2017 (8) TMI 1311 - AT - Income Tax

Addition @ 4.92% of total purchases from hawala parties - purchase from grey market - Held that - We are convinced with the arguments of the revenue that the assessee has failed to discharge the primary onus of proving the purchases and it could not produce evidences to show actual delivery of material and also could not produce confirmatory letters from the alleged bogus suppliers. However, we also find that the assessee is in possession of purchases invoices and the payments are through banking channels. Therefore, even if all the purchases are found to be bogus, we note that sales turnover has not been disputed by the revenue. Therefore, in such a situation, the addition, which could be made, was to account for profit element embedded in these purchase transactions to factorize profit earned by assessee against purchase of material in the grey market and undue benefit of VAT against bogus purchases which CIT(A) has rightly done. Therefore, we confirmed the order of CIT(A).

Summary

Issues:
- Disallowance of purchases from hawala parties.
- Burden of proof on the assessee regarding the genuineness of purchases.
- Determination of the profit element in the bogus purchases.
- Validity of the CIT(A)'s decision to restrict the disallowance.

Analysis:
1. Disallowance of purchases from hawala parties:
The primary issue in this case revolved around the disallowance of purchases from hawala parties by the Assessing Officer (AO). The AO disallowed a substantial amount on account of bogus purchases, leading to a significant tax implication for the assessee. The main contention was regarding the genuineness of these purchases and whether the assessee could prove their legitimacy.

2. Burden of proof on the assessee regarding the genuineness of purchases:
The AO emphasized that the onus of proof to establish the genuineness of purchases was on the assessee. The AO raised concerns about the lack of contemporaneous records, discrepancies in purchase bills, and the absence of confirmatory evidence from the alleged suppliers. Additionally, the AO cited legal precedents to support the position that payment through cheques alone does not suffice to prove the authenticity of purchases.

3. Determination of the profit element in the bogus purchases:
The CIT(A) partially allowed the appeal by restricting the disallowance to 4.92% of the total purchases from hawala parties. The CIT(A) noted circumstantial evidence casting doubt on the nature of transactions and concluded that the disallowance should be limited to the profit element embedded in the transactions. The CIT(A) reasoned that the disallowance should not be based on 100% of the bogus purchases but rather on a reasonable percentage to account for the profit component.

4. Validity of the CIT(A)'s decision to restrict the disallowance:
The Tribunal upheld the CIT(A)'s decision, emphasizing that while the assessee failed to prove the legitimacy of purchases conclusively, the existence of purchase invoices and payments through banking channels indicated some level of transaction. The Tribunal agreed with the CIT(A) that the disallowance should be limited to the profit element in the purchases, considering the uncontested sales turnover. Therefore, the Tribunal confirmed the CIT(A)'s order and dismissed both the departmental appeal and the Cross Objection (CO).

In conclusion, the judgment highlighted the importance of the burden of proof on the assessee in establishing the genuineness of transactions, the need to consider the profit element in disputed purchases, and the discretion of the CIT(A) in restricting disallowances. The Tribunal's decision to uphold the CIT(A)'s order underscored the nuanced approach taken to address the complex issues raised in the case.