2017 (4) TMI 1496 - AT - Income Tax

Estimation of income - bogus purchases - HELD THAT - AO ought to have disallowed only the profit element instead of the entire purchases. We notice from the case file that the assessee had quoted umpteen number of judicial precedents in this regard. Hon ble jurisdictional high court s decision in Sanjay Oil Cake Industries 2008 (3) TMI 323 - GUJARAT HIGH COURT supports this latter plea. Larger interest of justice would be served in case only the profit element @15% in the above bogus purchases is disallowed/added rather than the entire amount. Whilst concluding so it is made clear that we have duly taken into account the fact that the assessee is a trader than manufacturer so as to arrive at the above disallowance percentage. We accordingly direct the Assessing Officer to restrict the impugned disallowance @15%.

Summary

Issues involved: Appeals challenging correctness of purchases disallowances, treating purchases as bogus, disallowance of entire purchase amounts, plea to disallow only profit element in purchases, application of precedents for disallowance percentage determination.

Analysis:

Issue 1: Challenge to correctness of purchases disallowances
The two assessees filed appeals against the CIT(A)'s orders confirming the Assessing Officer's action of disallowing purchases totaling to ?38 lakhs and ?65,01,101. The lower authorities treated these purchases as bogus, leading to the disallowances. The assessee contended that the purchases were genuine and challenged the correctness of the disallowances.

Issue 2: Disallowance of entire purchase amounts
The Assessing Officer disallowed the entire purchase amounts as he was unable to serve the parties involved under section 133(6) of the Income Tax Act, 1961. The assessee claimed to have recorded all purchases and quantity details in books of accounts but failed to provide confirmations from the suppliers. The Assessing Officer alleged that the purchases were bogus to reduce trading profits, resulting in the disallowances.

Issue 3: Plea to disallow only profit element in purchases
The assessee argued that only the profit element embedded in the purchases should be disallowed instead of the entire amounts. The ITAT agreed with this argument, citing judicial precedents and directing the Assessing Officer to restrict the disallowance to 15% of the bogus purchases. The decision was based on the principle that only the profit element should be added, considering the assessee's trading nature.

Issue 4: Application of precedents for disallowance percentage determination
The ITAT considered various judicial precedents, including the decision in Sanjay Oil Cake Industries (2009) 316 ITR 274 (Guj), to support the plea for disallowing only the profit element in the purchases. The ITAT directed the Assessing Officer to apply a 15% disallowance on the bogus purchases in both cases, emphasizing that the decision should not be treated as a precedent for future assessments.

In conclusion, the ITAT partly allowed the appeals of the assessees, directing the Assessing Officer to restrict the disallowance to 15% of the bogus purchases in both cases, based on the principle of disallowing only the profit element and considering the trading nature of the assessee.