2016 (2) TMI 888 - AT - Income Tax

Bogus purchase - addition as assessees income - Held that - AO was not justified in holding that the entire bogus purchases by the assessee from the aforesaid two parties in the assessee s undisclosed income. The assessee had earned commission @ 5% for clandestinely facilitating the bogus transactions of the parties to purchases and sales.

Summary

Issues Involved:
1. Legitimacy of purchases from M/s. Shraddha Saburi Merchants Ltd. and M/s. Sai Kripa Metallic Tradecom Ltd.
2. Determination of the assessee's income from the alleged bogus purchases.
3. Estimation of commission income earned by the assessee.

Detailed Analysis:

1. Legitimacy of Purchases:
The assessee firm, engaged in manufacturing and trading conductors and metals, filed its return for AY 2007-08, later revised, declaring an income of Rs. 5,91,912. A survey under section 133A of the Income Tax Act revealed that the assessee had purchased materials worth Rs. 3,82,69,759 from M/s. Shraddha Saburi Merchants Ltd. and M/s. Sai Kripa Metallic Tradecom Ltd., which were deemed bogus as these entities were involved in accommodation entries without actual business transactions. Despite opportunities, the assessee could not substantiate the purchases with documentary evidence. The Assessing Officer (AO) concluded that these purchases were bogus and added the entire amount to the assessee's income, resulting in a total assessed income of Rs. 3,87,89,670.

2. Determination of Income from Alleged Bogus Purchases:
The assessee appealed to the CIT(A), who remanded the case for further inquiries. The CIT(A) found that the assessee acted as an indenting agent, facilitating the transactions between the purchase and sale parties for a commission. The CIT(A) noted that all transactions were through banking channels and no cash transactions were involved. The CIT(A) held that the AO was unjustified in treating the entire purchases as the assessee's undisclosed income, especially when the quantities purchased and sold were identical. The CIT(A) concluded that the assessee earned commission from these transactions and estimated the commission at 5% of the total purchases, amounting to Rs. 19,13,488, after considering the net commission income already declared by the assessee.

3. Estimation of Commission Income:
The assessee contested the CIT(A)'s estimation of commission at 5%, arguing that the commission should be 0.17% as shown in their books. The Revenue, on the other hand, contended that the entire amount of Rs. 3,82,69,759 should be taxed as the assessee's income. The Tribunal, after considering the material on record and the detailed findings of the CIT(A), upheld the CIT(A)'s order. The Tribunal agreed that the assessee facilitated the transactions for a commission and that the AO's addition of the entire purchase amount was unjustified. The Tribunal also found the CIT(A)'s estimation of commission at 5% to be reasonable given the clandestine nature of the transactions.

Conclusion:
The Tribunal dismissed both the assessee's appeal and the Revenue's cross-appeal. The Tribunal confirmed the CIT(A)'s findings that the entire purchases should not be treated as the assessee's undisclosed income and that the commission earned by the assessee should be estimated at 5% of the total purchases. The Tribunal found no reason to interfere with the CIT(A)'s order and upheld the partial relief granted to the assessee.