2021 (8) TMI 1261 - AT - Income Tax

Estimation of income - bogus purchases - 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 by the Hon ble Gujarat High Court 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 We agree with the view of the lower authorities that there should be an estimation of profit element from these purchases and should be estimated reasonably as the assessee could not conclusively prove that the purchases made are from the parties as claimed, especially in the absence of any confirmations from them - keeping in view the nature of business of the assessee i.e. trader in Ferrous and non-Ferrous Metals, it would be justified if the profit element embedded in those purchases are estimated at 4%. Accordingly, we direct the Assessing Officer to estimate the profit element from the non-genuine purchases at 4% for both the Assessment Years i.e., A.Y 2009-10 and A.Y. 2011-12 and restrict the disallowance of purchases to 4% and compute the income accordingly. Apeals of the assessee partly allowed.

Summary

Issues:
- Reopening of assessments based on information received from DGIT(Inv.,) about accommodation entries provided by various dealers.
- Treatment of purchases as non-genuine by the Assessing Officer.
- Disallowance of purchases and estimation of Gross Profit by the Assessing Officer and Ld.CIT(A).
- Appeal by the assessee against the orders of the Ld.CIT(A).
- Submissions made by the Ld. Counsel for the assessee.
- Arguments presented by the Ld.DR.
- Analysis of the lower authorities' decisions and legal precedents.
- Decision of the Appellate Tribunal ITAT Mumbai to estimate the profit element from non-genuine purchases at 4% for both Assessment Years.

Analysis:
The appeals were filed by the assessee against orders of the Ld.CIT(A) sustaining the action of the Assessing Officer in reopening assessments for A.Y. 2009-10 and A.Y. 2011-12 based on information regarding accommodation entries provided by dealers. The Assessing Officer treated purchases as non-genuine, suspecting gray market transactions without transportation of goods. The Ld.CIT(A) upheld the disallowance of purchases but varied the estimation of Gross Profit for the two assessment years. The assessee contended that the disallowance was excessive, citing a Tribunal decision and requesting a lower percentage for profit estimation.

During the hearing, the Ld.DR supported the authorities' decisions, while the Ld. Counsel for the assessee reiterated submissions made before the Ld.CIT(A) and argued for a reduced disallowance percentage based on a Tribunal precedent. The ITAT Mumbai analyzed the case law and concluded that not all purchases could be deemed non-genuine when sales were accepted as legitimate. Referring to High Court judgments, the ITAT emphasized estimating the profit element in such transactions rather than disallowing entire amounts. Considering the nature of the assessee's business and lack of conclusive proof for purchases, the ITAT directed the Assessing Officer to estimate the profit element at 4% for both assessment years, limiting the disallowance accordingly.

In summary, the ITAT Mumbai partly allowed the assessee's appeals, emphasizing the need to estimate the profit element from non-genuine purchases rather than disallowing entire amounts, in line with legal precedents and the nature of the assessee's business.