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Principal Commissioner Of Income Tax, Delhi-17, Vs. M/s Wadhawan Designs
February, 18th 2019
$~8
*      IN THE HIGH COURT OF DELHI AT NEW DELHI
                                             Decided on:1st February, 2019.
+      ITA 66/2018
       PRINCIPAL COMMISSIONER OF
       INCOME TAX, DELHI-17,                          ..... Petitioner
                    Through: Mr. Ruchir Bhatia, Sr. Std. Counsel.
                                    versus

       M/S WADHAWAN DESIGNS                    ..... Respondent
                  Through: Mr. Lalit Valecha & Ms. Divya
                            Vishvapriya, Advs.

CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE PRATEEK JALAN
S. RAVINDRA BHAT, J. (OPEN COURT)

%

CM Appl. 2633/2018 (exemption)
       Exemption allowed, subject to all just exceptions.
       The application is disposed of.
ITA 66/2018
1.     The question of law framed in this case is as follows:-
       "Did the ITAT fall into error in setting aside the concurrent
       finding with respect to the disallowance of purchases worked
       out at 6,77,21,540/-, claimed by the assessee in the facts and
       circumstances of the case?"

2.     The relevant facts are that the assessee reported income for A.Y.
2010-11; during the course of scrutiny the AO noticed that the sum of
6,77,21,540/- were shown in the assessee's books, as amounts spent
towards purchases made on account of raw materials sought to have



ITA 66/2018                                                        Page 1 of 8
procured to manufacture garments. The assessee claimed that the
readymade garments were exported and claimed drawback amounts from
the concerned authorities. After enquiry, the AO was of the opinion that the
amounts claimed towards purchase of the raw materials were bogus. In para
3.3 of the AO's orders, the AO detailed the nature of the particulars
provided by the assessee with respect to the entities/firms from whom
purchases were made.
3.     The assessee's claim was disallowed and the entire sum of  6.77
crores was brought to tax under Section 68. The assessee appealed to the
Commissioner, and the Appellate Commissioner considered its submissions
as well as the relevant case laws. The CIT(A) also noted that the assesee's
partner one Mr. Inderpal Singh Wadhawan when confronted with a similar
situation, had approached the Settlement Commission resulting in a
favourable order. The CIT(A), accordingly, enquired further into the matter
as is evident from the discussion in the appellate order. The CIT(A)
thereafter noted as follows:-
       "5.5 I have carefully considered the facts of the case and
       submission of the appellant. I have perused the material
       available on the record. Further, on specific query raised by
       me, for producing the parties from whom purchases shown to
       have been done and giving their current address, the appellant
       showed its inability to do so. However, in the submission filed
       before the AO on 15.03.2015, the appellant stated that these
       parties did not receive notices due to various reasons. If
       appellants submission filed before the AO on 15.03.2015 is
       accepted; then it is surprising to note that when the appellant
       knew the reasons of non-service of the notices at that point of
       time then why the appellant did not produce these parties
       before the AO even when specifically asked by the AO to do so.
       It means that the appellants reasoning of not getting the
       notices served on stated suppliers are not at all genuine. Since
       the parties from whom purchases shown to have been done








ITA 66/2018                                                         Page 2 of 8
       were not demonstrated by the appellant to be in existence at
       given address or at any address even in the appellate
       proceedings; therefore, such conduct of the appellant buttresses
       the AOs inference that the purchases are not verifiable. Here,
       in such facts & circumstances, the AO; placing reliance on the
       decision of the Honble Delhi High Court in case of La Medica
       (2001) 250 ITR 575, concluded 30% of the purchases of
       Rs.22,57,38,4697/-      as    unverifiable/bogus/inflated    and
       consequentially, made disallowance of Rs.6,77,21,540/- on this
       score.
       5.6 On similar facts, the appellants group concerns who filed
       the above mentioned Applications before the ITSC had admitted
       that they were not able to establish the genuineness of such
       purchases to the satisfaction of the AO. Some of the suppliers of
       the appellant are also suppliers in those two cases who filed the
       above mentioned Applications before the ITSC. Thus in view of
       above mentioned facts & circumstances, it is inferred that the
       appellants purchases are not verifiable at all. The payments
       made through banking channel do not substantiate the fact that
       the purchases made by the appellant from the parties under
       reference are genuine. In view of facts mentioned in the
       impugned order and the appellants failure to demonstrate the
       genuineness of purchases before me, I concur with the finding
       of the AO. "

4.     Furthermore the CIT[A] noted that another amount of 6,18,35,598/-
stood on account of debt owned by sundry creditors in the assessee's books
which were also without any explanation. Using the concurrent powers,
CIT[A] was not satisfied with the assessee's explanation and proceeded to
treat them as unexplained credits under Section 68. The CIT[A] however
held that since the larger sum of 6.77 crores was brought to tax, this
amount i.e. 6,18,35,598/- could be subsumed.
5.     The ITAT to whom the assessee appealed, allowed and accepted the
assessee's plea while affirming the finding with respect to rejection of the
books of accounts of the assessee.        However, it adopted the strange




ITA 66/2018                                                          Page 3 of 8
reasoning that the amounts were taxed on gross profit basis and applied a
rate of 6.05%, having regard to the past year's income and profit reported.
The findings of the ITAT are as follows:-
       20. In view of the above we are inclined to hold that the
       addition of 30% of total purchases made by the AO which also
       includes alleged sundry creditors pertaining to same purchase
       cannot be held as sustainable specially in the event of rejection
       of books of account u/s 145(3) of the Act. On the basis of above
       discussion we reach to a logical conclusion that when the books
       and trading results of the assessee have been rejected by the
       AO then no addition on account of bogus purchases or
       unexplained sundry trade creditors, who are related to the
       impugned purchases, can be made in the hands of assessee.
       21. However, in the event of rejection of books of accounts the
       AO is eligible to proceed to estimate gross profit and net profit
       rate of the assessee for arriving to taxable business income of
       the assessee. But this power of estimation is not arbitrary
       power as when the books of account and trading results are
       rejected u/s 145(3) of the Act, then the AO gets right to assess
       the business income u/s 144 of the Act by using his logical and
       judicial wisdom under 'best judgment assessment'. For the best
       judgment assessment the Assessing Officer after taking into
       account all relevant material which the assessing officer has
       gathered shall after giving the assessee and opportunity of
       being heard made the assessment of the total income or loss to
       the basis of its judgment and determine the same table by the
       assessee on the basis of such assessment in the present case no
       such exercise has been carried out by the AO as per mandate
       and requirement of the provisions of the Act.
       22. Be that as it may, in the present case, the rejection of books
       of accounts by the AO u/s 145(3) of the Act has been accepted
       by the assessee as there is no challenge to this conclusion
       recorded by the authorities below. In this situation, the AO is
       eligible to estimate the gross profit and net profit rate of the
       assessee comparing the earlier year results or comparing for
       the gross profit and net profit rate of the another entity which is
       engaged in the similar kind of business. In the present case,
       since on being asked by the Bench the Ld. DR could not




ITA 66/2018                                                            Page 4 of 8
       controvert this fact that the gross profit and net profit rate of
       the assessee in the present A.Y. 2010-11 was 6.05% and 2.01%
       respectively, which was higher in comparison to gross profit
       and net profit rate of immediately preceding A.Y.2009-10 then
       no further addition in this regard can validly be made and
       sustained. Thus, on the basis of foregoing discussion we hold
       that the addition made by the AO 30% of total purchases is not
       a valid and sustainable addition on all four corner of the
       factual matrix of the present case as noted above and mandate
       of the Act, therefore, we dismiss the same. Accordingly, the
       ground no.1 of the assessee is allowed."
6.     The Revenue urges that since the assessee's books of accounts were
rejected and at the same time sum of 6.77 crores was brought to tax
concurrently, under Section 68, ITAT could not have apply GP Ratio as in
this case. Learned counsel for the assessee, on the other hand, submits that
during the course of the assessment proceedings the materials which it
possessed by way of names and identity of the suppliers had been duly
furnished. It was further stated that the assessee had regular transactions
with those suppliers and in these circumstances the entire amounts would
not have been disallowed.
7.     The AO as well as CIT[A] had relied upon the decision of this Court
in Commissioner of Income Tax, Delhi-III, New Delhi vs. La Medica, Delhi
(2001) 250 ITR 575. In that judgment the Court had dealt with a somewhat
similar situation where the claim of expenditure was suspected. The
relevant discussion is as follows:-
       "Though essentially the conclusion of the Tribunal have the
       colour of factual findings, still we find that the Tribunal has not
       taken into consideration relevant materials and has also acted
       on irrelevant materials. The fact that the alleged sellers have
       been found to be persons with no means to effect purchases or
       to carry on business is a factor which does not appear to have
       been considered by the Tribunal in its proper perspective.









ITA 66/2018                                                            Page 5 of 8
       Materials on record clearly establish that Chedi Lal was a petty
       employee of a concern of which Satya Pal Jain was a partner.
       In fact Satya Pal Jain was a partner of Medipac, one of the
       sister concerns of the assessee firm. On enquires conducted by
       the authorities after due notice to the assessee it was found that
       there was no such concern called Kalpana Enterprises at either
       71, Canning Street, Calcutta or 479, Bartan Market, Sadar
       Bazar, Delhi. Additionally Chedi Lal opened the bank account
       with the introduction of Satya Pal Jain and the amounts were
       withdrawn. If the purchases were really affected from Kalpana
       Enterprises it is not understood as to how some other person
       namely Inder Sain Jain(HUF) accepted that the materials were
       supplied by it. The question before the Tribunal was not
       whether purchases were made from another concern. What was
       under consideration was whether the purchases were made
       from Kalpana Enterprises as was claimed by the assessee.
       Ample material has been brought on record by the Revenue to
       show that the purchases were in fact not made from Kalpana
       Enterprises. These are some of the relevant materials which
       have not been considered by the Tribunal. Tribunals
       conclusion that even if it is accepted that Chedi Lal was only an
       instrument used by Satya Pal Jain, assessee was not involved in
       it, is a conclusion arrived at without any foundation. On the
       contrary it has been established by materials on record that
       assessee knew that the whole thing was a fictitious
       arrangement. Once it is accepted that the supplies were not
       made by Kalpana Enterprises to whom payments were alleged
       to have been made, the question whether the purchases were
       made from some other source ought not to have weighed with
       the Tribunal as a factor in favour of the assessee. The
       conclusion of the Tribunal are, therefore, clearly erroneous
       contrary to materials on record and have been arrived as
       without taking into consideration relevant material and placing
       reliance on irrelevant materials. It is to be noted that assessees
       stand was not that it had effected purchases from anybody else.
       Its stand throughout was that it had effected purchases from
       Kalpana Enterprises. It was not open to the Tribunal to make
       out a third case, which was not even the case of the assessee, to
       hold that the transactions were real and not fictitious as
       claimed by the Revenue. As observed in Omar Salay Mohamed



ITA 66/2018                                                           Page 6 of 8
       Sait v. commissioner of Income-tax (1959) 37 ITR 151 (SC), a
       question of law arises of a finding of fact is arrived at by the
       Tribunal after improperly rejecting evidence. A question of fact
       becomes a question of law if the finding is not founded on any
       evidence or material, or if it is contrary to evidence. Similar is
       the position if it is perverse or there is no direct nexus or link
       between conclusion of fact and the primary fact upon which
       that conclusion is based. Where Tribunal acts on partly
       relevant and partly irrelevant materials, and it is not possible to
       say as to what extent latter has influenced its mind, the finding
       is vitiated because of use of irrelevant material. That given
       rises to a question of law. This position has been succinctly
       stated by the Apex Court in Dhirajlal Girdharilal v.
       Commissioner of Income-tax, (1954) 26 ITR 736(SC),
       Commissioner of Income-tax v. Daulat Ram Rawatmull, (1973)
       87 ITR 349 (SC). Where the Tribunal misdirects itself in law in
       basing its conclusions on some evidence ignoring other
       essential materials on record, a question of law arises. (See:
       Commissioner of Income-Tax v. Radha Kishan Nandlal, (1975)
       99 ITR 143 (SC). The answer to the question therefore, is in the
       negative, in favour of Revenue and against the assessee. "
8.     In this case, the particulars and materials with respect to the
supplier's details furnished by the assesee were unsatisfactory. The AO has
in the assessment order discussed this in great detail. It was evident that the
suppliers were not forthcoming and even notices sent to them were returned
unserved. In these circumstances and given the state of the law ­ as
indicated in Commissioner of Income Tax vs. Lovely Exports (2008) 216
CTR 195, affirming the Division Bench judgment of this Court in
Commissioner of Income Tax vs. Divine Leasing & Finance Ltd. (2008) 299
ITR 268, the burden in the first instance to disclose that the amounts were
duly paid, in the course of regular commercial transaction, by establishing
the identity of the recipients, genuineness       of the transaction and the
creditworthiness of the party concerned lay with the assessee. Clearly, it




ITA 66/2018                                                            Page 7 of 8
made some attempt to disclose the identity but was unsuccessful because
none of the suppliers could be traced. The genuineness of the transaction
too could not be established.
9.     In these circumstances, the application of law by the lower revenue
authorities [AO and the CIT(A)] was correct. Having accepted that the
expenditure claimed was bogus, the ITAT, for strange and unexplained
reasons, applied the GP Ratio which was entirely unwarranted and thus,
reduced the tax liability of the assessee drastically.
10.    In these circumstances the appeal has to succeed. The question of law
framed is answered in the affirmative, i.e. against the assessee and in favour
of the Revenue.
11.    The appeal is accordingly allowed.



                                                    S. RAVINDRA BHAT, J.


                                                         PRATEEK JALAN, J.
FEBRUARY 1, 2019
,,hkaur/pv




ITA 66/2018                                                          Page 8 of 8

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