2020 (5) TMI 695 - AT - Income Tax

Estimation of income - Bogus purchases - CIT(A) has sustained the addition made by the AO on estimating @ 16% of the alleged bogus purchases - HELD THAT - ITAT Mumbai Bench in the case of Heeramaneck Son 2018 (12) TMI 1830 - ITAT MUMBAI complete onus to prove the purchases conclusively was on assessee, which has remained un-discharged. In such a scenario, the addition, which could be made, was to account for profit element embedded in these purchase transactions to factorize for profit element earned by assessee against possible purchase of material in the grey market and undue benefit of VAT against alleged bogus purchases, which lower authorities have rightly done. However, considering GP rate of 10.59% already reflected by the assessee as well as VAT rate applicable to the goods being dealt with by the assessee, we find the estimation to be on the higher side and therefore, we restrict the same to 3% of alleged bogus purchases. Thus as assessee has already declared GP ratio from the purchases made from Om Corporation and others respectively. We notice from the financial statement that assessee has declared GP of 15.60% and we do not know how much GP, assessee has earned out of the disputed purchases. Therefore, we are inclined to direct the AO to estimate the income @ 3% of the alleged purchases. Accordingly, we direct the AO to estimate the income of the assessee @ 3% of the alleged purchases. - Decided partly in favour of assessee.

Summary

Issues:
Assessment of income based on alleged bogus purchases.

Analysis:
The appeal was filed against the order of the Ld. Commissioner of Income Tax (Appeals) for the Assessment Year 2010-11. The assessee initially declared a total income of ?3,86,900, but the assessing officer reopened the assessment after receiving information from the sales tax department regarding alleged bogus purchases. The AO made an addition of ?12,43,645 at a rate of 16% on account of these bogus purchases. The Ld. CIT(A) confirmed this addition, leading the assessee to appeal to the ITAT Mumbai.

During the appeal, the Ld. AR argued that the 16% estimation by the Ld. CIT(A) was too high, considering the assessee had already declared a GP ratio. The Ld. AR relied on judgments by the Coordinate Bench of ITAT where a 3% estimation was used for similar cases. On the other hand, the Ld. DR supported the Ld. CIT(A)'s decision. The ITAT referred to a previous case where it was held that the assessee failed to conclusively prove the purchases, leading to an estimation of the profit element embedded in the transactions. Despite the GP rate declared by the assessee and the applicable VAT rate, the ITAT restricted the estimation to 3% of the alleged bogus purchases.

Based on this decision, the ITAT directed the AO to estimate the income at 3% of the alleged purchases, as the assessee had already declared a GP ratio. Consequently, the appeal filed by the assessee was partly allowed, and the AO was instructed to recompute the income accordingly.