2017 (10) TMI 1509 - AT - Income Tax

Bogus purchases - quantification of the profit involved in making of the purchases by the assessee of the goods under consideration from the open/grey market - HELD THAT - In view the VAT benefit of (1%) and Custom duty (2%), the profit element from making of such purchases, in the backdrop of certain other benefits that the assessee would had derived from making of the same from the open/grey market, coupled with the fact that the unidentified seller operating in the open/grey market would not be transferring the entire set of benefits to the buyers, thus, can fairly be taken at 4%. We thus, in light of our aforesaid observations direct the A.O to restrict the addition in the hands of the assessee to 4% of the aggregate value of purchases of ₹ 2,49,99,469/- claimed by the assessee to have been made from the aforementioned party, viz. M/s Olive Overseas Pvt. Ltd. The addition sustained by the CIT(A) is modified in terms of our aforesaid observations.

Summary

Issues Involved:
1. Addition of ?14,99,968/- being 6% of purchases from M/s Olive Overseas Pvt. Ltd.
2. Legality of the assessment order under Section 143(3).
3. Charging of interest under Sections 234A, 234B, 234C, and 234D.
4. Revenue's challenge on disallowance of 6% of bogus purchases instead of the entire amount under Section 69C.

Detailed Analysis:

1. Addition of ?14,99,968/- being 6% of purchases from M/s Olive Overseas Pvt. Ltd.:

The assessee argued that the Commissioner of Income-tax (Appeals) [CIT(A)] erred in confirming an addition of ?14,99,968/- being 6% of purchases made from M/s Olive Overseas Pvt. Ltd. The CIT(A) observed that the purchases were not genuine as the supplier was a bogus entity providing accommodation entries. The CIT(A) concluded that the assessee must have purchased the goods from the open/grey market and restricted the addition to 6% of the purchase value, considering the profit element involved in such transactions. The ITAT, however, modified this approach, stating that the profit element should be fairly estimated at 4% of the total bogus purchases of ?2,49,99,469/-, considering VAT benefit, custom duty, and other factors.

2. Legality of the assessment order under Section 143(3):

The assessee contended that the assessment order under Section 143(3) was illegal and bad in law due to the lack of reasonable opportunity for a hearing, non-appreciation of facts, and failure to provide copies of material used against the appellant. The ITAT noted that the Assessing Officer (A.O) had issued a notice under Section 133(6) to verify the genuineness of the purchases, which could not be served. The assessee failed to produce the director of M/s Olive Overseas Pvt. Ltd. and did not substantiate the genuineness of the purchases. The ITAT upheld the A.O's and CIT(A)'s findings that the purchases were bogus, but modified the addition to 4% of the total purchases.

3. Charging of interest under Sections 234A, 234B, 234C, and 234D:

The assessee raised an issue regarding the charging of interest under Sections 234A, 234B, 234C, and 234D. The ITAT did not specifically address this issue in detail, as the primary focus was on the genuineness of the purchases and the appropriate addition to be made. The interest under these sections would typically follow the outcome of the tax liability determined.

4. Revenue's challenge on disallowance of 6% of bogus purchases instead of the entire amount under Section 69C:

The revenue challenged the CIT(A)'s decision to disallow only 6% of the bogus purchases as profits suppressed, instead of disallowing the entire amount under Section 69C. The ITAT agreed with the CIT(A) that the entire purchase consideration could not be added under Section 69C since the A.O had accepted the sales. The ITAT stated that the purchases were made from the open/grey market and not from the bogus entity. The ITAT modified the addition to 4% of the total purchases, considering the profit element involved in such transactions.

Conclusion:

The ITAT concluded that the purchases from M/s Olive Overseas Pvt. Ltd. were bogus, and the assessee likely made purchases from the open/grey market. The addition in the hands of the assessee was restricted to 4% of the total bogus purchases, modifying the CIT(A)'s addition of 6%. The appeal of the assessee was partly allowed, and the appeal of the revenue was dismissed. The order was pronounced in the open court on 27.10.2017.