Bombay High Court in Mahalaxmi Cotton Ginning Pressing and Oil Industries v The
State of Maharashtra & Others (2012) 51 VST 1 (Bom.) (HC) (SLP dismissed by the
Supreme Court) dealing with set off under section 48(5) and 51(7) of the Maharashtra
Value Added Tax Act, 2002. Issue before the court was when dealer collects the taxes
and does not deposit it in the Government Treasury, can the purchased be entitled to
set off of the said taxes. Validity of the provision was challenged. Upholding the
validity of the provision the court held that .Section 48(5) uses the expression
“actually paid” in to the Government treasury. The words “actually paid” must
receive their ordinary and natural meaning. There is no reason for the court to depart
from the plain and ordinary meaning of these words when used in the context of
section 48(5). To accept the contention that “actually paid…in the Government
Treasury” should be read to mean the tax that ought to have been deposited but has
not been deposited in the treasury would amount to rewriting the legislative provision.
In the said judgement, a statement was made on behalf of the Sales Tax authorities
that nearly 35,000 notices have been issued to hawala beneficiaries involving a
quantum of nearly 1,000 crores rupees. The statement and affidavit was made before
the Court that the State Government shall pursue action against selling dealers who
have collected tax from purchasing dealers but have not deposited the same into the
Government treasury. Statement was made before the Court that in cases of hawala
transactions, recovery action and or prosecution would be initiated against such
suppliers. The Sales Tax department is bound by the assurance given before the
Court. As per the information on the website of Sales Tax authorities, i.e. ‘Mahavat’
www.mahavat.gov, a list of 2,162 alleged non genuine dealers who had issued false
bills without delivery of goods as on April 2014 is put up. List of non-filers of CST is
93, 276, and that of VAT is 69,473 as on 15-07-2014.
Based on available information and information received from Sales Tax authorities,
income-tax officials have issued notices to various assesses, a number of assessments
have been completed, some under process and some may receive notice in due course.
Assuming each of the alleged 35,000 beneficiaries must have dealt in two assessment
years there would be at least 70,000 scrutiny assessments.
Therefore, I must congratulate the Chairman and the members of the Committee for
selecting this very important subject ”Purchases from suspicious dealers-Taxation
issues” for today’s discussion.
2. Whether a transaction of purchase is genuine or not is always a question of fact
and the primary onus is on the assessee to prove the genuineness of purchases.
2.1 As tax consultants, our efforts should be to make representation to minimise the tax
liability within the frame work of law. Representation before tax authorities becomes
very important, because once the addition is confirmed by the Tribunal, the Assessing
Officer will levy the concealment penalty, and once the penalty is confirmed in
number cases, the department has started initiating prosecution proceedings. One can
approach the High Court under section 260A of the Income–tax Act, 1961, only on
substantial question of law and not on facts. Therefore, making a good representation
before the Assessing Officer, drafting of grounds of appeal and statement of facts
before Commissioner (Appeals) is very important. Many times, it is observed that
assessees do not file or file inadequate and incomplete statement of facts. When the
matter is taken up before the Tribunal or High Courts, grounds before Commissioner
(Appeals), and statement of facts become very important part of record and evidence.
2.2. For today’s discussion, I have divided the subjects in to twelve parts.
(1 ) General principles;
(4) Legal remedies and Right of information Act;
(7) Compounding of offences;
(8) Waiver application;
(9) Advantages of approaching the Settlement Commission;
(10) Writ petition;
(11) Implications under general law; and
(12) Check lists
3. Taxation issues
3.1. Broadly there could be four types of dealers from whom the assessee might have
purchased the goods;
1) Those registered dealers whose registration are cancelled either prospectively or
retrospectively, on the said dealers admitting that they have not done genuine business
but issued only invoice.
2) There could be genuine dealers but not deposited the tax collected to Government and
now being unable to pay may file affidavit stating that they are hawala bill providers.
3) There may be some dealers who have done the actual sales and also issued bogus
bills. Now they may say that I have issued only hawala bills.
4) Only bill providers
3.2. Direct Taxation issues may arise when the purchases are from suspicious
(a) Whether entire purchases can be disallowed under section 37(1)?
(b) Whether the assessee is entitled to deduction in respect of a reasonable price for
purchase of the goods especially when sales are not doubted?
(c) Whether the expenses on purchases can be disallowed under section 40A(3)?
(d) Whether the outstanding amount can be added under section 68, 69 or 69C?
(e) Whether peak credit can be considered to make the addition. If yes, whether of
individual account or of all the alleged bogus purchases from all dealers together?
(f) Whether books of account can be rejected under section 145(2)?
(g) When books of account are rejected can there be a separate addition on account of
GP, unexplained investment, peak credit etc.?
(h) Whether set off for addition made for earlier year can be allowed for the current year?
(i) If addition made in earlier year is allowed to be set off, whether penalty can be levied
under Explanation 2 to section 271(1)(c)?
(j) If the revised return is filed, what will be the implications on concealment penalty?
(k) If books of accounts are held to be not reliable, can special audit be ordered by the
(l) Statement on oath of alleged suspicious dealers, implications on assessment and
(m) Statement on oath of assesssee in the course of survey /assessment /or search
(n) If additions are upheld, consequential relief under sections, Sections 80IA, 80IB,
(o) In case of scrutiny assessments, whether receipt of notice under section 148 can be
challenged by way of Writ under Art 226 of the Constitution of India?
4. Prima facie onus to prove genuineness of purchases is on assessee.
4.1 Initial burden is on the assessee to prove the genuineness of purchases.
CIT v. Korlay Trading Co Ltd (1998) 232 ITR 820(Cal.)(HC)
The genuineness of transaction was doubted by the AO. Purchase and sale of shares
made through broker. The assessee furnished the name of the company, number of
shares purchased, date of sale, amount of purchase and sale money etc. The assessee
had discharged its initial burden. The claim of the assessee could not be denied
merely because the broker, through whom the shares were purchased and sold, failed
to produce his books. That does not mean that the transaction was not genuine. Loss
on shares could not be disallowed.
4.2. The presumption of law is “what is apparent is real” - Duties of the authorities
CIT v. Adinath Industries (2001) 252 ITR 476(Guj.) (SLP dismissed) (2001) 247
AO issued notice on ground that purchase made by assessee were bogus. Duty of
authorities to make necessary inquiry before arriving at conclusion. Court held that
the AO could have unearthed the fact that seller was a bogus party by recording the
statement of the bank manager, accountant or cashier or the party who introduced the
seller to the bank but without any evidence and merely on the basis of withdrawal of
amounts from the account of the seller the AO had drawn a presumption that the
amount had come back in the assessee’s hands. The asessee had produced the gate
pass, receipt note, weight note, laboratory report and sample report. The matter was
decided on appreciation of evidence. Deletion was held to be valid.
4.3. Records maintained as per Excise laws are important piece of evidence
Motipur Sugar Factory (P) Ltd v. CIT (1974)95 ITR 401 (Pat.)(HC)(409)
Seetarama Mining Co. v. CIT (1968) 68 ITR 1 (AP)(HC)
Shanker Rice Co. v. ITO (2000) 72 ITD 139 (Asr.)(SB)(Trib.)(158)
In above cases, the courts have taken the view that, records maintained by Central
Excise Authorities/ Various State Govt authorities are important piece of evidence.
Applying the same principle if sales tax authorities have taken the view that the
purchases are bogus and if assessee has accepted the same. The order of Sales Tax
authorities can be relied on by the AO to doubt the genuineness of the purchase
transactions. In such a situation the burden is on the assessee to prove that though the
sales tax authorities have taken the view that purchases are genuine.
4.4. Shifting of onus on the department.
4.4.1 Babulal C. Borana v. ITO (2006) 282 ITR 251 (Bom)(HC)
The assessee has recorded the transaction relating to 50 M.Ts. of HDPE in the
regularly maintained books of account and the assessee has offered explanation
regarding the nature and source of investment but the same was not accepted.
However, books of account were not rejected. Identity of vendor was disclosed,
source of investment was explained. Held, amounts could not be added as
unexplained investment only because the vendor denied the transaction. The Court
held that though the assessee’s contention that he had no bank account was found to
be false, the disallowance was not justified. And the fact that Sales Tax was not paid
by the party who sold the goods does not affect the genuineness of transaction.
4.4.2 ACIT v. Kishan Lal Jewels (P.) Ltd. (2012) 147 TTJ 308 (Del.) (Trib.)
The assessee while furnishing necessary information regarding the transactions and
the aforesaid parties like purchase bills issued against goods purchased, sales- tax
registration numbers of the parties, PANs, their confirmations and Bank statements
showing the debit of the amount paid through Account payee Cheques to them in the
account of assessee and credited in the Bank Account of sellers, had discharged its
primary onus, thereafter the onus shifted on the department to rebut the same.
Addition under section 69C was held to be not justified.
4.4.3 ITO v. Permanand (2007) 107 TTJ 395(Jd)(Trib)
AO cannot make addition on the basis of observations made by the Sales Tax
department without conducting independent enquiries.
4.5. Evidences which can help an assessee to discharge his onus
- Producing the books of accounts, bills, stock register, payment etc.
- Filing confirmation and producing parties.
- Delivery challans
- Lorry receipts
- Octroi payment
- Confirmation from broker
- Quantity tally
- Sales details
- Excise register, payment
- Confirmation from transport operator
- Godown rent and records maintained by godown keeper
- Bank accounts cheque clearance certificate
- Comparison of GP/NP
- Rate comparison
- Consumption details
- Amounts credited to respective Accounts
- Third party assessment orders
- Expert valuation etc.
5. Additions were held to be not justified.
5.1. CIT v. Nikunj Eximp Enterprises (P.) Ltd. (2013) 216 Taxman 171 (Mag.)
Sale to government department-Alleged bogus purchases-Sales not doubted, merely
because suppliers not appeared before the Assessing Officer or Commissioner
(Appeals), purchases cannot be disallowed.
5.2. CIT v. M.K. Bros. (1987)163 ITR 249 (Guj.)(HC)
Purchases made by assessee. Subsequent statements by sellers in Sales Tax
proceedings that they had issued bogus vouchers. No evidence that bogus vouchers
were issued to assesse. Payments by account payee cheques. Amount represented
purchases cannot be disallowed.
5.3. YFC Projects (P) Ltd. v. DCIT (2010) 46 DTR 496 (Delhi)(Trib.)
Non filing of confirmation. Certificate from Bank. AO was not justified in making
disallowances of purchases made by the assessee merely due to non filing of
confirmation from suppliers especially when the assessee has filed certificate from
bank indicating the facts the cheques issued by it were cleared and no defects in the
books of account was pointed out.
5.4. Rajesh P. Soni v. ACIT (2006) 100 TTJ 464 (Ahd.) (Trib.)
Addition under section 69 was not justified merely because suppliers could not be
located and were not produced for examination.
5.5. J. H. Metals v ITO (2001) 77 ITD 71(TM)(Asr.)(Trib.)
Scrap purchase made in cash from kabarias who did not issue bills, on internal
vouchers. GP was normal. Stock register was maintained. Addition as bogus
purchases was deleted.
5.6. Vijay Proteins Ltdv.ITO (1996) 58 ITD 428 (Ahd.)(Trib.)
Assessee-company having failed to prove genuineness of transactions with 33
suppliers of oil cakes either by producing them or brokers or transports, Assessing
Officer's findings that sales invoices, vouchers for freight payments in respect of
purchases were all fictitious ones, were justified. Assessee having failed to prove that
such oil cakes were received from outside Gujarat State, as shown in aforesaid
invoices, disallowance by Assessing Officer of entire freight charges in relation to
aforesaid purchases had to be confirmed. Addition made on account of purchases of
oil cakes shown as made from 33 bogus suppliers could adequately cover unexplained
peak amount of investment made in purchase of such oil cakes, and no separate
addition could be made in respect of closing credit balances found against some of
those bogus suppliers. Detection by Assessing Officer of serious mistakes found in
vouchers produced by assessee and that too, of a large amount, justified rejection of
assessee's books of account and consequently lump sum addition, based on results of
percentage of yield of oil and oil cakes declared by assessee itself in preceding and
subsequent years, was justified and had to be confirmed.
No appeal was filed against this order. However, in one of the orders wherein this
order was relied on went to High Court. High court referred the decision and
approved the decision.
5.7. CIT v. Bholanath Poly Fab Pvt. Ltd. (2013)355 ITR 290 (Guj.)(HC)
Trading in finished fabrics. Only profit element is liable to tax.
5.8. CIT v. Simit P Sheth (2013) 356 ITR 451 (Guj)(HC)
Trading in steel. Some purchases are bogus. Estimation of profit is only held to be
5.9. CIT v. Sanjay Oil Cake Industries v. CIT (2009) 316 ITR 274 (Guj.)(HC)
- Purchase of oil cake. AO had information that these parties are hawala entry giversEntire purchases were added. Tribunal restricted to 25% of purchases as profit of
assessee. Both the assessee and Revenue filed an appeal before the Court. High Court
affirmed the view of Tribunal.
5.10. ITO v. Eagle Impex (ITA no 5697/Mum/2010 (AY. 2003-04) Bench “H” dt 22-02-
Partnership firm doing business of manufacturing/ trading and export of stainless steel