2021 (10) TMI 1323 - HC - Income Tax

Bogus purchases - ad-hoc disallowance to be sustained with respect to bogus purchases - AO has observed 100% of the purchase value to be added to the income of Assessee, CIT(A) has said it should be 15% and ITAT has said it should be 10% - HELD THAT - First of all, this would be an issue which requires evidence to be led to determine what would be the actual profit margin in the business that Assessee was carrying on and the matter of calculations by the concerned authority. According to the Tribunal, in all such similar cases, it is ranged between 5% to 12.5% as reasonable estimation of profit element embedded in the bogus purchase when material consumption factor do not show abnormal deviation. Whether the purchases were bogus or whether the parties from whom such purchases were allegedly made were bogus was essentially a question of fact. When the Tribunal has concluded that the assessee did make the purchase, as a natural corollary not the entire amount covered by such purchase but the profit element embedded therein would be subject to tax. No substantial question of law.

Summary

Issues:
Impugning an Order by ITAT, substantial questions of law regarding reliance on information, direction to estimate profit, failure to substantiate purchases, legality of booking expenditure through bogus bills, applicability of Section 37, Section 40A(3), extent of ad-hoc disallowance, determination of profit margin, whether purchases were bogus.

Analysis:
The Appellant challenged an Order by ITAT, raising substantial questions of law. The first issue was the ITAT's failure to rely on information from the Investigation Wing and Sales Tax Department regarding alleged bogus purchases. The Appellant argued that booking expenditure through bogus bills is illegal and prohibited by law, potentially violating Section 37 of the Income Tax Act. However, the ITAT found that the Assessing Officer did not doubt the work contract receipt, suggesting the possibility of genuine purchases.

The second issue was the direction by ITAT to estimate profit at 10% of alleged bogus purchases, contrary to the Appellant's argument citing a Supreme Court case. The Appellant contended that the entire value of bogus purchases should be added, but the ITAT considered a reasonable estimation of profit margin between 5% to 12.5% in similar cases. The Tribunal concluded that only the profit element embedded in the purchases should be subject to tax, not the entire amount.

The third issue involved the failure to substantiate purchases during assessment proceedings, with the Appellant arguing that the onus lies on the assessee to prove the genuineness of purchases. Additionally, the legality of booking expenditure through bogus bills was questioned under Section 40A(3), which limits cash payments for deductions. However, this argument was not raised or considered by the authorities.

Ultimately, the Court dismissed the appeal, stating that the determination of the extent of ad-hoc disallowance for bogus purchases was a question of fact, not raising any substantial questions of law. The decision highlighted the need for evidence to determine the actual profit margin and the reasonableness of the estimation made by the authorities based on material consumption factors.