2017 (10) TMI 1558 - AT - Income Tax

Estimation of income - Bogus purchases - addition u/s 69C - HELD THAT - Assessee by making the purchases from the open/grey market would had procured the goods at a lower rate, i.e by saving on the VAT liability, cash discounts and certain other factors, as in comparison to the price at which the same would be available in the organized sector. We find that as the VAT involved on ferrous and non-ferrous items during the year under consideration was 4%, therefore, keeping in view the other monetary benefits which the assessee as observed by us hereinabove would had benefited from by procuring the goods from the open/grey market, the same could safely be taken at an aggregate figure of 8%. We thus, in the backdrop of our aforesaid observations direct the A.O to restrict the addition in the hands of the assessee to 8% of the aggregate value of the purchases claimed by the assessee to have been made from the aforementioned parties. We thus modify the order of the CIT(A) to the extent of estimation of the profit element involved in making of the purchases under consideration.

Summary

Issues Involved:
1. Addition under Section 69C for alleged bogus purchases.
2. Justification of CIT(A)'s confirmation of addition at 17.5% of total purchases as bogus.
3. Rejection of books of accounts under Section 145(3).
4. Onus on the assessee to prove the genuineness of purchase transactions.

Issue-wise Detailed Analysis:

1. Addition under Section 69C for alleged bogus purchases:
The assessee was engaged in the business of dealing in ferrous and non-ferrous metals and had declared total income for A.Y. 2010-11. During the assessment proceedings, it was observed that the assessee had made purchases from 12 parties blacklisted by the Sales Tax Authorities for providing accommodation entries. The Assessing Officer (A.O) issued notices under Section 133(6) to verify the genuineness of these purchases, which either were returned undelivered or not complied with. The A.O directed the assessee to produce these parties and provide documentary evidence, which the assessee failed to do. Consequently, the A.O concluded that the purchases were not genuine and made an addition of ?3,66,65,814/- under Section 69C, considering the peak amount of alleged bogus purchases.

2. Justification of CIT(A)'s confirmation of addition at 17.5% of total purchases as bogus:
The CIT(A) upheld the A.O's finding that the purchases were not genuine but concluded that the addition should be restricted to the profit element involved in such purchases. The CIT(A) estimated the profit element at 17.5% of the total purchases and directed the A.O to reduce the profit already declared by the assessee from this percentage. This decision was based on the premise that the assessee did make purchases, albeit not from the alleged bogus parties but from unidentified sources. The CIT(A) relied on judicial pronouncements, including the Hon’ble Gujarat High Court's judgment in Bholanath Polyfab Pvt. Ltd., to support this stance.

3. Rejection of books of accounts under Section 145(3):
The CIT(A) observed that the rejection of books of accounts under Section 145(3) would typically arise when the profitability ratio is not accepted or major discrepancies are noticed in the books. However, in this case, the A.O did not reject the books of accounts but questioned the genuineness of the purchases. The CIT(A) maintained that the onus was on the assessee to prove the genuineness of the transactions, which was not satisfactorily discharged.

4. Onus on the assessee to prove the genuineness of purchase transactions:
The Tribunal observed that the assessee failed to substantiate the genuineness of the purchase transactions. The information from the Sales Tax Authorities indicated that the parties were providing accommodation entries without actual sale of goods. The assessee did not produce the parties for examination nor provided irrefutable documentary evidence such as transportation details or delivery challans. The Tribunal agreed with the CIT(A) that the sales were genuine, indicating that the goods were purchased from unidentified sources. However, the Tribunal modified the CIT(A)'s order, directing the A.O to restrict the addition to 8% of the total purchases, considering the benefits the assessee might have gained from purchasing in the open/grey market.

Separate Judgments Delivered:
The Tribunal's decision applied mutatis mutandis to the cross-appeals for A.Y. 2009-10 and A.Y. 2011-12, with similar findings and directions for restricting the addition to 8% of the total purchases for these years as well.

Conclusion:
The appeals of the assessee for A.Y. 2009-10, 2010-11, and 2011-12 were partly allowed, while the appeals of the revenue for the same years were dismissed. The Tribunal directed the A.O to restrict the addition to 8% of the total purchases for each assessment year.