2020 (7) TMI 792 - AT - Income Tax

Estimation of income - bogus purchases - 12.5% disallowance done by the assessing officer - CIT-A enhancing the disallowance to 100% as relying on case of Shoreline Hotels Pvt. Ltd 2018 (9) TMI 1248 - BOMBAY HIGH COURT - addition in this case has been solely made by the assessing officer on the reasoning that upon enquiry by the sales tax Department it has been found that assessee is beneficiary of bogus purchases from the parties mentioned - HELD THAT - It is settled law that case law cannot be considered in isolation of the context thereof. This is duly the ratio arising of out of the decision of Sun Engineering Works Pvt. Ltd. 1992 (9) TMI 1 - SUPREME COURT . In the decision of Shorteline Hotels Pvt. Ltd. 2018 (9) TMI 1248 - BOMBAY HIGH COURT considered was in context of the order passed by learned CIT(A) under section 263 of the income tax act, wherein the ITAT had upheld the order of the learned CIT, invoking his jurisdiction u/s. 263. The issue was expenditure incurred in the maintenance by a hotel. In contrast the present case is a case where the assessee is a dealer in steel and disallowance has been done by the Assessing Officer on a finding that the assessee has made purchases through grey market. In our considered opinion by no stretch of imagination it can be said that there is any similarity in the facts upon which the honourable jurisdictional High Court has rendered the above said decision and the facts of the present case. CIT has observed that assessee was asked to furnish stock register and item to item tally of purchase and sales. She further noted that assessee submitted that no stock register was maintained the purchases to sales cannot be tallied item-wise. We find that this observation of the learned CIT is in direct contrast with the finding of the assessing officer. Assessing officer has found that assessee has duly maintained the stock statement the purchases are duly mentioned therein. Be as it may when learned CIT is giving a finding that assessee has not been able to tally the sales to the purchases and as per the learned CIT the purchases are hundred percent bogus, then the natural corollary was that learned CIT should have rejected the sales as well. Since learned CIT has not done so the observations of the learned CIT do not support the case for 100% disallowance. In the present case we find that the ratio of the decision in the case of M.Haji Adam Co. 2019 (2) TMI 1632 - BOMBAY HIGH COURT is duly applicable. In the said case honourable jurisdictional High Court had expounded that in case of trading concerns the addition on account of bogus purchases should be limited to the difference between the gross profit that is shown by the assessee on normal purchase as against the gross profit shown on bogus purchases. Accordingly, we remit the issue to the file of the Assessing Officer to make the disallowance in accordance with the ratio of the decision of M.Haji Adam Co. Appeal by the assessee is partly allowed.

Summary

Issues:
- Addition of account of bogus purchase
- Disallowance enhancement to 100%
- Application of relevant case laws
- Requirement of maintaining stock register and tally of purchases and sales
- Disallowance sustainability when sales are not doubted

Analysis:

The case involves an appeal by the assessee challenging the addition of a bogus purchase account and the subsequent enhancement of the disallowance to 100% by the CIT(A). The assessee, engaged in steel trading, faced a reopening of assessment due to alleged bogus purchases flagged by the sales tax department. The assessing officer disallowed 12.5% of the purchases without verifying with the alleged suppliers. The CIT(A) increased the disallowance to 100% citing the Shoreline Hotel Pvt. Ltd. case. The assessee argued for following the M.Haji Adam & Co. case and requested a remittance to the assessing officer.

The ITAT considered the assessing officer's basis for the addition, noting that no direct enquiry with suppliers was made, but the assessee provided ledger accounts and purchase invoices. The assessing officer suspected grey market purchases, leading to the 12.5% disallowance. The CIT(A) relied on the Shoreline Hotel Pvt. Ltd. case, which the ITAT found inapplicable due to differing contexts. Additionally, discrepancies in maintaining stock records were highlighted, with the CIT(A) claiming 100% bogus purchases without rejecting sales, contrary to the assessing officer's findings.

The ITAT referred to the M.Haji Adam & Co. case, emphasizing limiting additions for bogus purchases to the difference in gross profits from normal purchases. Consequently, the issue was remitted to the assessing officer to align with the M.Haji Adam & Co. case law. The ITAT partially allowed the appeal, emphasizing the importance of applying relevant case laws and maintaining accurate records to determine the sustainability of disallowances when sales are not doubted.