2017 (6) TMI 1325 - AT - Income Tax

Estimation of income - bogus purchases - AO in applying the profit rate i.e. gross profit rate @ 12.5% - CIT(A) confirming the addition @ 7.50% - HELD THAT - Admittedly these are bogus purchases but assessee has already disclosed a profit rate of 5.05% and qua that reduction should have been allowed to the assessee. Application of profit rate at 12.5% is perfectly but assessee has already disclosed profit rate of 5.05% which should have been reduced. Accordingly profit rate to the bogus purchases should be estimated at the rate of 7.45% and disallowance should be made. Direct the AO accordingly. The appeal of assessee is partly allowed.

Summary

Issues:
Application of profit rate on bogus purchases.

Analysis:
The appeal was regarding the application of a profit rate on alleged bogus purchases by the Assessing Officer (AO). The AO had added a sum by estimating a profit rate of 12.5% on the bogus purchases made by the assessee. The CIT(A) confirmed the AO's action, leading to the assessee filing an appeal before the Tribunal. The Tribunal noted that the assessee was engaged in trading ferrous and non-ferrous metals and had submitted relevant documents during scrutiny proceedings. Information received indicated that the assessee, along with other suspicious dealers, was involved in bogus purchases. The AO added a specific amount based on a profit rate of 12.5%. The assessee provided evidence such as purchase ledger, sale ledger, stock records, and proof of payment through bank statements. However, the parties involved in the transactions could not be located. The assessee argued for a lower profit rate, citing past and future profit ratios. The Tribunal acknowledged the bogus purchases but considered the disclosed profit rate of 5.05%. It directed the AO to estimate the profit rate on bogus purchases at 7.45% and allowed the appeal partly.

The Tribunal's decision focused on the discrepancy between the profit rate applied by the AO and the profit rate disclosed by the assessee. Despite acknowledging the bogus nature of the purchases, the Tribunal considered the assessee's declared profit rate of 5.05% and adjusted the profit rate on bogus purchases to 7.45%. This adjustment aimed to strike a balance between penalizing the assessee for the bogus transactions and recognizing the disclosed profit rate. The Tribunal's decision highlighted the importance of considering all relevant factors, including past financial data, when determining the appropriate profit rate in cases involving alleged bogus transactions.