2017 (6) TMI 1365 - AT - Income Tax

Estimation of income - Bogus purchases - HELD THAT - Even in case due to the reasons that either the assessee failed to prove the genuinity of purchases or the parties not appeared on the notices issued by the AO under the Income Tax Act the tax authority must tax the only real income. Thus if the transaction is not verified the only taxable is a taxable income component not the entire transaction. We are of the opinion that in order to fulfil the gap of Revenue leakage disallowance of reasonable percentage of the impugned purchase will meet the end of justice. In the present case the assessee has total purchase of Rs.2, 09, 75, 237/- and the alleged bogus purchases are only of Rs.9, 21, 532/- which is hardly 4.39% of total purchases. The GP percentage in the present case is 23.4% which is much higher than the VAT rate charged by the Maharashtra Government. As a matter of fact the VAT department is charged from 4% to 12.5% by the Govt. of Maharashtra on various purchases. Considering the totality of the fact and in order to fulfil the gap of Revenue leakage the disallowance of reasonable percentage will meet the end of justice in the present case. Thus considering the peculiarity of the present case we deemed it appropriate to reduce the disallowance @ 10% of impugned purchases (10% of Rs. 9, 21, 532/-). Hon ble Bombay High Court in the case of CIT vs Shri Hariram Bhambhani 2015 (2) TMI 907 - BOMBAY HIGH COURT also held that Revenue is not entitled to brought the entire disputed sale consideration but the only profit attributable on the unrecorded sale consideration can alone be the subject to tax. With this observation the appeal of assessee is partly allowed.

Summary

Issues:
- Disallowance of purchases alleged as bogus/hawala without evidence
- Taxation of difference in gross profit on purchases made
- Failure to prove genuineness of purchases and absence of corroborative evidence

Issue 1: Disallowance of purchases alleged as bogus/hawala without evidence
The case involved an appeal by the assessee against the order of the Commissioner of Income Tax(Appeals) for the assessment year 2010-11. The Assessing Officer (AO) disallowed purchases of Rs. 9,21,532, alleging them as bogus/hawala without substantial evidence. The AO based this decision on information from the Sales Tax Department indicating the vendors were hawala dealers. The assessee provided address details, purchase bills, and bank statements to prove the genuineness of the transactions. However, the AO did not consider these submissions and made the addition under section 69C of the Income Tax Act. The CIT(A) upheld the addition, leading to the appeal before the tribunal.

Issue 2: Taxation of difference in gross profit on purchases made
During the proceedings, the assessee argued that only the difference in applicable gross profit on the purchases should be taxed, as the relevant income from sales had already been accounted for. The assessee emphasized that sales cannot occur without corresponding purchases. The assessee presented evidence of consistent Gross Profit ratio over multiple assessment years to support their case. The tribunal noted that the AO primarily relied on the Sales Tax Department's report without conducting an independent inquiry. The tribunal held that in cases where the genuineness of purchases is not proven, only the taxable income component should be taxed, not the entire transaction. Considering the peculiarities of the case, the tribunal reduced the disallowance to 10% of the alleged bogus purchases.

Issue 3: Failure to prove genuineness of purchases and absence of corroborative evidence
The tribunal observed that the assessee failed to provide corroborative evidence such as stock registers, loading/unloading details, and vouchers to substantiate the purchases. Merely possessing purchase bills and making payments through banking channels was deemed insufficient to prove the genuineness of the transactions. The tribunal emphasized the importance of submitting primary documents and corroborative evidence to support claims of purchases. Ultimately, the tribunal partially allowed the appeal, reducing the disallowance to 10% of the disputed purchases based on the principle of taxing only the profit attributable to unrecorded sale consideration.

In conclusion, the tribunal's judgment addressed the issues of disallowance of alleged bogus purchases, taxation based on gross profit differentials, and the importance of providing corroborative evidence to establish the genuineness of transactions. The decision highlighted the need for tax authorities to tax only the real income component in cases where transactions are not fully verified.