2010 (7) TMI 454 - AT - Income Tax

Bogus Purchase - Shri Ravi Haldiya in his statement under section 132(4) stated that the payments to such parties from whom purchases have been shown to have been made through cheques but immediately the whole amount was received back in cash - The onus was upon the assessee to prove the genuineness of the purchases - Assessee has failed to produce the quantitative details and stock register and the assessee was also not able to get the closing stock verified and hence the books of account have correctly been rejected - the addition as confirmed by the ld. CIT(A) is proper as the amounts were still payable to the trade creditors from whom purchases could not be established and such amount exceeds the addition confirmed by the ld. CIT(A) - The appeal of the assessee is dismissed

Summary

Issues Involved:
1. Rejection of books of account.
2. Verification of purchases from 14 parties.
3. Application of gross profit rate.
4. Onus on the assessee to prove genuineness of purchases.
5. Legal precedents supporting the rejection of books and non-verifiability of purchases.

Detailed Analysis:

1. Rejection of Books of Account:
The primary issue revolves around the rejection of the assessee's books of account by the Assessing Officer (AO) due to non-verifiability of purchases amounting to Rs. 38,81,984 from 14 parties. The AO inferred from the Chartered Accountant's audit report that the assessee was not maintaining proper stock details and failed to furnish quantitative details or a stock register. The AO held that the valuation of closing stock was not verifiable and was taken on an estimate basis.

2. Verification of Purchases from 14 Parties:
The AO received information from the Director of Income-tax (Investigation) indicating that purchases from these 14 parties were bogus, as payments made by cheques were returned in cash. The assessee was unable to produce these parties for verification despite being asked multiple times. Summons issued under section 131 of the Income-tax Act to these parties were returned unserved, leading the AO to conclude that the purchases were not genuine.

3. Application of Gross Profit Rate:
The AO applied a gross profit (GP) rate of 25% instead of the declared 11.88%, resulting in a trading addition of Rs. 17,38,830. The CIT(A) upheld the GP rate of 25% only for the non-verifiable purchases. The Tribunal noted that out of the total turnover of around Rs. 1 crore, purchases worth Rs. 38.81 lakhs were not verifiable, which constituted 40% of the total purchases. The Tribunal upheld the application of a higher GP rate for these purchases, considering the non-verifiability and the outstanding amounts payable to these parties at the end of the year.

4. Onus on the Assessee to Prove Genuineness of Purchases:
The Tribunal emphasized that the primary onus is on the assessee to establish the genuineness of the purchases. The assessee failed to provide sufficient evidence, such as the correct addresses or contact details of the suppliers, and did not produce the parties for verification. The Tribunal referred to several legal precedents to support this view, including decisions from the Hon'ble Rajasthan High Court and the Supreme Court, which held that the onus lies on the assessee to prove the genuineness of the transactions.

5. Legal Precedents Supporting Rejection of Books and Non-verifiability of Purchases:
The Tribunal cited various case laws to justify the rejection of books of account and the non-verifiability of purchases:
- Indian Woolen Carpet Factory v. ITAT: The onus is on the assessee to prove the genuineness of purchases.
- CIT v. Precision Finance (P.) Ltd.: Payment by account payee cheque does not make a transaction genuine.
- CIT v. Golcha (P.) Ltd.: Genuineness of transactions can be decided based on primary facts on record.
- CIT v. La Medica: If the seller is non-existent, the purchase price is treated as income from undisclosed sources.
- Beena Metals v. CIT: Failure to furnish particulars of brokers leads to the conclusion of bogus purchases.
- Kachwala Gems v. Jt. CIT: Payment by account payee cheque is not sufficient to establish genuineness.

Conclusion:
The Tribunal upheld the rejection of the books of account and the application of a higher GP rate for non-verifiable purchases. The assessee's failure to produce evidence and the non-verifiability of the parties from whom purchases were made justified the AO's actions. The appeal of the assessee was dismissed, affirming the CIT(A)'s order.