2012 (10) TMI 278 - AT - Income Tax

Dis-allowance on account of payment of bogus purchases made - Held that - Though assessee has recorded bogus purchases in the books of account based on accommodation bill received, however in view of the maintenance of quantitative details having followed the practice of purchasing goods from the grey market but sales have duly been recorded; would be with the intention to gain some benefit. By adopting this illicit practice the traders have managed to save few percentage of cess/tax being levied on the purchases if made through registered dealers. Keeping that fact in mind that ultimately a reasonable percentage of profit is to be taxed on the sales executed, the Respected Coordinate Benches have arrived at a conclusion to disallow 12.5% of the purchases. Direction given to restrict the disallowance at 12.5% of the impugned purchases - Decided partly in favor of assessee

Issues Involved:
1. Reopening of assessment under sections 147/148.
2. Validity of reassessment proceedings.
3. Addition on account of bogus purchases.
4. Percentage of disallowance for bogus purchases.
5. Principles of natural justice regarding the provision of statements and affidavits of suppliers.

Detailed Analysis:

1. Reopening of Assessment under Sections 147/148:
The assessee initially contested the reopening of the assessment under sections 147/148, arguing that there was no reason to believe that income had escaped assessment. However, during the proceedings, the assessee's representative stated that these grounds were not pressed. Consequently, these grounds were dismissed as not pressed.

2. Validity of Reassessment Proceedings:
The assessee argued that the reassessment proceedings were void ab initio and bad in law. They contended that the Commissioner of Income Tax (Appeals) [CIT(A)] failed to appreciate the facts and circumstances of the case. However, as these grounds were not pressed by the assessee's representative, they were dismissed.

3. Addition on Account of Bogus Purchases:
The Assessing Officer (AO) noted that the assessee was involved in procuring bogus purchases from M/s. Girnar Sales Corporation and M/s. Shiv Metal Corporation. The AO found that these entities issued bogus bills without supplying any material, and the payments were made through cheques, which were immediately withdrawn in cash. For the assessment years 2003-04 and 2004-05, the AO added the amounts of Rs. 18,56,660 and Rs. 10,65,695, respectively, to the assessee's income, concluding that these were inflated purchases.

4. Percentage of Disallowance for Bogus Purchases:
The CIT(A) examined the facts and opined that the issue of bogus purchases could be decided in light of the decision in Vijay Proteins Ltd. 58 ITD 428 (Ahd.), where it was held that 25% of the purchase cost would be a reasonable amount to disallow. Accordingly, for the assessment year 2003-04, the CIT(A) confirmed the addition of Rs. 4,64,165 (25% of total purchases) and deleted Rs. 13,92,495. For the assessment year 2004-05, the CIT(A) confirmed the addition of Rs. 1,81,998 and deleted Rs. 8,83,697.

The assessee's representative relied on the decision in M/s. Sanket Steel Traders vs. ITO, where the Tribunal directed the AO to disallow 12.5% of the purchases. The Tribunal, in the present case, followed this precedent and directed the AO to restrict the disallowance to 12.5% of the impugned purchases for both years.

5. Principles of Natural Justice:
The assessee argued that the CIT(A) erred in not deleting the entire addition of bogus purchases, as the assessee was not given copies of the statements and affidavits of the suppliers, violating the principles of natural justice. However, the Tribunal's decision to restrict the disallowance to 12.5% of the purchases rendered this argument redundant.

Conclusion:
The Tribunal consolidated the appeals and cross-objections for both assessment years, granting partial relief to both the assessee and the Revenue. The disallowance for bogus purchases was restricted to 12.5% of the total purchases, following the precedent set by the Tribunal in similar cases. The assessee's cross-objections were dismissed as redundant. Thus, the appeals were partly allowed, and the cross-objections were dismissed.

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