2017 (10) TMI 1633 - AT - Income Tax

Estimation of income - bogus purchases - CIT(A) sustaining only an addition @ 15% profit rate on total purchases made from 2 purchase parties as the assessee failed to prove the genuineness of the said purchases - HELD THAT - It is law that when sales are not doubted, 100% disallowance for bogus purchase cannot be done. This proposition is supported from Hon ble jurisdictional High Court decision in the case of Nikunj Eximp Enterprises 2013 (1) TMI 88 - BOMBAY HIGH COURT . Facts of the present case indicate that assessee has made purchase from the grey market. Making purchases through the grey market gives the assessee selling on account of non-payment of tax and others at the expense of the exchequer. In such situation, in our considered opinion, on the facts and circumstances of the case the 15% disallowance out of the bogus purchases meets the ends of justice. We uphold the order of CIT(A) and direct that the disallowance be limited to 15% of the bogus purchases. Appeal filed by the Revenue stands dismissed.

Summary

Issues:
- Disallowance on account of bogus purchases

Analysis:
1. The appeal by the Revenue challenged the CIT(A)'s decision not to sustain a 100% disallowance on account of bogus purchases amounting to Rs. 64,20,135.
2. The Assessing Officer made a 100% addition on the basis of information from the Sales Tax Department that the suppliers were bogus, without issuing any notice to those suppliers.
3. The CIT(A) noted that the sales were not doubted, and in such cases, a 100% disallowance for bogus purchases cannot be justified. The CIT(A) sustained a 15% disallowance of the bogus purchases after considering various case laws and the nature of the business.
4. The CIT(A) emphasized that in the construction business, maintaining a one-to-one correlation of purchases and sales is practically not possible. Therefore, instead of adding the total amount of purchases, an estimation of profit should have been made.
5. The CIT(A) referred to relevant case laws, including the Gujarat High Court decisions in Bhoianath Poly Fab Pvt. Ltd. and Sanjay Oilcake Industries, where only the profit element embedded in such purchases was subjected to tax, not the entire amount.
6. The ITAT upheld the CIT(A)'s decision, stating that a 15% disallowance out of the bogus purchases met the ends of justice, considering the facts and circumstances of the case where purchases were made from the grey market.
7. The ITAT dismissed the appeal filed by the Revenue and directed that the disallowance be limited to 15% of the bogus purchases, as upheld by the CIT(A).

This detailed analysis of the judgment highlights the key arguments, legal principles, and decisions made by the authorities involved in the case of disallowance on account of bogus purchases.