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2016 (5) TMI 1463 - AT - Income TaxAddition on account of peak credit - AO to apply gross profit @ 10% - Held that - As gone through the order of Jurisdictional High Court in the case of CIT vs. Jagdishchandra Vishwakarma 2011 (2) TMI 1508 - MADHYA PRADESH HIGH COURT wherein the facts are that all the payments were made through account payee cheques, but assessee could not produce the seller. Therefore, in that case, the Tribunal had held that if all the payments have been made through account payee cheques, the purchase cannot be termed as bogus. In the instant case, the facts are not identical but in this case, the AO has not made any enquiry to prove that the money given by the assessee to Jai Deep Trading Company has returned back to the assessee, though the assessee has denied to make any bogus purchases from the above party. AO and CIT(A) is not justified in his action. In the result, the appeal of the assessee is partly allowed and we reverse the finding of the CIT(A) and we delete the addition on account of peak credit. We also direct the AO to apply gross profit @ 10%. - decided against revenue.
Issues Involved:
1. Whether the purchases made by the assessee from M/s. Jaideep Trading Company were genuine or bogus. 2. Whether the addition of the entire amount of ?3,11,72,462/- as bogus purchases was justified. 3. Whether the peak credit theory applied by the CIT(A) was appropriate. 4. Whether the interest charged under sections 234B and 234C and the initiation of penalty proceedings under section 271(1)(c) were justified. Detailed Analysis: 1. Genuineness of Purchases from M/s. Jaideep Trading Company: The assessee declared a total income of ?2,51,51,370/- and made purchases of ?3,11,72,462/- from M/s. Jaideep Trading Company. The Assessing Officer (AO) suspected these purchases to be bogus. During a search, it was found that the bills from M/s. Anuj Enterprises, a related entity, were bogus, and similar modus operandi was suspected for purchases from M/s. Jaideep Trading Company. The assessee argued that the purchases were genuine, supported by quantitative records, and payments were made through account payee cheques. However, the AO treated these purchases as bogus based on the affidavit of Shri Dharmesh Purohit, who stated that the bills were merely accommodation bills. 2. Justification of Addition of ?3,11,72,462/- as Bogus Purchases: The CIT(A) observed that the AO made a clear finding that the transactions were bogus and that the appellant was used as a conduit. However, the CIT(A) noted that the entire amount should not be added as bogus purchases. Instead, the peak credit theory was applied, reducing the addition to ?62,52,248/- after necessary verification. The CIT(A) relied on precedents where only a percentage of such bogus purchases was added. 3. Application of Peak Credit Theory: The CIT(A) applied the peak credit theory, which is a recognized method under the Income Tax Act. The peak credit was calculated at ?62,52,248/-, considering the maximum amount involved in financing the bogus transactions. This approach was supported by various judicial precedents, including the decisions of the ITAT Ahmedabad Bench and the Gujarat High Court. 4. Interest and Penalty Proceedings: The CIT(A) held that the charging of interest under sections 234B and 234C is mandatory and consequential. However, the initiation of penalty proceedings under section 271(1)(c) was not appealable and thus rejected the ground. Tribunal's Decision: The Tribunal found that the assessee maintained quantitative details and that the purchases were supported by bank transactions and sales records. The AO failed to prove that the payments made to M/s. Jaideep Trading Company returned to the assessee. The Tribunal noted that the CIT(A) applied a gross profit rate of 25%, but the Tribunal deemed a 10% gross profit rate on the bogus purchases as fair. The Tribunal modified the CIT(A)'s order, directing the AO to apply a 10% gross profit rate on the purchases of ?3,11,72,462/- and deleted the addition based on peak credit. Conclusion: The appeal of the assessee was partly allowed, and the Revenue's appeal was dismissed. The Tribunal directed the AO to apply a 10% gross profit rate on the disputed purchases and deleted the addition based on peak credit. The decision emphasized the need for concrete evidence to prove the return of payments to the assessee to classify purchases as bogus.
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