2016 (7) TMI 1507 - AT - Income Tax

Bogus purchases - CIT(A) upholding the disallowance of 25% - HELD THAT - CIT(A) had not given any basis for upholding the addition of 25% of the purchase amount treated as bogus by the AO. However, trading results of the assessee have not been disturbed nor books of accounts have been rejected. The GP rate disclosed by the assessee in the assessment year 2009-2010 was 4.73%, wherein assessment year 2010-11 was 3.72. There is increase of 33% in the sales amount during the year under consideration. The sales has increased from 16.62 crores to 21.83 crores during the year. Increase in sales reduces the net profit margins slightly , therefore, keeping in view the GP rate of 3.72% in earlier year as well as increase in turn over during the year under consideration, we direct the AO to restrict the addition by applying the GP rate of 3.50% in place of 3.44% shown by the assessee. - Decided in favour of assessee partly.

Summary

Issues: Appeal against CIT(A) order on addition of bogus purchases.

The judgment concerns an appeal filed by the assessee against the order of CIT(A)-Mumbai for the assessment year 2011-2012. The primary issue in this appeal revolves around the addition sustained by CIT(A) concerning bogus purchases. The AO had made an addition of ?31,36,444 on account of these purchases based on information from the sales tax department. The CIT(A) upheld the addition of inflated purchases to the extent of 25%, noting that the AO had accepted the trading results as disclosed in the audited profit and loss account. The CIT(A) observed that once the sales are accepted, the purchases cannot be doubted. The assessee appealed against the order upholding the 25% disallowance, while the revenue did not appeal against the order deleting 75% of such purchases.

Upon review, it was found that the CIT(A) had not provided a basis for upholding the addition of 25% of the purchase amount treated as bogus by the AO. Despite this, the trading results of the assessee were not disturbed, and the books of accounts were not rejected. The Gross Profit (GP) rate disclosed by the assessee in the assessment year 2009-2010 was 4.73%, decreasing to 3.72% in the assessment year 2010-11. However, there was a 33% increase in sales amount during the year under consideration, leading to a slight reduction in net profit margins. Considering the GP rate of 3.72% in the previous year and the increase in turnover, the AO was directed to restrict the addition by applying a GP rate of 3.50% instead of the 3.44% shown by the assessee. As a result, the appeal of the assessee was allowed in part. The order was pronounced in the open court on 14/07/2016.