2017 (7) TMI 1327 - AT - Income Tax

Bogus purchases u/s 69C - assessee failed to furnish documentary evidence to prove that purchase made were genuine - AO has also added the GP @8% on the total bogus purchases - CIT(A) has applied GP margin at 5.07% and restricted the addition - HELD THAT - We find that there are divergent views of various High Courts on what amount of GP should be applied in such bogus purchases. We find that in the case of Smith and Sheth 2013 (10) TMI 1028 - GUJARAT HIGH COURT held that a trader sold some goods and he would purchase the same from other sources. When the total sale is accepted by the AO he could not have questioned the very basis of purchase. Therefore purchases are not bogus but they are made from parties other than those who are mentioned in the books of account. This being the decision not the entire purchase price but only the profit element in such purchases can be added to the income of the assessee. Disallowance to the extent of 12.5% of such bogus purchase will be justified in the facts of this case also. Therefore, we modify the order of the CIT(A) and direct the AO to restrict the disallowance the extent of 12.5% of such bogus purchases - Appeals filed by the Revenue are allowed for statistical purposes.

Summary

Issues:
1. Bogus purchases allowed by CIT(A) without proper evidence
2. Failure to appreciate provisions of section 69C of the Act
3. Gross deviation in maintenance of accounts under Section 145

Analysis:
1. The appeal involved the Revenue challenging the CIT(A)'s orders for assessment years 2009-10 to 2011-12 regarding the allowance of bogus purchases made by the assessee without sufficient evidence. The assessee failed to provide documentary proof of the genuineness of the purchases, leading to a dispute over the legitimacy of the transactions.

2. The Revenue contended that the CIT(A) erred in not considering the provisions of section 69C of the Act, which require the assessee to explain the source of expenditures. In cases where no explanation is provided, the Act allows for the addition of such expenditures to the assessee's income. The absence of proper documentation and explanations raised concerns regarding the validity of the purchases.

3. Additionally, for the assessment year 2010-11, the assessee raised a ground related to the provisions of Section 145 concerning the maintenance of accounts. The CIT(A) failed to address the gross deviation in the maintenance of the assessee's accounts and the non-compliance with prescribed norms, indicating discrepancies in the accounting practices followed by the assessee.

4. The assessee, a trader in Rubber & Rubber chemicals, made purchases from parties identified as hawala entities by the Sales Tax Department. The Assessing Officer (AO) issued notices to these parties under section 133(6), but the notices were returned. Consequently, the AO added the peak balance of certain amounts and made additions under section 69C of the Income Tax Act, along with applying a GP margin on the alleged bogus purchases.

5. During the proceedings, the CIT(A) applied a GP margin of 5.07% and limited the addition to a specific amount. Citing precedents, the Revenue argued for a higher addition percentage based on judgments confirming additions for bogus purchases. The absence of representation from the assessee further complicated the matter.

6. The Tribunal noted that while the assessee lacked evidence to prove the legitimacy of the purchases, they possessed invoices and made payments through banking channels. Given the uncontested sales turnover, the Tribunal decided that additions should only reflect the profit element embedded in the purchase transactions. Considering divergent views on the appropriate GP margin for such cases, the Tribunal settled on a 12.5% disallowance of the bogus purchases to align with consistent judicial interpretations.

7. Ultimately, the Tribunal allowed the Revenue's appeals for statistical purposes, modifying the CIT(A)'s order to restrict the disallowance to 12.5% of the bogus purchases. The decision aimed to balance the need for additions with the recognition of legitimate sales turnover, emphasizing the profit element in the disputed transactions.