2011 (11) TMI 753 - AT - Income Tax

Summary

Issues Involved:
1. Bogus Purchases and Disallowance Percentage
2. Addition on Account of Peak Investment
3. Telescoping of Unaccounted Income

Issue-wise Detailed Analysis:

1. Bogus Purchases and Disallowance Percentage:
The core issue revolves around the disallowance of purchases deemed bogus by the Assessing Officer (AO). The AO disallowed 25% of the purchases, suspecting that the assessee obtained fictitious invoices from certain suppliers. The Commissioner (Appeals) reduced this to a 2% disallowance, considering the assessee's gross profit rate and the absence of concrete evidence from the AO. The Tribunal upheld the Commissioner (Appeals)'s decision, noting that the AO accepted the fact of purchases but questioned their source. The Tribunal emphasized that the AO did not verify the existence of suppliers with sales tax authorities or banks and that less than 4% of the purchases were disputed. The Tribunal found the 25% disallowance excessive and upheld the 2% disallowance, dismissing the Revenue's appeal for a higher disallowance.

2. Addition on Account of Peak Investment:
The AO added peak investments in grey market purchases to the assessee's income, which the Commissioner (Appeals) partially upheld. The Tribunal found that since only 2% of the purchases were disallowed, the question of unexplained peak investments did not arise. The Tribunal noted that the assessee provided peak credit calculations under the AO's direction, which did not justify the peak addition. Consequently, the Tribunal deleted the addition sustained by the Commissioner (Appeals) on account of peak investment, allowing the assessee's ground on this issue.

3. Telescoping of Unaccounted Income:
The assessee sought the benefit of telescoping unaccounted income against the unaccounted stock found during the search. The Commissioner (Appeals) denied this benefit, stating that there was no evidence of unaccounted income being invested in unaccounted stock in the corresponding years. The Tribunal, however, held that if the Revenue's case is that funds were generated by inflating purchases, those funds logically would be used for investments. The Tribunal referred to judicial precedents supporting this view and remanded the issue back to the AO for fresh adjudication, allowing the ground for statistical purposes.

Conclusion:
The Tribunal upheld the 2% disallowance of purchases, deleted the addition on account of peak investment, and remanded the issue of telescoping unaccounted income back to the AO for fresh consideration. The assessee's appeals were partly allowed, while the Revenue's appeals were dismissed.