2016 (11) TMI 1716 - AT - Income Tax

Bogus purchases - assessee had obtained bogus purchase bills from 14 parties which were stated to be hawala operators - assessee contended that he was engaged in extensive projects and in need of huge quantity of materials to speed up the work of the projects towards completion which made the assessee to make purchases from dealers who offered fine quality of material at rational rates along with early delivery of the goods and thus the assessee, in hasten, did not inquire much about the genuineness of the dealers and their background in respect of default with the sales tax / VAT department - HELD THAT - The Tribunal, in all such cases, has invariably taken a stand that when GP/NP rates are comparable and sales figures are not disputed by the revenue then entire purchases do not deserve disallowance rather some ad hoc disallowance ranging from 5% to 12.5% has been found to be a reasonable estimation of profit element embedded in the bogus purchases particularly when material consumption factor do not show abnormal deviations. We also observe that CIT(A) has enhanced the amount of bogus purchases with respect to three more parties aggregating to Rs.1,58,00,987/- without confronting the same to the assessee. We direct that assessee shall suffer disallowance with respect to bogus purchases to the extent of 10% of Rs.2,47,15,690/- as against full disallowance made by AO. The same comes to Rs.24,71,569/-. CIT(A) has enhanced bogus purchases with respect to three parties, two of which already figure in the list of AO. Therefore, no further additions shall be made against party at Serial No. 2 3 of the above table. Qua first party namely M/s Ramex Trading Impex Pvt. Ltd. for Rs.69,90,308/-, the matter is remitted back to the file of CIT(A) for fresh adjudication after providing suitable opportunity of being heard to the assessee. The assessee is directed to substantiate its claim before CIT(A) forthwith, failing which CIT(A) shall be at liberty to decided the issue on the basis of material available on record. The appeal of the assessee is thus partly allowed.

Summary

Issues:
- Dispute over bogus purchases in Assessment Year 2009-10.

Analysis:
1. The assessee, a Private Limited Company, faced a dispute regarding bogus purchases totaling Rs.2,47,15,690, which the Assessing Officer (AO) added to the income. The Commissioner of Income Tax (Appeals) [CIT(A)] partially upheld the addition after scrutinizing ledger accounts, purchase patterns, and discrepancies in documentation related to the alleged bogus suppliers. The CIT(A) observed similar patterns with three more parties, increasing the bogus purchases by Rs.1,58,00,987. The CIT(A) concluded that only the profit element embedded in the bogus purchases should be added to the income, resulting in a disallowance of 15% amounting to Rs.3,70,82,206. The assessee appealed, seeking a reduction in the disallowance percentage, while the revenue cross-appealed for a full disallowance.

2. The Tribunal noted that in similar cases, an ad hoc disallowance ranging from 5% to 12.5% of bogus purchases is considered reasonable when profit rates are comparable, and sales figures are undisputed. The Tribunal found discrepancies in the CIT(A)'s enhancement of bogus purchases without prior notice to the assessee, leading to a difference of Rs.34,34,471. The Tribunal directed a disallowance of 10% of the original bogus purchases amounting to Rs.2,47,15,690, totaling Rs.24,71,569. For the enhanced purchases related to three parties, the Tribunal decided not to make further additions for two parties already listed by the AO. The matter concerning the third party, "M/s Ramex Trading Impex Pvt. Ltd." for Rs.69,90,308, was remitted back to the CIT(A) for fresh adjudication with an opportunity for the assessee to substantiate its claim.

3. The Tribunal partly allowed the assessee's appeal by reducing the disallowance percentage and dismissed the revenue's appeal. The final decision was pronounced on 18th November 2016.