2018 (1) TMI 1412 - AT - Income Tax

Addition of bogus purchases - inability of the assessee to produce the suppliers - Held that - In this case the sales have not been doubted. It is settled law that when sales are not doubted, 100% disallowance for bogus purchase cannot be done. The rationale being no sales is possible without actual purchases. This proposition is supported from the Hon ble jurisdictional High Court decision in the case of Nikunj Eximp Enterprises 2014 (7) TMI 559 - BOMBAY HIGH COURT In the present case, the facts of the case indicate that assessee has made purchase from the grey market. Making purchases through the grey market gives the assessee savings on account of non-payment of tax and others at the expense of the exchequer. In such situation, in my considered opinion, on the facts and circumstances of the case, 12.5 % disallowance out of the bogus purchases meets the end of justice. As assessee has prayed that when only the profits earned by the assessee on these bogus purchase transaction is to be taxed, the gross profit already shown by the assessee and offered to tax should be reduced from the standard 12.5% being directed to be disallowed on account of bogus purchase find considerable cogency in the submission as otherwise it will be double jeopardy to the assessee. Accordingly, modify the order of learned CIT-A and direct that the disallowance in this case be restricted to 12.5 % of the bogus purchases as reduced by the gross profit rate already declared by the assessee on these transactions.- Decided partly in favour of assessee

Summary

Issues:
1. Disallowance on account of alleged bogus purchases for A.Y. 2009-10.
2. Dismissal of plea for withdrawal of penalty proceedings u/s 271(1)(c).

Issue 1: Disallowance on account of alleged bogus purchases for A.Y. 2009-10:
The appeal was against the 12.5% disallowance on alleged bogus purchases for A.Y. 2009-10. The appellant contended that the AO's opinion was based on presumptions without material evidence. The CIT (A) confirmed the disallowance, stating that necessary documentary evidence supported the purchases. The ITAT considered the appellant's reliance on a Gujarat High Court decision where disallowance was deleted due to documentary evidence. The ITAT noted that sales were not doubted, citing a jurisdictional High Court decision that disallowance cannot be 100% if sales are not questioned. However, the appellant purchased from the grey market, saving on taxes. The ITAT decided on a 12.5% disallowance, considering the circumstances. The appellant requested the disallowed amount to be reduced by the gross profit already declared on these transactions to avoid double taxation. The ITAT agreed, modifying the CIT (A) order to restrict disallowance to 12.5% of bogus purchases after adjusting for gross profit.

Issue 2: Dismissal of plea for withdrawal of penalty proceedings u/s 271(1)(c):
The appellant's plea to withdraw penalty proceedings under section 271(1)(c) was dismissed by the CIT (A). However, the judgment primarily focused on the disallowance of alleged bogus purchases, and no further details were provided regarding the penalty proceedings.

In conclusion, the ITAT partially allowed the appeal, modifying the disallowance on bogus purchases for A.Y. 2009-10 and addressing the plea for withdrawal of penalty proceedings under section 271(1)(c). The judgment emphasized the importance of documentary evidence, the impact of grey market purchases, and the need to avoid double taxation while determining disallowance percentages.