2012 (2) TMI 598 - AT - Income Tax

Bogus purchases - Held that - We have been informed that the malpractice of bogus purchase is mainly to save 10% sales tax etc. It has also been informed that in this industry about 2.5% is the profit margin. Therefore we hereby direct that the disallowance is required to be sustained at 12.5% of the purchases from those parties. With these directions we hereby decide. The grounds of the rival parties which are partly allowed.

Summary

Issues:
Cross-appeals by assessee and Revenue regarding addition of alleged bogus purchases and subsequent challenge of the amount by both parties.

Analysis:
The main issue in this case pertains to the confirmation of addition of Rs. 12,71,471 on account of alleged bogus purchases made by the assessee for the assessment year 2006-07. The Revenue challenged the decision of the Ld. CIT(A) in restricting the addition from Rs. 41,04,903 to Rs. 12,31,471. The facts revealed that the Assessing Officer received information regarding the issuance of bogus sale bills by certain parties, leading to doubts about the genuineness of the assessee's purchases. The AO found no substantial evidence to prove the authenticity of the purchases, as crucial documents like lorry receipts, transportation details, and weighment records were missing. Consequently, the AO treated the purchases as bogus and added Rs. 41,04,903 to the assessee's income. Additionally, the books of account were rejected under section 145(3) of the Income Tax Act, and the assessee's profit was estimated at Rs. 5 lakh, which was contested before the Ld. CIT(A).

Upon appeal, the Ld. CIT(A) acknowledged a pattern of accumulating sales bills from previous years but determined that 30% of the purchase cost would be a reasonable amount to confirm, resulting in the deletion of Rs. 12,31,471 from the addition. The assessee's representative argued that quantitative details of purchases and sales were maintained, supported by the Special Auditor's report. However, the absence of stock registers, weighment details, and transportation records raised doubts. The representative cited precedents where the burden of proof lay with the assessee to establish the genuineness of purchases, emphasizing the need for substantial evidence to support transactions.

The Tribunal considered the precedents and upheld the CIT(A)'s decision to restrict the addition to 12.5% of the non-genuine purchases, aligning with the industry practice of saving sales tax and maintaining a 2.5% profit margin. The Tribunal emphasized the importance of following established legal principles and directed the disallowance to be sustained at 12.5% of the purchases from the concerned parties. Ultimately, both the assessee's and Revenue's appeals were partly allowed, with the Tribunal pronouncing the order in open court.

In conclusion, the judgment addressed the issues of alleged bogus purchases, the burden of proof on the assessee, the significance of maintaining proper documentation, and the application of legal precedents to determine the quantum of disallowance in such cases.