2020 (4) TMI 889 - AT - Income Tax

Estimation of income - bogus purchases - CIT-A sustained 12.5% disallowance - HELD THAT - In this case the sales have not been doubted it is settled law that when sales are not doubted, hundred percent disallowance for bogus purchase cannot be done. The rationale being no sales is possible without actual purchases. This proposition is supported from decision in the case of Nikunj eximp enterprises 2014 (7) TMI 559 - BOMBAY HIGH COURT In this case the honourable High Court has upheld hundred percent allowance for the purchases said to be bogus when sales are not doubted. 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 savings on account of non-payment of tax and others at the expense of the exchequer - in the absence of any enquiry by the AO from the alleged bogus supplies in my considered opinion on the facts and circumstances of the case the 2% disallowance out of the bogus purchases meets the end of justice. Accordingly, direct that disallowance be restricted @ 2% of the bogus purchase - Appeal filed by the assessee stands partly allowed.

Summary

Issues:
1. Disallowance on account of bogus purchases - 12.5% disallowance sustained by CIT-A.
2. Reopening of assessment based on information from sales tax department.
3. Addition made by AO without issuing notice u/s 133(6) of the Act.
4. Applicability of hundred percent disallowance for bogus purchases when sales are not doubted.
5. Consideration of grey market purchases and tax implications.
6. Final decision on the disallowance percentage.

Analysis:
1. The appeal involved a dispute regarding the disallowance on account of bogus purchases, with the revenue contesting the CIT-A's decision to sustain only a 12.5% disallowance. The assessee, engaged in the business of ferrous & non-ferrous metals, faced a 12.5% addition by the AO for bogus purchases based on information from the sales tax department.

2. The assessment was reopened due to information from the sales tax department indicating purchases from bogus dealers. The AO made the addition without issuing a notice u/s 133(6) of the Act or conducting any inquiry from the alleged bogus supplies.

3. The CIT-A, upon the assessee's appeal, noted that the sales were not doubted and relied on various case laws to sustain the 12.5% disallowance. However, the revenue appealed to the ITAT against this decision.

4. The ITAT, after hearing both parties, considered the aspect that when sales are not doubted, a hundred percent disallowance for bogus purchases may not be warranted. Citing a jurisdictional High Court decision, the ITAT highlighted the possibility of sales not being possible without actual purchases.

5. The judgment discussed the implications of making purchases from the grey market, which could result in savings for the assessee at the expense of the exchequer. Despite this, due to the absence of any inquiry by the AO from the alleged bogus supplies, the ITAT decided to restrict the disallowance to 2% of the bogus purchases, considering the facts and circumstances of the case.

6. Consequently, the appeal filed by the assessee was partly allowed, and the ITAT directed a 2% disallowance on the bogus purchases, emphasizing the importance of justice in the decision-making process.