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PCIT vs. Pinaki D. Panani (Bombay High Court)
January, 21st 2020

S. 68/ 69C Bogus purchases: Even if the purchases made by the assessee are to be treated as bogus, it does not mean that entire amount can be disallowed. As the AO did not dispute the consumption of the raw materials and completion of work, only a percentage of net profit on total turnover can be estimated (Mohommad Haji Adam & Paramshakti Distributors followed)

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/-

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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 the Income Tax Act on 7
December, 2011. Thereafter the assessment was reopened under
Section 147 of the Income Tax Act. 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
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
contracted amount. Aggrieved by this order the Appellant-

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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. MohommadHaji 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

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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 :-

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“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

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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.

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