TaxTMI 
TaxTMI 
2025 (12) TMI 584
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....declaring total income of Rs.53,36,75,280/- Rs.47,04,60,043/- and Rs.34,98,31,681/- respectively. It is noted that, a search action was conducted upon SNJ Group on 06-08-2019 and in connection with the same, the business premises of M/s Crystal Bottles was also searched where incriminating material relating to the assessee was seized. On analysis of the seized material found from the premises of M/s Crystal Bottles, it was inferred that, they had facilitated inflation of expenses of the assessee by providing bogus invoices of purchase of old bottles. During the pendency of the assessment proceedings which was initiated u/s 153C of the Act, a search u/s 132 of the Act was conducted upon the assessee on 15-06-2022, in the course of which several materials viz., books of accounts, documents & electronic data, loose sheets, note books etc. was found and seized. According to the AO, the seized material inter alia contained details of suppression of income by the assessee by debiting bogus purchases from vendors of old liquor bottles and transportation & logistics services. Consequent to the search action, the income-tax assessments for AYs 2020-21 to 2022-23 was selected for complete sc....
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.... the assessee from these vendors and that the date-wise details were the notings of cash amounts due from them. It is observed that, this analogy of the Revenue was based on the statement(s) obtained from key employees of the assessee i.e., Shri S Varatharaj [from whose possession the pen drive was found] and Shri Augsutine Paulraj. These employees had explained that, the column `Others' in the excel file represented the commission retained by the vendors for facilitating bogus invoices and that the column 'Total' denoted the cash which was to be returned back by the vendors against the cheques paid to them in lieu of bogus invoices. The AO thereafter extracted the data of old-bottle supplier-wise purchase ledgers from the SAP software along with their off-set accounts of old bottle purchases. According to the AO, though these vendors were actually supplying old bottles for which genuine invoices were being raised, but these same vendors were also providing bogus invoices to facilitate inflation of expenses of the assessee. This inference was drawn from the purchase ledgers, which according to the AO, contained entries both for genuine old bottle purchases and bogus old....
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....ent of the Managing Director of the assessee, Shri M Anand who had confirmed the statements given by Shri S Varatharaj & Shri Austine Paulraj. Thereafter, the AO at Para 6 of his order elaborately set out the findings unearthed upon conducting search/survey action on these suppliers. To sum up, according to the AO, these suppliers had also corroborated the statements of the employee(s) that they had facilitated inflation of expenses by providing bogus invoices. The AO is found to have summarized the evidences unearthed with respect to old bottle purchases at Para 8 of his order, which is extracted below :- "During the course of search, the following evidences have been unearthed with respect to bogus old bottle purchase invoices booked by M/s SAFL: a) During the course of search at the residence of Shri.S.Varatharaj, DGM (Finance) M/s SAFL, it was found that he was systematically maintaining month wise details of bogus expenses, booked in the guise of purchase of old bottles, in an excel workbook named "ENA Schedule" in a silver colour pen drive (Neel Max 32 GB). He has explained the evidences found in an elaborate manner, the modus operandi of booking the bogus e....
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.... avoid litigation and buy peace I hereby offer Rs.230,00,00,000/- as undisclosed income earned through above entities for various financial years and I will pay the taxes accordingly. However, as of now I could not derive year wise exact quantum of unaccounted income earned in each entity. I request you to provide two-week time to arrive that M/s SAFL had paid 8% commission on basic value of invoice, le without GST and TDS/TCS, to the old bottle suppliers for raising bogus old purchase invoices. b) Shri. Augustine Paulraj Vice President (Finance) M/s SAFL, vide his sworn statement, recorded at his residence, deposed that M/s SAFL had booked bogus/ excess invoicing to the tune of Rs.390,72,59,061/- from FY 2012-13 to FY 2022-23 to meet certain hidden overhead expenses, which were not allowable expenses under I.T. Act. c) Shri.M.Mani, Accounts Officer at M/s.SAFL, testified that he processed old bottle purchase invoices without GRN in SAP software under the directions of Shri. Augustine Paulraj. He also clarified that, those genuine invoices received at the factory processed in SAP had the GRN details and purchase order number, whereas the bogus invoices had no GRN ....
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....arded the invoices physically to him for approval. After approval, Shri. Augustine Paulraj had sent them to back Shri.S.Varatharaj, who forwarded the same to Shri. Ramesh for audit approval. After the approval of audit team, Shri.M.Mani from accounts office processed the payments towards the bogus invoices and the corresponding amount in cash was received by Shri. Raman from the suppliers and in order to track this payment, Shri. Varatharaj prepared a monthly report towards such bogus payment, which was seized at his residence. Further, from his statement it is also gathered that Shri. Augustine Paulraj handed over the monthly payments report to Shri.M.Raman for payment tracking which also was seized along with hand written noting of Shri. M Raman with respect to the payments received from the supplier. It is pertinent to mention here that the 'modus operandi' of raising bogus old bottle purchase explained by Shri. Augustine Paulraj has been accepted by all the key people of M/s SAFL involved in raising and processing of bogus invoices, making payments and collecting the corresponding cash from the suppliers. h) Based on the findings and evidences gathered during t....
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....rther, Shri. Manuel Gnana Muthu Anand, after reconfirming the statement of Shri.S.Vartharaj, Shri. Augustine Paulraj and Shri. M Raman and statements of various old bottle suppliers, had accepted that M/s SAFL booked bogus purchases to the tune of Rs.390,72,59,061/- from FY 2012-13 to FY 2022-23 and offered the undisclosed income earned by MGM group to the tune of Rs.230 crores for FYs:2012-13 to 2022-23. m) The comparative analysis of hologram consumption data maintained by Shri.Y.Victor Vasantha kumar, production and dispatch details provided by Shri. Sanjeev Yash Roy, old bottle utilization details maintained by Shri K.Parathasarathy at factory premises of M/s SAFL and actual books of accounts of M/s SAFL, it is established beyond doubt that M/s SAFL had booked bogus old bottle purchase invoices over and above actual purchases. n) The evidence found during the course of search proceedings at the business premises of M/s Lotus Bottle Suppliers, established that M/s Lotus Bottle Suppliers had raised bogus old bottle purchase Invoices to M/s SAFL and returned back the amount corresponding to bogus invoices in cash after taking its commission. Further, the evidence....
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....on oath that Niha group entities raised bogus old bottle Invoices the tune of Rs.69,78,04,742/- during the FYs: 2012-13 to 2022-23 and offered the undisclosed commission income for taxation. p) From the statement of Shri. Murugan and Shri. B Siva and evidence gathered during the course of search action at the business premises of M/s Sri Pachaivazhiamman Traders, it is established beyond doubt that the entity had raised bogus invoices to M/s SAFL. Further, the year wise amount of bogus invoices raised by M/s Sri Pachaivazhiamman Traders provided by Shri. R Murugan is exactly matching with bogus invoice ledger, 'Stock-Pack MtrI-Bottle', extracted from the SAP software of M/s SAFL. The number of old bottles supplied by M/s Sri Pachaivazhiamman Traders to M/s SAFL for FY 2019-20 and 2020-21, extracted from the excel sheets found in HP metal 16GB pen drive, is matching with details of old bottle utilised for production, maintained by Shri. K Parthasarathy at the factory premises of SAFL. Whereas the total number of old bottle purchases from M/s Sri Pachaivazhiamman Traders, booked in M/s SAFL for these financial years was much more than the above quantification. This p....
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.... course of search, it is categorically established that M/s SAFL had booked bogus old bottle purchase invoices in its regular books of accounts, through old bottle suppliers, against RTGS / cheque payments and received back the amount corresponding to bogus invoices in cash from the bottle suppliers after giving them 6% to 8% of commission ... " 5. In light of the above findings, the AO is noted to have added the entire value of the bogus old bottle purchases, as quantified by him in the Table at Para 8.1.2 of his assessment order, in all the impugned year(s) before us. Aggrieved by the order(s) of the AO, the assessee preferred appeal before the Ld. CIT(A). It is seen that, the Ld. CIT(A) after considering the submissions put forth by the assessee in light of the findings of the AO, had ultimately rejected the books of accounts of the assessee and estimated the profits at 10% of the turnover. Being aggrieved by the order of the Ld. CIT(A), both the assessee and Revenue are in appeal before us. 6. We have heard both the parties, perused the findings of the lower authorities and considered the material placed before us. It is noted that, the assessee is engaged in the business....
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....ed by the AO into two categories viz., (a) genuine supplies which were supported by GRN details in the software and (b) bogus supplies wherein only invoices were recorded without GRN because there was no actual movement of goods. In support of this inference, the AO also undertook extensive analysis of hologram utilization across the years and relied upon the statement(s) obtained from the key persons of these vendors in the course of the search/survey action conducted upon them. The Ld. CIT, DR thus wants us to consider all these material, statement(s) and analysis made out by the AO cumulatively, which according to her, proved that the old bottle purchases to the tune as quantified by the AO was indeed bogus. 8. After considering the gamut of facts placed before us, it is noted that, the foundational basis of the impugned addition was the excel file comprising of five sheets which contained details of old bottle purchases only for a three-month period in the year 2020. The Ld. AR pointed out that, when the Investigating authorities required Shri Varatharaj to explain the contents of this excel file, he had averred that the details of invoices tabulated in this excel file compr....
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....erent life cycles. Consequently, the old bottles so received may not be of the same quality and understandably some bottles may be covered with dust, chipped etc. and when they are double washed & inspected, at the factory, more rejections would occur. It was explained that, the purchase of these old bottles was also divisible into two categories viz., (i) inspected washed quantity with accepted quality and (ii) uninspected quantity chipped, dust and partially washed bottles (for emergency requirements). According to the Ld. AR, the first category being already inspected, verified and of accepted quality was accepted on receipt and therefore the Goods Receipt Note (GRN) was immediately raised, as minimal wastage was expected in the production process. He took us through the details of these first categories of purchases along with the quantities of wastage and the final utilization to show that the wastage in this category was indeed minimal. It is seen that, the explanation given by the assessee regarding the inspected purchases is also supported by the statement(s) obtained from the factory staff at the time of search. In so far as the second category was concerned, the Ld. AR su....
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....with the AO that, the material seized from the premises of the assessee would show that the assessee was indulging in availing bogus invoices from their old bottle suppliers across all the years. The data contained in the excel sheet is found to be an anecdotal sample and therefore it is not safe to use it as the basis to allege that the purchases made across ten years was bogus. The AO's action of extrapolating the data for three months found in an excel sheet across ten years and assuming that same modus operandi (non-recording of GRNs) would have been followed in all the years, in our opinion, cannot be entirely countenanced, particularly in absence of any direct evidence found from the assessee's premises to support such a proposition. Moreover, according to us, at first blush, the explanation given by the assessee for non-recording of GRNs relating to their emergency purchases is found to be plausible. At the same time however, it is observed that, the key employees had admitted that, the purchases without GRNs were bogus. We are aware that, statements alone cannot be the basis to justify any addition(s) but having perused the contents thereof, their persuasive value i....
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....it numbers, which is not possible in this line of business. Moreover, though the case of the Revenue is that, the entire value of purchases is bogus, but it is crucial to note that, the search team had failed to unearth corresponding value of unaccounted asset or unexplained investment or expenditure, in the course of search which was conducted across several days across several premises of the assessee. At the direction of this Bench, the Ld. CIT, DR for the Revenue has placed on record copies of all the panchnamas drawn at different premises of the assessee group. Having perused the same, it is observed that, only cash aggregating to Rs.2.5 crores was found & seized from different premises and no other unaccounted asset or investment was found by the Investigating authorities. Hence, it would be ludicrous to allege that the assessee inflated expenses by Rs.390 crores across several years and received back cash, when neither the alleged cash received back nor any corresponding asset or investment was unearthed in the course of search. 12. Overall therefore, we are in agreement with the Ld. CIT(A) that, there are indeed discrepancies in the books of accounts as rightly highli....
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....ing procedures were not fully followed and (iii) the purchases without GRNs lacked proper documentation, and therefore on these counts sustain the action of the Ld. CIT(A) in rejecting the books of accounts and estimating the profits of the assessee. The relevant findings of Ld.CIT(A) as partly countenanced by us supra, are as under :- "6.2.19 During the course of the appellate proceedings, the AR, along with the representatives of the appellant company, provided an explanation of the actual events and the accounting process related to the purchase of old bottles from the vendors. The old bottles are purchased routinely in the regular course of business. The use of these bottle undergo reconditioning for reuse, involves several steps to ensure that the bottles meet industry standards for hygiene, safety, and regulatory compliance. The bottles are sorted to separate those that are still in good condition from those that are damaged and cannot be reused. The bottles undergo an inspection process to assess their condition. Bottles with cracks, chips, or other defects are discarded. Bottles that pass the inspection are cleaned and sanitized before re-use. This ensures that the....
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....ed that the purchase of bottles either following the normal process or sourced on emergency basis without GRN, both were reflected as debit entry in stock in the SAP Software, although it was a manual entry in the SAP software in the case of bottles purchased without GRN numbers. The appellant's contention is that the stock debits were made for both kind of purchases in the SAP, evidences that the same were consumed in the production and hence cannot be rejected in toto. On the other hand, there seems to be accounting anomalies in as much as classification of incorrect offset account such as "Stock_PackMtrl Bottle", "Consumption-Bottles" and "Cost of Goods Sold-FG," On observing these accounting anomalies, it can be reasonable construed that the books does not reflect the true affairs of the appellant company. 6.2.22 Further, the undersigned observes that neither the Investigation Officer nor the AO has made any specific findings that the appellant company has utilised the unaccounted income generated through alleged bogus purchases of old bottles in the form of unaccounted application of such income. During the course of the search conducted in the case of the appella....
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....uch as the use of incorrect offset accounts for bogus transactions. ⮚Handling of SAP entries to process invoices without valid supporting documentation (e.g., missing GRN, no purchase orders). ⮚Failure to comply with standard accounting procedures for genuine purchases. ⮚The inability to substantiate purchases with proper documentation, which significantly impacts the reliability of the accounts. 6.2.25 Based on the above factors, the undersigned holds that the current books of accounts cannot be considered reliable for determining the true taxable income for the relevant assessment years. Therefore, as per the provisions of section 145(3) of the Act, the undersigned has the authority to reject these books of accounts and determine the taxable income to ascertain the true taxable income of the appellant company for the year under consideration. The undersigned, in order to set right the issues related in determination of the profit element embedded in such purchases rejects the books of accounts in accordance to section 145(3) of the Act. 6.2.26 At this juncture it is appropriate to rely upon the decisions rendered b....
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....w of the above, no substantial question of law is emerging from the impugned order. Hence, we find no reason to interfere with the impugned order passed by the Tribunal which is hereby sustained along with reasons mentioned therein." 6.2.27 Further the Hon'ble Punjab & Haryana High Court in the case of Mahavir Rice Mills v. CIT (2023) 153 taxmann.com 686 (P&H) has upheld the estimation made, by rejecting the books of account of the assessee in the absence of details of stock. The relevant para of the judgment is extracted below for ready reference: "9. As per above Section, the income has to be computed in accordance with the method of accountancy followed by an assessee i.e. cash or mercantile. Such method has to be followed keeping in view the accounting standard notified by the Central Government from time to time. In the absence of qualitative details, it is quite difficult to examine the sales of the assessee. The higher quality of a rice can be shown as sold at a lower rate in the bills. There was flaw in the maintenance of the details. Thus, the addition of Rs. 2,00,000/- on account of sale of rice has rightly been made. 10. Thus, order dated 2....
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....s case." 13. In light of our finding rendered at para 12 supra, we now turn our attention to the estimation of the profits. It is seen that the turnover is the only undisputed figure between the parties and therefore in our thoughtful consideration, it would be suitable to adopt and apply reasonable profit ratio to the turnover reported in the audited financials for arriving at the assessable income of the assessee. For this, the Ld. AR urged us to consider the comparative analysis of other similarly placed entities and also the average profits earned by the assessee itself in the comparable years. It is seen that, similarly placed entities such as KALS Distilleries Ltd, Enrica Enterprises Pvt Ltd, Shiva Tillers Pvt Ltd had reported net profit margins in the range of 1% to 6% and the profits reported by the assessee ranged between AYs 2019-20 to 2022-23 ranged from 5.38% to 7.69%. The Ld. AR further pleaded that, there was a significant reduction in profit margins in this industry on account of the nationwide lockdown imposed during the breakout of COVID pandemic which affected both the production as well as sales reduction in the prices of IMFL (Indian Made Foreign Liquor) by t....
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....l as by the assessee". 6.2.33 Further, the Hon'ble Madras High Court in the above case M/s. Empee Distilleries Ltd Vs. ACIT, Central Circle1(2) [2010]187 Taxman 188 (Madras) has held as under with respect to the inflation of purchase expenditure as under. "In respect of the first question, the inflation of the purchase expenditure of the old bottles, though for the sake of claim the relief was disputed before the authorities, yet the fact remained that such huge inflation had been accepted by the managing director of the company, who offered a sum of Rs. 74.50 lakhs for taxation. It was also proved by the authorities below that a very huge purchase of old bottles had been made by the assessee through its employees. However, when questioned the employees had categorically admitted before the authorities that they were forced to sign on the dotted lines and, as such, there was no proof for such huge purchase forthcoming from the assessee. The proof adduced had been rejected as stated above. The Commissioner (Appeals) had rejected the claim of wastage of 4.50 per cent as on the higher side, however, it was found with the available material that it was not possibl....
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.... examination of this issue raised, including a review of the appellant's financial statements, observes that the turnover of Rs. 433,97,34,105/- for the year in question is consistent with that of previous years. In light of this, it is held that the plea raised by the AR that the price reduction by TASMAC has materially affected the appellant's income is not substantiated by the financial data and therefore is not considered. 6.2.36 Based on the above, it is observed that the average net profit- to-turnover ratio for AYs 2019-20 to 2022-231 stands at 6.31%. Having rejected the books of accounts, the undersigned by observing the judicial discipline(s) and in order to ensure equity and fairness, is of the view that an average rate of 10% of gross turnover would be appropriate to be considered as the net profit. Accordingly, the balance that requires to be considered in the hands of the appellant company for the years under consideration are quantified as under :- Sl No. Particulars as reported u/s 139 of the Act 2020-21 2021-22 2022-23 1 Gross turnover 494,87,70,663/- 433,11,64,415/- 433,97,34,105/- 2 Gross profit reported 134,....
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....if the booksof accounts are rejected, the disallowance of this item of expenditure and income from sale of scrap ought to be separately adjudicated and decided upon as to whether it is to be separately added to the estimated business income. According to us however, once the books of account are rejected by invoking the provisions of section 145 of the Act and the income is estimated to the best of judgment as per the provisions of section 144 of the Act, the said estimate is made in substitution of the business income that is to be computed in accordance with the provisions contained in sections 30 to 43D as laid down in section29 of the Act. Consequently, all the deductions which are referred to in sections 30 to 43D of the Act are deemed to have been taken into account while making such an estimate. Useful reference in this regard may be made to the decision of Hon'ble Andhra Pradesh High Court in the case of Indwell Constructions Vs. CIT (232 ITR 776) and Hon'ble Allahabad High Court in the case of CIT vs Banwari Lal Banshidhar (229 ITR 229). Likewise, no separate additions by way of unexplained cash credit u/s 68 of the Act is permissible, when the books of accounts ha....
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....unt of cash credit and on account of unexplained payments for purchases made outside the books can be made once the net profit rate is applied on contract receipts of an assessee for estimating his income from contract work" iii) The Hon'ble High Court of Allahabad in the case of CIT vs. Banwarilal Banshidhar, (1998) 229 ITR 0229 had taken a similar view and held that where income is assessed at G.P. rate by rejecting the books of assessee u/s.145(3), no disallowance can be made separately u/s.40A(3) of the Act". iv) The Hon'ble Andhra Pradesh High Court in the of ITA No. 3187/M/2010 in the case of Maddi Sundaram Oil Mills vs. CIT reported in 37 ITR 369 has held that when the AO rejects the books of account and estimates the income of the assessee, no further addition can be made relying on the rejected books of account. v) The Hon'ble ITAT Chennai in the case of ACIT vs S. Moorthy, (ITAT No. 3091/CHNY/2019) had also taken a similar view and held that "If books of account of the assessee are rejected and income is estimated by applying certain profit rate, it would take care of all expenses necessarily to be incurred for earning profit and hen....