2020 (3) TMI 1387 - AT - Income Tax

Unexplained investment in respect of bogus purchases - As argued sales have been accepted as genuine from out of these purchases and hen the sales have been accepted as genuine the entire purchases cannot be treated as non-genuine - HELD THAT - Hon ble Gujarat High Court in the case of Bholanath Polyfab Pvt. Ltd 2013 (10) TMI 933 - GUJARAT HIGH COURT held that when the assessee made purchases and sold the finished goods as a natural corollary not the entire amount covered under such purchases would be subject to tax but only the profit element embedded therein. Similar view has been taken in the case of CIT v. Simit P. Seth 2013 (10) TMI 1028 - GUJARAT HIGH COURT -Simply because the parties were not produced the entire purchases cannot be added as held by the Bombay High Court in the case of CIT v. Nikunj Eximp 2013 (1) TMI 88 - BOMBAY HIGH COURT - However at the same time keeping in view the nature of business of the assessee and the fact that the assessee is making some local purchases without any transportation bills lorry receipts etc the possibility of making purchases in gray market on cash cannot be ruled out. Taking the totality of facts and circumstances into consideration and the nature of business carried on by the assessee we direct the Assessing Officer to restrict the disallowance/addition to 4% of the bogus purchases. Accordingly we direct the Assessing Officer to restrict the disallowance of purchases to 4% and compute the income accordingly. Appeal of the assessee is partly allowed.

Summary

Issues:
Challenge to addition of unexplained investment in respect of bogus purchases.

Analysis:
The appeal was filed against the order of the Learned Commissioner of Income Tax (Appeals) for the Assessment Year 2009-10, where the assessee contested the addition made by the Assessing Officer towards unexplained investment related to bogus purchases. The assessee, engaged in the business of supplying Ferrous and non-Ferrous metals, iron, steels, etc., had filed a return of income declaring &8377;2,42,751. The Assessing Officer reopened the assessment based on information indicating accommodation entries without actual material purchases. The assessee failed to prove the genuineness of purchases from five parties mentioned in the Assessment Order, leading the Assessing Officer to treat the purchases as non-genuine, adding &8377;17,55,675 to the income. The Ld.CIT(A) upheld this addition due to the absence of parties before them to defend the case of the assessee.

During the appeal hearing, the Ld. Counsel for the assessee reiterated submissions made previously, while the Ld. DR supported the lower authorities' orders. The Tribunal noted that although the sales were accepted as genuine, the entire purchases could not be deemed non-genuine. Citing precedents, the Tribunal highlighted that only the profit element embedded in such purchases should be taxable. Considering the nature of the business and the possibility of gray market purchases without proper documentation, the Tribunal directed the Assessing Officer to limit the disallowance/addition to 4% of the bogus purchases. Consequently, the Assessing Officer was instructed to restrict the disallowance of purchases to 4% and compute the income accordingly.

In conclusion, the appeal of the assessee was partly allowed by the Tribunal, with the order pronounced on 13th March 2020.