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Purchase made from hawala parties not treated as bogus

Today we are going to discuss an important & most popular matter in relation to purchase made from hawala parties not treated as bogus in income tax. The ACIT in its recent judgement announced that the purchase made from hawala parties can’t be treated merely as a bogus purchase.

The Parties to case are Ramesh Kumar & Co vs. ACIT (ITAT Mumbai), I.T.A. No.2959/Mum/2014, Pronouncement date: 28.11.2014.

The Assessee (appellant) made allegations that he had made a genuine purchase & the payment in relation to that purchase is also made through account payee cheque. The Documents in relations to all allegations are also submitted by assessee. But the AO (respondent) had not made further investigation and disallow the purchase made from hawala parties.

Aggrieved by the order of AO the assessee had made further application to CIT but the order of AO is upheld by the CIT & then after Assessee made an application to ACIT.

ACIT after hearing all the allegations of assessee made an announcement that without making further investigations you can’t treat the purchase made from hawala parties as bogus purchase.

The Pronouncement made by ACIT provides a great relief to all those assessee who made genuine purchase from parties which later on announced as hawala parties.

Before this announcement all the cases related to purchase made from hawala parties are against the assessee & the AO disallow the purchase made from hawala parties treating them as bogus purchase without making further investigation. But after this announcement AO is now making further investigation & allow the genuine purchases.

The Full Judgment is given below-




Assessment Year: 2010-11

Ramesh Kumar & Co.,OfficeNo.50,IIndFloor,SwastikPlazaVL MehtaRoad,



Vs. The ACIT 21(1),C-10,IncomeTaxOffice, BandraKurlaComplex,Bandra(E),


Appellant .. Respondent
Appellant by: ShriK.R.Lakshminarayanan
 Respondent by: Shri Jeetendra Kumar

Date of Hearing           : 24.11.2014

Date of Pronouncement: 28.11.2014




This appeal by the assessee is preferred against the order of the

Ld. CIT (A)-32,Mumbai dt.3.3.2014 pertaining to A.Y.2010-11.

The assessee has raised 8 substantive grounds of appeal. The sum and substance of the grievance of the assessee is that the Ld.CIT (A) erred in law as well as on facts in upholding the addition of Rs.4,98,80,892/- made by  the AO u/s. 69C of the Act by  treating the purchases as not genuine.

The assessee is a partnership firm carrying out the business of civil contracts, civil infrastructure, such as drainage and road repairs & maintenance mainly with Municipal Corporation of Greater Mumbai. The return for the year was filed on 28.9.2010 declaring total income of Rs.2,99,79,680/-.The return was selected for scrutiny assessment and statutory notices were accordingly issued and served on the assessee.

During the course of the assessment proceedings, the Assessing Officer observed that the assessee has shown contract receipts at Rs, crores against which total purchases and  direct expenses were shown at Rs.27.5crores.   The details of purchases were filed with full address of the parties and the amount of purchase made from them during the year under consideration. While going through the list of purchases, the AO observed that many of the parties were blacklisted by Sales tax department of Maharashtra Govt. and the      Maharashtra Sales tax department had cancelled their TIN numbers.

On receiving the list of beneficiaries to these Hawala parties, the assessee was asked to produce these parties with relevant documentary proof to prove the genuineness of the transaction. The assessee failed to produce the parties but filed the copies of bills. It was further explained that payments to these parties were made through account payee cheques. It was further claimed that the transactions are genuine and the assessee has purchased material from these parties. The parties shortlisted by the AO are as under:


Sr.No. Name of party TIN Amount   inRs.
1. Shubh laxmi Sales Corp. 27490615192V 3678176
2. Riddhi Siddhi Enterprises 27750610781V 3970355
3. Deep Enterprises 27750595164V 3126703
4. Toral Enterprises 27600666493V 2501019
5. CNS Trade Links Pvt. Ltd 27750532987V 274685
6. Siddhi Enterprises 27860154093V 4001487
7. Shantinath Corporation 27520680408V 3809804
8. Tulsiani Rading Pvt. Ltd. 27440688212V 10610755
9. Rohit Enterprises 27020680974V 4645143
10. Samarth Enterprises 27560694451V 2027551
11. Niddhish Impex Pvt. Ltd. 27600648257V 11235194
TOTAL 49880892/-

The assessee was asked to show cause why the transactions with these parties should not be considered  as non genuine and the whole amount claimed as purchase from these parties should not be disallowed. On receiving no plausible reply   to the show cause notice, the AO proceeded by treating the purchases of Rs.4,98,80,892/ -as bogus purchases and added the same to the total income of the assessee.

Aggrieved by this, the assessee carried the matter before the Ld. CIT (A). It was strongly contended by the assessee that the execution of the work is executed by the assessee under the directions of the Sub Engineers of Municipal Corporation of Greater Mumbai. The progress and quantity of work is verified by the authorities. The running account bill prepared and submitted by the contractor (assessee) is checked and verified by the sub-engineer and further have checks in the department and in the process of working, completion of work, measurement, quantity etc. and that there was never any complaint and no dispute or litigation has arisen in respect of any of the purchases made by the assessee. It was further explained that the purchases were reflected in the books of account and the utilization of goods is supported by the records of the certification of Municipal Corporation of Greater Mumbai. It was further submitted that if the assessee had not purchased the goods, the assessee would not have been able to complete the work assigned and in turn would not have received the payment from the Government agencies i.e. Municipal Corporation of Greater Mumbai. On financials, the assessee stated that the gross profit rate offered by the assessee is approximately 14.2. % which is very much legitimate and reasonable

After  giving  a  thoughtful  consideration  to  the  facts  and submissions of the assessee, the Ld.CIT(A) was not convince das according to him, the assessee had failed to substantiate the claim of purchases of good sat site without submitting the delivery challans. The ratio analysis  of the financials given by the assessee were also rejected by the Ld. CIT (A). The Ld. CIT (A) dismissed the appeal and confirmed the addition made by the AO by observing that the assessee has failed to co- relate the material purchased with their use in the projects.

Aggrieved by this, the assessee is before us.

The Ld. Counsel for the assessee reiterated what has been submitted before the lower authorities. It is the say of the Ld. Counsel that all the purchase invoices were submitted before the AO and the AO has not pointed out any defect in the purchase invoice. The Ld. Counsel further stated that the purchases were duly paid by account payee cheque.


And the payment is reflected in their respective copies of ledger account. The payments are also reflected in the bank statements of the assessee therefore it cannot be said that purchases are bogus.

Per contra, the Ld. Departmental Representative strongly supported the findings of the authorities below.

We have carefully perused the orders of the lower authorities and the relevant documentary evidences brought before us. We find that the AO has made the addition as some of the suppliers of the assessee were declared Hawala dealer by the Sales tax Department. This may be a good reason for making further investigation but the AO did not make any further investigation and merely completed the assessment on suspicion. Once the assessee has brought on record the details of payments by account payee cheque, it was in cum bent on the AO to have verified the payment details from the bank of the assessee and also from the bank of the suppliers to verify whether there was any immediate cash withdrawal from their account. No such exercise has been done. The Ld. CIT (A) has also confirmed the addition made by the AO by going on the suspicion and the belief that the suppliers of the assessee are Hawala traders. We also find that no effort has been made to verify the work done by the assessee from the Municipal Corporation of Greater Mumbai. We agree with the submissions of the Ld. Counsel that if there were no purchases, the assessee would not have been in a position to complete the civil work.

On civil contract receipts ofRs.32.05crores, the assessee has shown gross profit at 14.2% and net profit at 9.72%.

Even if for the sake of argument, the books of accounts are rejected, the profit has to be computed on the sales made by the assessee


U/s.44AD of the Act, the presumptive profit in case of civil contractors is 8% and in case of a partnership firm; a further deduction is allowed in respect of salary and interest paid to the partners. The ratio analysis of the profitability is also in favors of the assessee. In our considered opinion, the purchases are supported by proper invoices duly reflected in the books of account. The payments have been made by account payee cheque which is duly reflected in the bank statement of the assessee. There is no evidence to show that the assessee has received cashbook from the suppliers. The additions have been made merely on the report of the Sales tax Department but at the same time it cannot be said that purchases are bogus. We, therefore, set aside the findings of the Ld. CIT (A) and direct the AO to delete the addition of Rs.4,98,80,892/-.

In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open court on 28thNovember2014



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