2016 (7) TMI 1304 - AT - Income Tax

Bogus purchases - purchases made by the assessee from three parties appearing in the sales tax hawala list - Held that - Merely on the basis of information from sales tax department, the AO has treated the purchases as bogus without making any independent enquiry. As found that assessee had shown net profit of ₹ 13,85,827/- on the sales of ₹ 5.29 crores. However, the AO has declined the corresponding sales made by the assessee, nor rejected assessee s books of accouns. Keeping view judicial pronouncements referred by the AR in the case of Ganpatraj A Sanghvi 2014 (11) TMI 295 - ITAT MUMBAI and also considering the net profit rate shown by the assessee, we restrict the disallowance/addition to the extent of 5% of the bogus purchases so made by assessee. - Decided partly in favour of assessee.

Summary

Issues:
Appeal against disallowance of purchase as bogus purchases for the assessment year 2010-2011.

Analysis:
The appeal was filed by the assessee against the disallowance of a purchase amount as bogus purchases by the Assessing Officer (AO). The AO disallowed purchases of a specific amount after receiving information from the sales tax authorities, claiming that purchases from certain parties were not genuine. The CIT(A) upheld the AO's decision. However, the ITAT Mumbai found that the AO did not conduct an independent inquiry before treating the purchases as bogus. The ITAT also noted that the assessee had shown a net profit on sales, and the AO did not reject the assessee's books of accounts. The ITAT referred to various judicial pronouncements and restricted the disallowance/addition to 5% of the alleged bogus purchases based on the net profit rate shown by the assessee.

The ITAT's decision was influenced by the lack of independent inquiry by the AO and the failure to reject the assessee's books of accounts. The ITAT considered the net profit rate shown by the assessee and referred to previous judicial pronouncements to limit the disallowance/addition to 5% of the disputed purchases. As a result, the appeal of the assessee was allowed in part, providing relief from the full disallowance initially made by the AO and confirmed by the CIT(A).

In conclusion, the ITAT Mumbai's judgment highlights the importance of conducting independent inquiries before disallowing expenses as bogus purchases. The decision also emphasizes the significance of considering the overall financial picture and judicial precedents when determining the extent of disallowances in such cases.