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2022 (2) TMI 1226 - AT - Income TaxEstimation of income - Bogus purchases - assessee could not establish the genuineness of the purchases from the non-existent vendors as per information received from Law enforcement agency of State Govt. of Maharashtra i.e. Sales Tax Department - HELD THAT - Where though the purchases found to be bogus by the Revenue Authorities but sales by the assessee have been accepted as genuine as against these bogus purchases, we are of the considered view that when sales have been accepted being genuine the entire purchases cannot be treated as non genuine to make addition of the entire bogus purchases amount. Hon ble High Court of Bombay in the case of JK Surface Coatings Pvt. Ltd. 2021 (10) TMI 1323 - BOMBAY HIGH COURT upheld the view taken by the Tribunal that in such circumstances gross profit should be in the range of 5% to 12.5% as reasonable estimation of profit element embedded in the bogus purchases Thus in the light of gross profit earned by the assessee in the last five years the average gross profit comes to 5% which is a reasonable gross profit earned by the assessee on the bogus purchases, hence, we direct the AO to charge the assessee at the gross profit @ 5% on the bogus purchases.
Issues Involved:
1. Genuineness of purchases from non-existent vendors. 2. Onus to justify the claim of expenses. 3. Substantiation of claims with supporting documents. 4. Disallowance of purchases in entirety. 5. Validity of proceedings under section 147 of the Income Tax Act. 6. Reopening of assessment based on information from the Sales Tax Department. 7. Application of the N.K. Proteins Ltd. case. 8. Acceptance of sales without corresponding purchases. 9. Restriction of estimated addition to 25% of alleged bogus purchases. 10. Principle of Natural Justice. 11. Grounds of appeal based on surmises and conjectures. Detailed Analysis: 1. Genuineness of Purchases from Non-Existent Vendors: The Revenue argued that the assessee failed to establish the genuineness of purchases from vendors deemed non-existent based on information received from the Sales Tax Department of Maharashtra. The Assessing Officer (AO) concluded that the purchases amounting to Rs.3,38,26,408/- were not genuine, adding this amount to the total income of the assessee. 2. Onus to Justify the Claim of Expenses: The Revenue contended that the onus to justify the claim of expenses lies on the assessee, who failed to discharge this responsibility concerning purchases from non-existent vendors. 3. Substantiation of Claims with Supporting Documents: The AO and the CIT(A) noted that the assessee could not substantiate its claims with relevant supporting documents such as movement of goods and stock registers. This led to the restriction of the addition to 25% of the alleged bogus purchases. 4. Disallowance of Purchases in Entirety: The Revenue argued that the entire amount of unverifiable or bogus purchases should be disallowed, referencing the Gujarat High Court decision in the N.K. Proteins Ltd. case, which the Supreme Court upheld. 5. Validity of Proceedings Under Section 147: The assessee challenged the initiation of proceedings under section 147 of the Income Tax Act, claiming it was void ab initio and illegal. 6. Reopening of Assessment Based on Information from Sales Tax Department: The assessee contended that reopening the assessment solely based on information from the Sales Tax Department without providing documentary evidence and cross-examination opportunities was unjustified. 7. Application of the N.K. Proteins Ltd. Case: The CIT(A) applied the N.K. Proteins Ltd. case to disallow the assessee's claims, which the assessee argued was inappropriate as the facts and circumstances differed. 8. Acceptance of Sales Without Corresponding Purchases: The assessee argued that the AO accepted the entire sales, implying that there could not be sales without corresponding purchases. 9. Restriction of Estimated Addition to 25% of Alleged Bogus Purchases: The CIT(A) restricted the addition to 25% of the alleged bogus purchases, which the assessee contended was excessive given their gross profit margins. 10. Principle of Natural Justice: The assessee argued that the CIT(A)'s order violated the principle of natural justice as it was passed without providing an opportunity for a hearing. 11. Grounds of Appeal Based on Surmises and Conjectures: The assessee claimed that the appeal grounds were based on surmises and conjectures, lacking concrete evidence. Tribunal's Findings: Assessment Based on Information from Sales Tax Department: The Tribunal noted that the entire assessment was framed based on information from the Sales Tax Department. The assessee was asked to prove the genuineness of the purchases, which they failed to do. Estimation of Profit Element in Bogus Purchases: The Tribunal referenced the Bombay High Court's decision in Pr. CIT vs. JK Surface Coatings Pvt. Ltd., which upheld that in cases where sales are accepted as genuine, the entire purchases cannot be treated as non-genuine. Instead, a reasonable estimation of the profit element embedded in the bogus purchases should be made, typically ranging from 5% to 12.5%. Gross Profit Estimation: The Tribunal considered the assessee's historical gross profit margins, which averaged around 5%. It directed the AO to charge the assessee at a gross profit rate of 5% on the bogus purchases of Rs.3,38,26,408/-. Conclusion: The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objections, directing a gross profit estimation of 5% on the bogus purchases. Order Pronouncement: The order was pronounced in the open court on 25th February 2022.
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