2011 (9) TMI 973 - HC - Income Tax

Bogus purchases - Held that - It is not the same as to say that for the purchase and sales which cannot be accounted for, estimated profit be added for computation of income at the rate of 25% of the bogus purchase as those cases need different appreciation from the present kind where claim of purchases and sales is a complete eyewash. Allowing disallowance at the rate of 25% the bogus purchase in cases like present one would amount to endorsing outright conduct of illegality.

Summary

Issues:
1. Determination of addition to 25% of bogus purchases
2. Modification of order by Appellate Tribunal regarding disallowance of 25% on bogus purchases

Analysis:
1. The case involved the determination of whether the Appellate Tribunal was correct in confirming the addition to 25% of bogus purchases made from nonexistent parties. The Assessing Officer found that the purchases were bogus, and the CIT(A) upheld this decision. The Tribunal restricted the addition to 25% of the bogus purchases based on a similar case precedent. The High Court noted discrepancies in the purchases made from certain parties, where the sellers admitted to not being in existence and conducting no business. The Court emphasized that the purchases were not accounted for in the books, and the material was not used in production or sold without proper records. The Court found the reliance on the previous case precedent to be erroneous, as the situations were different, and allowing a 25% disallowance on bogus purchases in this case would endorse illegal conduct.

2. The second issue revolved around the modification of the CIT(A) order by the Appellate Tribunal, directing the Assessing Officer to consider disallowance of 25% on the bogus purchases. The Tribunal based its decision on an agreement between both parties that 25% disallowance was fair. However, the High Court disagreed with this approach, stating that in cases where purchases and sales were completely fabricated, applying a 25% disallowance would be endorsing illegal activities. The Court allowed the Tax Appeal, setting aside the Tribunal's order and providing relief in the computation of the assessee's income.

In conclusion, the High Court found that the Tribunal's decision to restrict the addition to 25% of bogus purchases was erroneous, given the nature of the case where purchases and sales were entirely fabricated. The Court emphasized the need to consider the specific circumstances of each case and rejected the application of a general disallowance percentage.