Ld. CIT(A) observed that the assessee had furnished quantitative analysis of purchases and sales in response to the show cause notice, which remained uncontroverted by the AO. According to the Ld. CIT(A) therefore, only a reasonable percentage of the bogus purchases could be attributed as the income of the assessee and he is noted to have estimated the same at 12.5%. Being aggrieved by this order of the Ld. CIT(A), the Revenue is now in appeal before us. 6. Assailing the action of Ld. CIT(A), the Ld. DR for the Revenue submitted that, the material impounded during the course of survey clearly revealed that the impugned purchases were bogus and that the assessee had received back cash in lieu of the payments and therefore the AO had rightly disallowed the entire value of purchases. According to him, the Ld. CIT(A) was unjustified in restricting the disallowance to 12.5% of these purchases. He urged us that, the entire value of purchases ought to be disallowed. To support his submission, the Ld. DR relied on the decision of Hon'ble Bombay High Court in PCIT v. Kanak Impex (ITA No. 791 of 2021). 7. Per....
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....to be taxed in hands of the assessee. From the material available on record, it is observed that, the assessee is involved in the business of export of textiles under the name & style of M/s Pacific Exports. During the year, the assessee effected sales of Rs. 9.8 crores which comprised of export sales of Rs. 9.63 crores. Against these sales, the assessee is noted to have made purchases of Rs. 6,14,68,713/- which comprised of the alleged bogus purchases of Rs. 2,22,77,459/-. It is not in dispute that, in any trading / manufacturing transaction, a sale / manufacture of an article is possible only when there is a corresponding purchase. We find that, before the AO, the complete quantitative details of opening stock, purchases, sales and closing stock were furnished by the assessee in his reply dated 17.05.2023 to the notice issued u/s 142(1) of the Act. It is noted that these quantitative details and the book results of the assessee, have not been rejected by the AO. Accordingly, but for the quantities of yarn/cloth purchased by the assessee, the assessee could not have made the corresponding sales viz., export of fabrics. In the circumstances, if the entire value of purchase is consi....
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....y to reduce the income and the tax incidence on the income." 10. The Hon'ble High Court noted that, since these sub-contractors were not verifiable, the possibility of inflation of expenses could not be ruled out but at the same time agreed with the action of Ld. CIT(A) & Tribunal of not disallowing the entire expenses but restricting the same to 10%. The Hon'ble High Court observed that the disallowance of entire payments to sub-contractors would result in abnormal profitability and therefore countenanced the action of lower appellate authorities in estimating the profit element embedded in such inflated expenses. The relevant findings taken note of by us is as follows: - "12. A bare perusal of the compared results of the Gross Profit and Net Profit by the Assessee given in para 7 of the Tribunal's order clearly shows that the said Gross Profit at the rate of 14.21% and Net Profit at the rate of 3.83% declared by the Assessee, with the addition of 10% agreed by the Assessee before the learned Commissioner of Income-tax Income (Appeals), resulted in a much better result of profits declared by the Assessee in the present Assessment Year viz., A.Y. 2010-11 201....
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....and 2006-07, which were at the rate of 4.20% and 3.94%. In these circumstances, no disallowance was called for. Still, if the Assessee agreed to such addition to apparently buy peace with the Department, we fail to understand as to why the Revenue has filed these Appeals to drag cases further in the High Court incurring the loss of man hours and cost of litigation. Such unnecessary litigation on the part of the Revenue Authorities deserves to be strongly deprecated, but, the Revenue Authorities do not seem to be seeing the sense behind this and keep on filing Appeals under section 260A of the Act, as a matter of routine." 11. In the present case also, if the impugned purchases are disallowed, it would result in an abnormal gross profit rate of 41.55% and a distorted net profit rate of 25.45% in a regular textile export business. In our considered view therefore, the ratio laid down in the above decision is squarely applicable to the assessee's case. According to us, in the present case, it is the genuineness of the parties, from whom purchases have been made, which is under doubt and not the quantity of purchases. Hence, the AO's action of disallowing the entire value of pur....
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....the entire purchase price but only the profit element embedded in such purchases can be added to the income of the assessee. So much is clear by the decision of this court. In particular, the court has also taken a similar view in the case of CIT v. Vijay M. Mistry Construction Ltd. [2013] 355 ITR 498 (Guj) and in the case of CIT v. Bholanath Poly Fab (P.) Ltd. [2013] 355 ITR 290 (Guj). The view taken by the Tribunal in the case of Vijay Proteins Ltd. v. Asstt.CIT [1996] 58 ITD 428 (Ahd.) came to be approved. 8. If the entire purchases were wholly bogus and there was a finding of fact on record that no purchases were made at all, counsel for the Revenue would be justified in arguing that the entire amount of such bogus purchases should be added back to the income of the assessee. Such were the facts in the case of Pawanraj B. Bokadia (supra). 9. This being the position, the only question that survives is what should be the fair profit rate out of the bogus purchases which should be added back to the income of the assessee. The Commissioner adopted the ratio of 30 per cent of such total sales. The Tribunal, however, scaled down to 12.5 per cent. We may notice that ....
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.... opinion that no question of law, much less any substantial question of law arises from the impugned Judgment and Order of the Tribunal. The appeal, therefore, fails and is accordingly dismissed." 14. Following the above decisions (supra) which are found to be applicable on the given facts of the present case, we accordingly countenance the action of Ld. CIT(A) that only the profit element embedded in these bogus purchases ought to be assessed to tax. Coming to the issue of estimation of the profits, on the given facts according to us, the Ld. CIT(A) has rightly estimated it at 12.5% of the value of purchases, which is found to be fair & reasonable and therefore, no further addition was warranted in this regard. 15. For the reasons set out above, we don't see any reason to interfere with the order of the Ld. CIT(A) in this regard and thus uphold the same. Ground Nos. 1 to 3 are therefore dismissed. 16. Ground No. 4 raised by the Revenue is against the Ld. CIT(A)'s action of deleting the addition of Rs. 53,98,000/- made by the AO on account of alleged on-money payment on purchase of immoveable property. The facts relating to this issue are that, the assessee had purchas....
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.... by the assessee. On these facts therefore, we countenance the Ld. CIT(A)'s findings that, in absence of any corroborative evidence, the impugned addition made by the AO solely on the basis of a retracted statement recorded u/s 131 of the Act, was unsustainable. According to us, the decision of the Hon'ble Madras High Court in the case of Thiru A J Ramesh Kumar v. DCIT (441 ITR 495) cited by the Ld. DR is of no assistance to the Revenue as it concerns the evidentiary value of statement recorded u/s 132(4) of the Act. It is trite law that the statement recorded u/s 133A of the Act (survey) cannot be equated with the statement recorded u/s. 132(4) (search) and evidentiary value of statement recorded u/s 133A of the Act (survey) stands on a lower pedestal and the statement u/s. 133A of the Act cannot be even recorded on oath, which if recorded cannot be admissible/relied upon or acted upon. For this, we rely on the decision of the Hon'ble Supreme Court in the case of CIT v. Khader Khan Son (352 352 ITR 480) wherein it has been held that Section 133A of the Act does not empower any income tax authorities to examine any person on oath, hence any such statement lacks evidentiary valu....
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....of the Income Tax Act in the course of any search or seizure. Thus, the income-tax Act, whenever it thought fit and necessary to confer such power to examine a person on oath, the same has been expressly provided whereas section 133A does not empower any Income-tax Officer to examine any person on oath. Thus, in contradistinction to the power under section 133A, section 132(4) of the Income-tax Act enables the authorised officer to examine a person on oath and any statement made by such person daring such examination can also be used in evidence under the income-tax Act. On the other hand, whatever statement is recorded under section 133A of the income-tax Act it is not given any evidentiary value obviously for the reason that the officer is not authorised to administer oath and to take any sworn statement which alone has evidentiary value as contemplated under law. Therefore, there is much force in the argument of learned counsel for the appellant that the statement elicited during the survey operation has no evidentiary value and the Income-tax Officer was well aware of this," 14. Moreover, the word 'may' used in section 133A(3)(iii) of the Act clarifies beyond d....
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....ant asserts that the department's assumptions about the market value and on-money payment are not backed by solid evidence. Therefore, the appellant requests that the addition of Rs. 53,98,000/- be deleted, as the registered purchase deed is conclusive evidence of the property's actual value. 6.4.5 The undersigned has carefully examined the issue under consideration. The AO contemplated the addition on the basis of the statement recorded, during the course of survey as per the response of the assessee to question No. 8 put forth to him. It is significant to bring it on record that the survey team has not come across any evidence to substantiate the payment of on-money made by the appellant. Further while recording the statement from the appellant, no evidence of any kind was confronted with the appellant to substantiate the alleged on money payment. 6.4.6 The issue involved is about the payment of on-money to purchase the said property. The AO while making the addition of Rs. 53,98,000/- has not attempted to cross verify the value of property with the Registrar. No findings have been made by the AO as to whether the Registrar has demanded any extra stamp d....