2017 (3) TMI 1818 - AT - Income Tax

Bogus purchases - CIT(A) upholding the adhoc addition being 40% - HELD THAT - Materials were received and sold and duly accounted for and therefore it is not the case where the accommodation entries were taken to suppress the income of the assessee. Purchases made by the assessee stand proved. Disallowance as sustained by the FAA appears to be unreasonable and excessive and therefore cannot be sustained. In order to plug the leakages of revenue due to the possibility of purchasing goods from the gray market as generally the case is and thus savings made on account of sales tax, octroi and other charges, some reasonable addition should be made. Reasonable to sustain the addition @5% of the total purchases to cover and compensate for the saving made by the assessee by making purchases from grey market. Accordingly, we set aside the order of the ld.CIT(A) and direct the AO to made the addition @ 5% in place of 40% by the ld CIT of bogus purchases. - Decided partly in favour of assessee.

Summary

Issues:
Adhoc addition of alleged bogus purchases upheld by CIT(A) - Appeal against the order dated 16.3.2015 for assessment year 2009-10.

Analysis:
The case involved an appeal by the assessee against the CIT(A)'s decision upholding the adhoc addition of ?10,03,196, being 40% of alleged bogus purchases of ?25,07,989. The assessee, engaged in selling steel bars, roads, and angles on a wholesale basis, had its return of income processed under section 143(1) of the Act. The AO received information from the Sales Tax Department indicating that the assessee received bogus bills from certain parties, leading to the reopening of assessment. The AO, after considering submissions, treated the purchases as bogus, adding the entire amount to the total income. The CIT(A) partially allowed the appeal, sustaining an addition of ?10,03,196. The assessee contended that the purchases were genuine, supported by delivery challans, payments through banking channels, and proper record-keeping. The Tribunal noted the proper documentation and transactions, concluding that the purchases were genuine. However, considering the possibility of gray market purchases, it directed an addition of 5% of total purchases to cover potential revenue leakages, replacing the 40% addition by the CIT(A).

The Tribunal found that the purchases made by the assessee were genuine, supported by proper documentation and transactions. It noted the receipt of material through proper bills, payments via banking channels, and maintenance of stock records. The Tribunal concluded that the purchases were not accommodation entries to suppress income. However, to address potential revenue leakages due to gray market purchases, it directed a reasonable addition of 5% of total purchases instead of the 40% upheld by the CIT(A). The Tribunal's decision aimed to strike a balance between recognizing genuine transactions and safeguarding against revenue losses, ultimately partially allowing the assessee's appeal.

This judgment highlights the importance of maintaining proper documentation and transaction records to substantiate the genuineness of purchases. It also underscores the need for a balanced approach in assessing additions to cover potential revenue leakages, especially in cases involving gray market purchases. The Tribunal's decision reflects a nuanced consideration of the facts and legal principles, aiming to ensure fair treatment while safeguarding revenue interests.