2019 (9) TMI 1648 - AT - Income Tax

Estimation of income - Bogus purchases - CIT-A sustaining 12.5% disallowance - HELD THAT - It is settled law that when sales are not doubted, hundred percent disallowance for bogus purchase cannot be done. The rationale being no sales is possible without actual purchases. This proposition is supported from honourable jurisdictional High Court decision in the case of Nikunj Eximp Enterprises ( 2014 (7) TMI 559 - BOMBAY HIGH COURT ) In this case the honourable High Court has upheld hundred percent allowance for the purchases said to be bogus when sales are not doubted. However in that case all the supplies were to government agency. In the present case the facts of the case indicate that assessee has made purchase from the grey market. Making purchases through the grey market gives the assessee savings on account of non-payment of tax and others at the expense of the exchequer. As regards the quantification of the profit element embedded in making of such bogus/unsubstantiated purchases by the assessee, we find that as held by honourable High Court of Bombay in its recent judgement in the case of principle Commissioner of income tax versus M Haji Adam Co 2019 (2) TMI 1632 - BOMBAY HIGH COURT , the addition in respect of bogus purchases is to be limited to the extent of bringing the gross profit rate on such purchases at the same rate as of other genuine purchases. - Appeal of assessee allowed.

Summary

Issues:
1. Disallowance on account of bogus purchases sustained by CIT-A.
2. Reopening of assessment based on information from the sales tax Department.
3. Addition made by the income tax officer on account of bogus purchases.
4. Applicability of the principle when sales are not doubted.
5. Judgment regarding quantification of profit element in bogus purchases.
6. Direction to assessing officer to restrict the addition on bogus purchases.

Analysis:
1. The appeal concerned the disallowance of 12.5% on account of bogus purchases sustained by the CIT-A. The assessee, engaged in trading ferrous and non-ferrous metals, had the assessment reopened due to information from the sales tax Department regarding bogus purchases. While the assessee provided purchase vouchers and made payments through banking channels, the suppliers were not produced before the assessing officer.

2. The income tax officer made a 12.5% addition for bogus purchases, resulting in a disallowance of Rs. 16,99,595. The CIT-A confirmed this addition upon the assessee's appeal.

3. During the ITAT hearing, it was noted that the assessee had provided documentary evidence for the purchases, but adverse inference was drawn due to the inability to produce suppliers. Notably, sales were not doubted in this case. The ITAT referenced a jurisdictional High Court decision in the case of Nikunj Eximp Enterprises, which upheld a hundred percent allowance for purchases deemed bogus when sales were not doubted.

4. The judgment highlighted that in cases where sales are not doubted, a hundred percent disallowance for bogus purchases is not justified as no sales can occur without actual purchases. The ITAT also referred to the principle laid down by the High Court of Bombay in the case of M Haji Adam & Co, limiting the addition for bogus purchases to bring the gross profit rate in line with genuine purchases.

5. Consequently, the ITAT set aside the matter to the assessing officer with directions to restrict the addition on bogus purchases by aligning the gross profit rate with that of genuine purchases. The assessee was to be given an adequate opportunity to present their case, with the counsel agreeing to this proposition.

6. Ultimately, the ITAT partly allowed the assessee's appeal, emphasizing the importance of following the High Court judgments and ensuring a fair opportunity for the assessee in the proceedings.