2019 (12) TMI 1636 - AT - Income Tax

Estimation of income - Bogus purchases - income tax officer in this case has made 12.5% addition on account of bogus purchase - 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 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. We set aside the matter to the file of the assessing officer with the direction to restrict the addition as regards the bogus purchases by bringing the gross profit rate on such bogus purchases at the same rate as that of the other genuine purchases. Assessee s appeal is partly allowed.

Summary

Issues:
- Disallowance on account of bogus purchases
- Reopening of assessment based on information from sales tax Department
- Inability to produce suppliers for purchases
- Adverse inference drawn by the assessing officer
- Application of settled law when sales are not doubted
- Purchase from the grey market
- Quantification of profit element in bogus purchases
- Application of High Court judgment in restricting addition for bogus purchases
- Direction to assessing officer for quantification and opportunity for the assessee

Analysis:
The judgment pertains to an appeal by the assessee against a disallowance of 12.5% on account of bogus purchases sustained by the CIT-A for the assessment year 2010-11. The assessee, engaged in trading ferrous and non-ferrous metals, had its assessment reopened based on information from the sales tax Department regarding bogus purchases. Despite submitting purchase vouchers with payments made through banking channels, the suppliers were not produced before the assessing officer, leading to the disallowance of Rs. 7,19,770.

The CIT-A confirmed the disallowance, prompting the assessee to appeal before the ITAT. The ITAT, after hearing both parties and reviewing the records, noted that the assessee had provided documentary evidence for the purchases. It highlighted that while adverse inference was drawn due to the absence of supplier verification, the sales were not doubted. The ITAT referenced a High Court decision stating that when sales are not in question, a complete disallowance for bogus purchases is unwarranted since genuine sales necessitate actual purchases.

The judgment further discussed the distinction between purchases from the grey market, which can lead to tax evasion, and upheld a recent High Court ruling limiting additions for bogus purchases to align with the gross profit rate of genuine purchases. Consequently, the ITAT set aside the matter for the assessing officer to restrict the addition by adjusting the gross profit rate on bogus purchases to match that of legitimate ones. The assessee was directed to be given a fair opportunity to present their case.

Ultimately, the ITAT partially allowed the assessee's appeal, emphasizing compliance with the High Court's directive in quantifying the addition for bogus purchases. The judgment was pronounced on 3.12.2019, providing a comprehensive resolution to the issues raised in the appeal.