2018 (2) TMI 1785 - AT - Income Tax

Bogus purchases - Disallowance of approximately 15% as against 100% disallowed by the AO - Held that - CIT(A) sustained the addition partially at 15% of the total purchases by observing that the assessee has estimated the profit on WIP @5% which is low and thus justified sustaining of disallowance at 15%. However, in similar type of cases the Coordinate Benches have taken a view that the percentage addition should be made ranging from 2 to 12.5% depending upon the facts and circumstances of the case in order to bring to tax the savings which the assessee has made by the reason of purchase of goods from grey market when the sales/consumption is undisputed. In the present case the sales were not disputed and the method of accounting followed by the assessee is project completion, therefore, we are inclined to estimate the profit on the above purchases at 3%. Accordingly appeal of the assessee is partly allowed.

Summary

Issues:
Confirmation of disallowance of approximately 15% of bogus purchases.

Analysis:
The appeals were filed against the orders of the CIT(A)-11, Pune for assessment years 2008-09 to 2011-12. The main issue raised in all appeals was the confirmation of disallowance of around 15% of bogus purchases, as opposed to the 100% disallowed by the Assessing Officer (AO). The case involved a search action on a group engaged in commercial and residential projects, including the assessee. The AO disallowed the entire purchase amount as bogus, leading to the addition of the same to the assessee's income. In the appellate proceedings, the CIT(A) partially allowed the plea by confirming the addition to the extent of 15% of the impugned purchases.

For the assessment year 2008-09, the CIT(A) observed that the AO's profit estimation was on the low side and decided to disallow 15% of the purchases. The assessee contended that they had genuinely purchased goods, made payments via cheques, and provided evidence to support their claim. The assessee followed the project completion method for accounting, offering profits only after project completion. The AO, however, added the entire purchase amount as bogus without proper verification. The DR supported the lower authorities' decisions, emphasizing the assessee's involvement in bogus purchases.

Upon review, the Tribunal found the assessee to be a beneficiary of bogus purchase bills, as evidenced by purchases from dealers listed by the Sales Tax Department. The CIT(A)'s decision to sustain a 15% disallowance was deemed reasonable, but the Tribunal opted to estimate profit on the purchases at 3% due to the undisputed sales and the assessee's accounting method. The appeal was partly allowed without a detailed technical or legal determination.

The Tribunal's decision was applicable to the appeals for the subsequent assessment years (2009-10 to 2011-12), as the issues were identical with variations in amounts. Consequently, all appeals filed by the assessee were partly allowed, with the order pronounced on 12th February 2018.