2020 (6) TMI 718 - AT - Income Tax

Estimation of income - bogus purchases - estimating the profit rate of 12.5% - HELD THAT - Assessee has filed detailed evidences such as purchase bills books of account bank statement proving that the purchases are made through account payee cheques but the assessee could not produce genuiness of purchase as he was not having any evidence like transportation of goods entry of goods in the stock register as one to one consumption pattern of alleged purchases item wise and confirmation from the parties/ concerns etc. CIT(A) has rightly estimated the profit rate of alleged bogus purchase. But profit rate can be estimated on some basis as in the state of Gujart VAT is at 8% whereas in Maharashtra it is 4 to 6% varies from item to item. Going by the fact that this material might have been purchased by assessee from grey market at a lower purchase price some element of profit is earned. A reasonable estimate can be made. Hence estimate the profit rate at the rate of 8% of the bogus purchases and direct the Assessing Officer to recompute the income accordingly.

Summary

Issues involved:
- Disallowance of purchases from alleged suspicious dealers by estimating profit rate
- Violation of principle of natural justice
- Estimation of profit margin at 12.5%
- Evidence of transportation and stock register not provided
- Benefit derived from using accommodation entries

Issue 1: Disallowance of purchases from alleged suspicious dealers by estimating profit rate

The appeals revolve around the disallowance of purchases from suspicious dealers by estimating a profit rate of 12.5% on the alleged bogus purchases. The Assessing Officer (AO) received information from the Sales Tax Department indicating that the assessee made purchases from parties involved in issuing bogus bills without supplying goods. Despite the assessee providing details and evidence to establish the genuineness of purchases, the AO concluded that the purchases were not genuine due to lack of transportation details. Consequently, the AO estimated the profit rate at 12.5% based on a Gujarat High Court decision. The Commissioner of Income Tax (Appeals) confirmed the AO's decision, leading to the appeal before the Tribunal.

Issue 2: Violation of principle of natural justice

The appellant contended that the disallowance was unjustified and violated the principle of natural justice as they were not provided with material used against them or given the opportunity for cross-examination of the alleged suspicious dealers. This raised concerns regarding procedural fairness and the right to a fair hearing. However, the Tribunal's decision focused on the substantive issue of estimating the profit rate rather than delving into the procedural aspects of natural justice.

Issue 3: Estimation of profit margin at 12.5%

The AO and the CIT(A) estimated the profit margin at 12.5% on the alleged bogus purchases, citing the Gujarat High Court judgment as a basis for their decision. The Tribunal, while acknowledging the need for estimating profit due to lack of specific evidence, considered the varying VAT rates in different states and estimated the profit rate at 8% instead of 12.5%. This adjustment reflected a nuanced approach to determining the profit margin based on the specific circumstances of the case.

Issue 4: Evidence of transportation and stock register not provided

A key factor in the dispute was the lack of evidence regarding transportation of goods and entry of goods in the stock register. While the appellant furnished various documents such as purchase bills and bank statements, the absence of transportation receipts and detailed stock records raised doubts about the genuineness of the purchases. This gap in evidence influenced the authorities' decision to estimate the profit rate and disallow a portion of the claimed purchases.

Issue 5: Benefit derived from using accommodation entries

The Tribunal highlighted the benefit derived by the appellant from using accommodation entries, such as saving on VAT and transportation charges. This aspect underscored the tax implications of engaging with suspicious dealers and the need to bring to tax the advantages gained through such transactions. By restricting the disallowance to a lower profit rate of 8% and considering the specific circumstances of the case, the Tribunal aimed to balance the tax treatment while addressing the concerns raised regarding the genuineness of the purchases.

In conclusion, the Tribunal partially allowed the appeals by adjusting the profit rate estimation to 8% instead of 12.5% for the alleged bogus purchases. This decision reflected a nuanced approach considering the specific circumstances of the case and the need to balance procedural fairness with substantive tax treatment.