2017 (7) TMI 1400 - AT - Income Tax

Estimation of income on bogus purchases - Addition on the basis of surmises and presumption - AO after rejecting the books of accounts applied 12.5% as profit on purchases - HELD THAT - Application of GP 12.5% on the bogus purchases is reasonable but the GP declared by the assessee in the books of account should be reduced from the said percentage and only the differential should be applied - the rate as applied by the AO i.e 12.50% minus already declared in the profit and loss account i.e 9.38 % which comes to 3.12% should be applied. Accordingly, we set aside the order of ld.CIT(A) and direct the assessing officer to apply GP rate 3.12% on the bogus purchases to cover the various types of savings such as saving on account of VAT and other incidental charges. Resultantly, the appeal of the assessee stands partly allowed.

Summary

Issues involved:
1. Re-opening of assessment under section 148 of the Income Tax Act.
2. Confirmation of addition based on surmises and presumption.

Detailed Analysis:
1. Re-opening of assessment:
The appeal before the Appellate Tribunal ITAT Mumbai pertained to the assessment year 2009-10 and was directed against the order of the CIT(A)-45, Mumbai, dated 8.12.2016, which arose from the Assessing Officer's order dated 19.03.2015 under section 143(3) r.s.w.147 of the Income Tax Act, 1961. The grounds of appeal initially included the re-opening of the assessment under section 148 of the Act. During the hearing, the assessee's representative did not press these grounds, leading to their dismissal as not pressed.

2. Confirmation of addition based on surmises and presumption:
The main issue raised in the grounds of appeal was against the confirmation of an addition by the CIT(A) based on surmises and presumption. The facts of the case revealed that the assessee had filed a return of income declaring a certain amount, which was later reopened by the Assessing Officer due to alleged bogus entries of purchases from two parties. The AO, unsatisfied with the submissions, rejected the books of accounts and applied a Gross Profit (GP) rate on the alleged bogus purchases. The first appellate authority upheld this action, confirming the addition at a GP rate of 12.5%. However, the Appellate Tribunal disagreed with the application of the 12.5% GP rate on the bogus purchases, considering that the assessee had already declared a GP rate of 9.38% in the books of account. The Tribunal directed the assessing officer to apply a reduced GP rate of 3.12% on the bogus purchases, accounting for the difference between the declared rate and the applied rate. As a result, the appeal of the assessee was partly allowed.

In conclusion, the Appellate Tribunal ITAT Mumbai addressed the issues of re-opening the assessment under section 148 of the Income Tax Act and the confirmation of addition based on surmises and presumption. The Tribunal found the application of a 12.5% GP rate on bogus purchases to be unreasonable considering the GP rate already declared by the assessee. By directing a reduced GP rate of 3.12% on the bogus purchases, the Tribunal partly allowed the appeal of the assessee, emphasizing the importance of fair and reasonable assessments based on actual financial records.