2017 (11) TMI 1906 - AT - Income Tax

Bogus purchases - addition was restricted to 12.5% of the purchases by CIT-A - as argued AO has not conducted any enquiry on his behalf, to prove the above purchases made from concerns to be non-genuine - HELD THAT - Once the assessee has brought on record the details of payments by account payee cheque, it was incumbent on the AO to have verified the payment details from the bank of the assessee and also from the bank of the suppliers to verify whether there was any immediate cash withdrawal from their account. No such exercise has been done or findings recorded. There was no detailed investigation made by the AO himself - payments have been made by account payee cheque which are duly reflected in the bank statement of the assessee. There is no evidence to show that the assessee has received cash back from the suppliers. AO has not brought any material on record to show that there is suppression of sales. It is basic rule of accountancy as well as of taxation laws that profit from business cannot be ascertained without deducting cost of purchase from sales. After giving these observations, CIT(A) has directed AO to estimate profit at 12.5%. Assessee has already declared GP of 6.40% on the total sales. The GP declared by the assessee with respect to the alleged bogus purchases were better than the GP declared in respect of remaining sales. Therefore we modify both the orders of the lower authorities and direct the AO to restrict addition to the extent of 2% of the alleged bogus purchases so as to cover leakage of revenue if any. - Decided partly in favour of assessee.

Summary

Issues: Cross appeals filed by assessee and revenue against the order of CIT(A) regarding the addition of purchases made from suppliers found to be bogus by the Sales Tax Department during re-assessment proceedings.

Analysis:
1. Genuineness of Purchase Transactions: The Assessing Officer (AO) added back entire purchases in the assessee's income after observing that the suppliers were found to be bogus. However, the CIT(A) found that while the suppliers were bogus, the purchases were genuine. The CIT(A) estimated a profit element of 12.5% on the purchases, restricting the addition accordingly.

2. Assessee's Submissions: The assessee submitted various documents to substantiate the genuineness of the purchases, including ledger copies, purchase bills, bank statements, and audit reports. The assessee argued that the AO did not conduct a proper inquiry and relied on borrowed information without fresh tangible material to reopen the case.

3. Judicial Pronouncements: The assessee relied on judicial pronouncements to support the deletion of the addition made on purchases, emphasizing the substantial gross profit (GP) shown. The CIT(A) noted that the AO did not conduct further investigation despite some suppliers being declared hawala dealers by the VAT Department.

4. Verification of Payments: The CIT(A) highlighted that the AO failed to verify payment details from the bank accounts of both the assessee and the suppliers to determine any cash withdrawals. The CIT(A) emphasized the importance of verifying payments made through account payee cheques and the lack of evidence showing cash received back by the assessee.

5. Profit Estimation: Considering the totality of facts, the Appellate Tribunal directed the AO to restrict the addition to 2% of the alleged bogus purchases to cover any potential revenue leakage. The Tribunal modified the orders of the lower authorities and allowed the assessee's appeal in part while dismissing the revenue's appeal.

In conclusion, the judgment addressed the genuineness of purchase transactions, the adequacy of the assessee's submissions, the importance of verifying payments, and the estimation of profits in cases involving alleged bogus purchases. The decision provided a balanced approach by considering the overall circumstances and directing a limited addition to cover potential revenue losses.