2017 (11) TMI 1905 - AT - Income Tax

Addition on account of bogus purchases - AO estimated profit of 12.5% with respect to such alleged purchases and added the same in assessee s income - CIT(A) has confirmed the action of the AO estimating profit at 12.5% by relying on the decision in the case of Simit P Seth 2013 (10) TMI 1028 - GUJARAT HIGH COURT - as argued by AR that in the case of Simit P Seth estimation of profit of 12.5% by the High Court was made on the plea that rate of VAT was 10% in Gujarat and additional 2.5% profit was estimated AND contended that tax amount on account of VAT was also recovered from the assessee thereby leaving no benefit of VAT - HELD THAT - As assessee has already declared GP of 3.9% on the sales so made during the year. Therefore, keeping in view the totality of facts and circumstances of the case vis- -vis nature of assessee s business, GP offered by the assessee and also the rate of VAT prevailing in Maharashtra, having been recovered from assessee, we direct the AO to restrict the addition to the extent of 2% of such purchases. - Decided partly in favour of assessee.

Summary

Issues: Reopening of assessment u/s.147 and merit of the addition made on account of bogus purchases.

Reopening of Assessment u/s.147:
The appeal was filed against the order of CIT(A)-37, Mumbai concerning the order passed u/s.143(3) r.w.s. 147 of the IT Act. The AO disallowed 12.5% of alleged purchase amounting to ?5,62,78,018/- and added it to the total income of the assessee. The assessee contended that all purchases were supported by corresponding sales or were in the closing stock, and without purchases, sales were not possible. The tax auditor did not find any issues with the quantitative details of purchases, sales, or closing stock. The assessee maintained a stock register and provided documents supporting the alleged purchases to the Assessing Officer and CIT(A). The Assessing Officer did not reject the books of account, and the addition on account of gross profit was challenged based on a decision of a co-ordinate Bench of Mumbai Tribunal regarding bogus purchases.

Merit of Addition on Account of Bogus Purchases:
The AO estimated a profit of 12.5% on suspicious purchases and added it to the assessee's income. The CIT(A) upheld this decision, relying on a Gujarat High Court case. The assessee argued that since the VAT rate in Maharashtra was 4% (compared to 10% in Gujarat), the profit estimation should be adjusted accordingly. The assessee had already declared a gross profit of 3.9% on the sales. Considering the nature of the business, the GP offered by the assessee, and the VAT rate in Maharashtra, the Tribunal directed the AO to restrict the addition to 2% of the purchases. Consequently, the appeal of the assessee was allowed in part.

This detailed analysis of the judgment addresses the issues of reopening of assessment u/s.147 and the merit of the addition made on account of bogus purchases, providing a comprehensive understanding of the legal reasoning and decisions involved in the case.