Addition Towards Purchases Should Be Restricted To Embedded Profit Once AO Has Not Disputed Sales Declared By Assessee: Mumbai ITAT

The Bench of Aby T Varkey (Judicial Member) and MS Padmavathy S (Accountant Member) observed that “the AO has neither disputed the sales declared by the assessee nor any discrepancy is found by the AO in the books of accounts and therefore there is merit in the submission that the addition towards the impugned purchases should be restricted to the profit embedded in such transactions”. (Para 11)

As per the brief facts of the case, the assessee is a partnership firm carrying on the business as civil contractors at Thane, and is a registered contractor for various Government and Semi-government Agencies. During the year under consideration the assessee has executed contracts for constructing public and community toilet blocks in the slums of Mumbai. The AO noticed that there was a survey carried out in the case of the assessee and statements under section 131 were recorded from one Narayan Das Bhatia, partner and Ms. Isha Majalkar, Accountant of the assessee. The AO further noticed that the accountant stated that the profits of assessee to the extent of Rs. 1.3 crores were not to be declared in the return. The AO also noticed that the assessee had trade creditor outstanding from five parties to the tune of Rs. 1,25,62,972/- and that these creditors during the investigation conducted by Sales Tax Department have given sworn statements that they are entry providers without actual supply of materials. The AO linked these two facts to hold that the amount as stated by the accountant as profits to be suppressed is coming out of the purchases made from the above parties which are bogus in nature and accordingly made an addition of the entire purchases as income in the hands of the assessee. The AO also added 1% of the alleged bogus purchases towards commission which the entry provider usually charge.

The Bench noticed that though the AO has used the statement of the accountant as basis, he has conducted certain independent enquiry wherein the inspector of the ward had visited the addresses of the above listed parties and found them not existing in the said premises.

The AO has also relied on the findings of sales tax department and the affidavits admitting that these vendors are entry providers, submitted before the sales tax department, found the Bench.

The Bench also found that the department has brought on record the affidavits and statements where the vendors themselves have admitted that they have been operating as entry providers.

Hence, the ITAT remitted the issue to the AO with a direction to examine the profit % on the transactions and the profit % genuine purchase transactions of the assessee.

Counsel for Appellant/ Assessee: Rajesh Athavale

Counsel for Respondent/ Revenue: Ashok Kumar Ambastha

Case Title: M/s B Narayan Associates verses CIT

Case Number: I.T.A. No. 5107/Mum/2015

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