2017 (5) TMI 1811 - AT - Income Tax

Estimation of income - bogus purchases - CIT(A) estimated @ 12.5% - HELD THAT - The assessee has admittedly made bogus purchases from the stated parties but has made payment by account payee cheques and obtained tax invoices. Assessee has maintained inventory of stock and also consumed the material purchase in executing contract work. It means that the assessee has obtained bogus bills from the above stated hawala entry operators who provides only bills and not actual goods. Actually the assessee admitted that he has made purchases from grey market from where he has avoided payment of VAT and also at lower rate than the market price. Once the stock tally is there and no defect is pointed out only option left with the Revenue authorities is to apply profit rate and CIT(A) has rightly applied profit rate at the rate of 12.5% of the bogus purchases. Decided against revenue.

Summary

Issues involved:
Appeals by Revenue challenging CIT(A)'s order restricting addition on account of bogus purchases.

Analysis:
1. The common issue in the appeals pertains to CIT(A) restricting the addition made by AO on account of bogus purchases in three consecutive assessment years. The Revenue contested the CIT(A)'s decision to limit the addition, arguing that the purchases were made from hawala parties issuing fake bills without delivering goods.

2. The Assessing Officer (AO) disallowed the entire amount of bogus purchases for all three years based on information from the Income Tax Investigation Department and Sales Tax Department of Maharashtra. The AO added the disallowed amounts to the assessee's income. However, the CIT(A) restricted the addition to 12.5% of the bogus purchases, considering that the appellant did not doubt the purchases themselves but questioned the genuineness of the suppliers.

3. The CIT(A) referred to a Gujarat High Court case where it was held that even if purchases were made from bogus parties, only the profit margin embedded in those transactions should be taxed. The CIT(A) found that the appellant had maintained stock inventory and consumed the purchased material for contract work, indicating that the purchases were not entirely fake. Therefore, the CIT(A) applied a profit rate of 12.5% on the bogus purchases.

4. The Tribunal upheld the CIT(A)'s decision, emphasizing that the appellant had paid for the purchases through cheques, maintained stock records, and utilized the materials in its business activities. The Tribunal agreed with the CIT(A) that applying a profit rate on the bogus purchases was appropriate, considering the lack of evidence to show that the purchases were entirely fictitious or non-existent.

5. Consequently, the Tribunal dismissed all appeals by the Revenue, affirming the CIT(A)'s order to restrict the addition on account of bogus purchases to 12.5% of the total amounts involved. The decision was based on the understanding that the appellant had engaged in transactions with hawala parties but had utilized the purchased goods in its business operations, justifying the application of a profit rate rather than disallowing the entire amounts.