2017 (9) TMI 1887 - AT - Income Tax

Bogus purchases - addition restricted by CIT(A) being 25% of total non-genuine bogus purchases - Payment towards VAT on the purchases from hawala dealers made - as submitted by assessee disallowance made by Assessing Officer is inclusive of VAT and further the credit of VAT was denied by the sales tax department and raised a demand which was recovered from the assessee - HELD THAT - Merit in the submission of the ld.AR that the sustenance of 25% of bogus purchases is excessive and unreasonable particularly when the VAT credit was not allowed to the assessee by the sales tax department and demand of VAT on behalf of hawala suppliers was realized from the assessee. If we look at the gross profit disclosed by the assessee it is 16.78 % which is much more than the disallowance @ 11.50% which is normally made by the coordinate benches in the case of hawala purchases. But to discourage the practice of bogus trading some deterrent has to be there. I Ends of justice would be met if the addition is sustained equal to an amount arrived at by calculating 11.50% of bogus purchases minus the VAT credit denied to the assessee by the Sales Tax Deptt which comes to 6, 66, 690/- ( 31, 29, 564 minus 24, 62, 874). Accordingly the AO is directed to delete the additions of 61, 36, 710/-. Assessee s appeal is partly allowed.

Summary

Issues involved:
- Assessment of total income with respect to bogus purchases.
- Appeal against the addition of 25% of total bogus purchases.
- Disallowance of VAT credit by the Sales Tax department.

Assessment of total income with respect to bogus purchases:
The assessee, engaged in manufacturing welding machines, filed its return declaring total income. Subsequently, the case was reopened due to hawala purchase entries. The Assessing Officer completed reassessment, adding amounts towards bogus purchases. Grounds 1-4 were not pressed and dismissed. Grounds 6, 7, and 8 were dismissed as consequential. The key issue was Ground No.5, challenging the addition of &8377; 68,03,400 by CIT(A) for non-genuine bogus purchases. The AO observed purchases from 10 parties amounting to &8377; 2,72,13,601, declared as hawala parties. Despite the assessee's submissions, parties were not produced for verification, leading to the addition of the entire bogus purchase amount.

Appeal against the addition of 25% of total bogus purchases:
In the appellate proceedings, the CIT(A) partly allowed the appeal, upholding a 25% addition on bogus purchases. The CIT(A) noted the inability of the assessee to substantiate purchases from established hawala dealers. Citing case laws, a 25% disallowance was directed, covering related disallowances. The Tribunal observed the assessee's failure to produce parties for verification, leading to the CIT(A) reducing the addition to 25%. However, the Tribunal found the 25% addition excessive, considering VAT credit denial by the Sales Tax department. To deter bogus trading practices, the Tribunal sustained an addition equal to 11.50% of bogus purchases minus the denied VAT credit, directing the deletion of excess additions.

Disallowance of VAT credit by the Sales Tax department:
The Tribunal addressed the disallowance of VAT credit by the Sales Tax department, noting the VAT payment raised and not allowing the credit. The Tribunal allowed relief after sustaining additions, considering the gross profit rate and the VAT credit denial. The Tribunal applied a similar decision from another appeal, allowing relief based on gross profit rate and VAT credit denial, resulting in partial allowance of both appeals.

This comprehensive analysis highlights the assessment of total income concerning bogus purchases, the appeal against the addition of 25% on bogus purchases, and the disallowance of VAT credit by the Sales Tax department, providing a detailed overview of the legal judgment.