2009 (12) TMI 992 - AT - Income Tax

Summary

Issues Involved:
The judgment involves the assessment of the entire purchase amount as bogus and nongenuine, the rejection of the books of accounts u/s 145 of the Income Tax Act, and the determination of the appropriate gross profit rate for calculating the income of the assessee.

Assessment of Entire Purchase Amount:
The assessee's appeal was against the order upholding the entire purchase of Rs. 3,97,63,022/- as bogus and nongenuine. The AO treated the purchases as unexplained, non-genuine, and bogus, leading to the rejection of the assessee's books of accounts u/s 145 of the Income Tax Act. The AO added the entire purchase amount to the income of the assessee, considering it as unexplained. The assessee challenged this addition before the CIT(A), which was dismissed in default.

Determination of Gross Profit Rate:
The learned Counsel for the assessee argued that once the books of accounts were rejected, the proper course of action should have been to apply a gross/net profit rate to determine the income instead of making a substantial addition for unexplained purchases. It was contended that without purchases, no sales could have been made. The Counsel suggested applying the same gross profit rate of 1.50% as in the preceding assessment year.

Judgment:
The ITAT held that only income can be subjected to tax u/s 145 of the Income Tax Act and that the entire purchases cannot be treated as income without proper verification. The AO's decision to treat the entire purchase amount as income was deemed against the law. It was noted that the assessee's sales were accepted, and without purchases, no sales could have occurred. The ITAT directed the AO to delete the addition of Rs. 3,97,63,022/- on account of bogus purchases and instead make an addition of Rs. 4,79,518/- as profit earned by the assessee on rejection of book results. This adjustment was based on the application of a gross profit rate of 1.50%, similar to the preceding assessment year, which was considered reasonable and just.

Conclusion:
The ITAT set aside the orders of the authorities below and directed the AO to restrict the addition to Rs. 4,79,518/-, thereby partly allowing the appeal of the assessee. The judgment was pronounced on 18th Dec, 2009.