2017 (9) TMI 1916 - AT - Income Tax

Estimation of income - bogus purchases - CIT(A) reduced it to 25% - HELD THAT - In this case the sales have not been doubted it is settled law that when sales are not doubted, 100% disallowance for bogus purchase cannot be done. This proposition is supported from Hon ble jurisdictional High Court decision in the case of Nikunj Eximp Enterprises 2013 (1) TMI 88 - BOMBAY HIGH COURT - However, the facts of the present case indicate that assessee has made purchase from the grey market. Making purchases through the grey market gives the assessee selling on account of non-payment of tax and others at the expense of the exchequer. In such situation in considered opinion on the facts and circumstances of the case the 12.5% disallowance out of the bogus purchases meets the end of justice. This is following the decision of Hon ble Gujarat High Court in the case of Simit P Seth 2013 (10) TMI 1028 - GUJARAT HIGH COURT followed by the ITAT Mumbai Benches in a number of cases. We order of learned CIT(A) and direct that the disallowance be limited to 12.5% of the bogus purchase. Appeal filed by the assessee is partly allowed.

Summary

Issues:
- Disallowance on account of bogus purchase
- Burden of proof on the appellant
- Percentage of disallowance
- Merger of High Court and Apex Court orders
- Sales not doubted but purchases from grey market
- Disallowance percentage based on grey market purchases

Analysis:
1. The primary issue in this case revolves around the disallowance of a percentage of the amount claimed as purchases due to being deemed as bogus. The Assessing Officer initially disallowed the entire amount, but the CIT(A) reduced it to 25% after the appellant failed to provide sufficient evidence regarding the legitimacy of the purchases.

2. The burden of proof was on the appellant to substantiate the authenticity of the purchases. The appellant's failure to produce essential documents such as weightment slips, transportation records, and sale bills during both assessment and appellate proceedings weakened their case. The AO concluded that the purchases were accommodation bills aimed at reducing tax liabilities, leading to the disallowance under section 69C of the Act.

3. The issue of the merger of High Court and Apex Court orders arose in the context of a previous decision where the Tribunal restricted a similar disallowance to 25% of bogus purchases. The ITAT held that the dismissal of a Special Leave Petition by the Apex Court did not merge the High Court's decision, allowing the ITAT to exercise independent judgment.

4. While the sales made by the appellant were not under scrutiny, the Tribunal considered the nature of purchases from the grey market as detrimental to tax revenues. Following precedents and considering the facts of the case, the Tribunal decided to limit the disallowance to 12.5% of the bogus purchases to achieve justice and deter such practices.

5. Ultimately, the Tribunal partially allowed the appeal, modifying the CIT(A)'s order to restrict the disallowance to 12.5% of the claimed bogus purchases. This decision was based on the evidence presented, legal precedents, and the impact of grey market transactions on tax compliance and revenue.