2018 (11) TMI 1690 - AT - Income Tax

Bogus purchases u/s 69C - applying average gross profit rate at 5.64% - HELD THAT - Assessee has duly reconciled quantitative purchases with sales and the assessee is engaged in the trading activities. The assessee could not prove movement of material nor verification from these parties could be conducted. These parties are undisputedly listed as hawala dealers by Maharashtra Sales Tax department and on enquiries conducted by Maharashtra Sales Tax department, it was proved that these parties are hawala dealers issuing bogus accommodation bills without supplying any material. The assessee is beneficiary of these accommodation entries. The sales are however not doubted by Revenue and the assessee being trader has reconciled quantitative sale and purchase of goods dealt within by the assessee. Under these circumstances, only profit element embedded in such bogus purchases need to be brought to tax as income of the assessee which definitely involved guess work. The ratio of decision of Hon‟ble Supreme Court in the case of Kachwala Gems v.JCIT 2006 (12) TMI 83 - SUPREME COURT is applicable - we confirm additions to the tune of 12.5% of such bogus purchases

Summary

Issues Involved:
1. Legality of reassessment under Section 147 of the Income Tax Act, 1961.
2. Addition under Section 69C of the Income Tax Act on account of alleged bogus purchases.
3. Computation of disallowance and its justification.

Detailed Analysis:

1. Legality of Reassessment under Section 147:
The assessee challenged the reassessment framed under Section 147 of the Income Tax Act, 1961, arguing it was "bad in law." The Assessing Officer (AO) had reopened the assessment based on information from the Sales Tax Department and the Directorate General of Income Tax (Investigation), Mumbai, indicating that the assessee had received accommodation entries from hawala dealers issuing bogus invoices without supplying any material. The AO issued notices under Section 148 and provided reasons for reopening the assessment. The reassessment was upheld as the AO followed due process, including issuing statutory notices under Sections 143(2) and 142(1).

2. Addition under Section 69C on Account of Alleged Bogus Purchases:
The AO observed that the assessee made purchases from parties listed as hawala dealers by the Sales Tax Department. Notices issued to these parties under Section 133(6) were returned unserved, and the assessee failed to produce these parties or provide their new addresses. Consequently, the AO added the entire amount of ?6,60,35,324/- to the income of the assessee under Section 69C, treating these purchases as unexplained expenditure.

The Commissioner of Income Tax (Appeals) [CIT(A)] partly allowed the appeal, restricting the additions to the extent of gross profit margins, amounting to ?35,11,220/-, based on the average gross profit ratio of the assessee over three years. The CIT(A) held that since the sales were genuine and not under doubt, the entire amount of purchases could not be disallowed.

3. Computation of Disallowance and Its Justification:
The Income Tax Appellate Tribunal (ITAT) observed that the assessee provided quantitative reconciliation of purchases and sales, and payments were made through account payee cheques. Despite this, the AO could not verify the movement of material or the existence of the suppliers. The tribunal noted that the assessee's sales were not disputed, and it was engaged in trading activities. The tribunal referred to its previous order in Revenue's appeal, which restricted the disallowance to 12.5% of the bogus purchases, considering it a reasonable profit element embedded in such transactions.

The tribunal confirmed the addition of 12.5% of the bogus purchases for the assessment years 2009-10, 2010-11, and 2011-12, aligning with its earlier decision in the Revenue's appeal. The assessee's appeals for these years were dismissed, affirming the disallowance computed at 12.5% of the bogus purchases.

Conclusion:
The tribunal upheld the reassessment under Section 147 and confirmed the addition under Section 69C to the extent of 12.5% of the bogus purchases for the assessment years 2009-10, 2010-11, and 2011-12. The appeals filed by the assessee were dismissed, and the disallowance was justified as a reasonable profit element embedded in the bogus purchases. The order was pronounced in the open court on 27.11.2018.