2016 (8) TMI 1519 - AT - Income Tax

Reopening of assessment - Bogus purchases - information received from the office of the DDIT (Inv) Unit II-1 that the assessee had shown bogus/suspicious purchases from various vendors who were listed in the web site of sales tax department as hawala dealers - CIT-A upheld the addition of 6% of alleged bogus purchases - HELD THAT - We found that on the basis of information by the sales tax department regarding bogus suppliers and also keeping in view the reasons recorded by AO for reopening we do not find any infirmity in the action of AO for reopening of the completed assessment. Assessee being a trading concern merely sells purchased items at a small mark up to it s purchases without any further processing. AO has not questioned sales made by the assessee. Most of the sales were made to a government entity. AO has not doubted sales undertaken by the assessee nor rejected books of accounts. However no comparative chart was placed on record by assessee to substantiate the contention that assessee had earned same margin of profit out of sales of goods purchased from hawala dealers vis-a-vis other regular dealers. Keeping in view the GP rate and net profit rate shown by the assessee in earlier years vis-a-vis profit rate generally shown by other assessee engaged in similar trade and also keeping in view the advantage obtained by assessee through purchases from hawala dealer we modify the orders passed by lower authorities and restrict the addition to the extent of 3% of the alleged bogus purchases in place of 10% upheld by AO and 6% upheld by the CIT(A). - Decided partly in favour of assessee.

Summary

Issues:
Validity of reopening assessment and merit of addition on account of bogus purchase.

Validity of Reopening Assessment:
The appeals were filed against the order of CIT(A) for assessment years 2007-2008 to 2011-2012 under section 143(3) r.w.s.147 of the I.T. Act. The assessment was reopened based on information received regarding bogus/suspicious purchases from vendors listed as hawala dealers by the sales tax department. The AO made an addition on the ground that the assessee would have made an additional margin of 10% on the alleged bogus purchases. The CIT(A) upheld the validity of reopening and added 6% of the alleged bogus purchases. The Tribunal found no infirmity in the AO's action for reopening, considering the information provided by the sales tax department and the reasons recorded for reopening.

Merit of Addition on Account of Bogus Purchase:
The assessee, a partnership firm, primarily engaged in supplying marine products to PSUs, had a low net margin before partner's remuneration and taxes. The AO did not question the sales made by the assessee, most of which were to government entities, and did not doubt the sales or reject the books of accounts. However, the Tribunal noted that no comparative chart was presented to verify if the margin of profit from goods purchased from hawala dealers was similar to that from regular dealers. Considering the overall facts and circumstances, the Tribunal modified the lower authorities' orders and restricted the addition to 3% of the alleged bogus purchases instead of the 10% upheld by the AO and 6% by the CIT(A). This decision was based on the GP rate, net profit rate in previous years, profit rate of other similar traders, and the advantage gained by the assessee through purchases from hawala dealers.

Conclusion:
The Tribunal allowed the appeals in part, directing the AO to limit the addition to 3% of the disputed purchases for all the years under consideration. The decision was based on the lack of substantial evidence to support the higher percentage of addition upheld by the lower authorities. The order was pronounced on 24/08/2016.