2017 (9) TMI 2018 - AT - Income Tax

Estimation of income - bogus purchases - HELD THAT - We notice that the assessee has purchased various items from the suspicious dealers and the same was consumed in various orders. Accordingly it was submitted that the assessee could not maintain stock register. As already observed that in the absence of stock register it would be difficult to prove the consumption of materials. Hence we are unable to understand as to how the CIT(A) has held that the assessee has proved the consumption. In our view the submission of the assessee that it would be difficult to maintain stock register in this kind of trade cannot be rejected altogether. Hence there is merit in the view taken by Ld CIT(A) that the profit element embedded in the impugned purchases alone should be assessed to tax. Since the suppliers have accepted that they have not actually supplied goods the natural corollary is that the assessee might have purchased goods from some other source. In that case the inference is that the assessee might have made profit in such purchases by inflating the purchase bills. In fact it is the case of the sales tax department that the suspicious dealers have not paid VAT tax. Hence there is a possibility that the assessee might have saved VAT tax and also obtained some discount in purchase price. The vat rates applicable to the purchases made by the assessee are 5% and 12.5% depending upon the product. We notice that the G.P rate of the assessee has also fallen down i.e. in AY 2008-09 the G.P rate was shown at 24.94% and the same has fallen down to 23.76% in AY 2009-10 to 17.24% in AY 2010-11 and to 21.66% in AY 2011-12. In AY 2012-13 the G.P rate has again risen to 27.73%. The reduction in G.P rates inter alia supports the case of the revenue that there might be inflation of purchase rates. Thus the profit is generally made at Gross profit level and hence the Ld CIT(A) was not justified in adopting N.P rate for sustaining the addition - Addition may be sustained at 12.50%. Accordingly we modify the orders passed by Ld CIT(A) and direct the AO to sustain addition to the extent of 12.50% of the value of alleged bogus purchases in all the three years under consideration. Appeals of the revenue are partly allowed

Summary

Issues:
Validity of reopening of assessments; Opportunity of cross-examination not allowed; Disallowance of entire purchases as bogus purchases; Application of section 40A(3); Profit element embedded in purchases; Failure to prove genuineness of purchases; Discrepancies in purchase invoices; Disallowance upheld by Ld CIT(A) at 8%; Disallowance under section 40A(3) rejected; Addition sustained at 12.50%.

Validity of reopening of assessments:
The assessing officer received information from the sales tax department about suspicious dealers and observed purchases made by the assessee from such parties. The Tribunal found this information sufficient to justify the reopening of assessments, upholding the Ld CIT(A)'s decision on the validity of the reopening.

Opportunity of cross-examination not allowed:
The assessing officer reopened the assessment based on information from the sales tax department regarding suspicious dealers. The Tribunal noted that the assessee failed to provide evidence for transportation and receipt of materials, leading to the conclusion that the assessee did not discharge the responsibility to prove the genuineness of purchases. Therefore, the contention regarding the lack of opportunity for cross-examination was rejected.

Disallowance of entire purchases as bogus purchases:
The AO disallowed purchases made from suspicious dealers in all three years as bogus purchases due to lack of evidence for transportation and receipt of goods, absence of stock register, and failure to prove genuineness. The Ld CIT(A) disagreed with the disallowance of entire purchases, considering the profit element embedded in the purchases. The Tribunal upheld the Ld CIT(A)'s decision and sustained the addition at 8% of the value of bogus purchases.

Application of section 40A(3):
The AO also considered the possibility of cash purchases and applied section 40A(3) as an alternative view. However, the Ld CIT(A) rejected this view, citing a precedent that the provisions of section 40A(3) cannot be applied without clear proof of actual cash purchases. The Tribunal agreed with the Ld CIT(A)'s decision on this matter.

Profit element embedded in purchases:
The Tribunal analyzed the purchases made by the assessee from suspicious dealers and the consumption of materials in job works. It was observed that the assessee could not maintain a stock register, making it difficult to prove consumption. The Tribunal agreed that the profit element embedded in the purchases should be assessed, ultimately sustaining the addition at 12.50% of the value of alleged bogus purchases in all three years.

Failure to prove genuineness of purchases:
The Tribunal noted the lack of evidence for transportation, receipt of goods, and the absence of a stock register. The assessee's inability to prove the genuineness of purchases led to the conclusion that the addition of 12.50% was justified. The Tribunal also considered the reduction in gross profit rates over the years, supporting the possibility of inflated purchase rates.

Discrepancies in purchase invoices:
The AO highlighted discrepancies in purchase invoices, such as missing details and lack of cheque information. Due to these discrepancies and the failure to prove genuineness, the AO disallowed purchases from suspicious dealers. The Tribunal supported the AO's decision to sustain the addition at 12.50% based on the available evidence and circumstances.

Conclusion:
After considering all arguments and evidence, the Tribunal partly allowed the revenue's appeals and dismissed the assessee's appeals. The addition was sustained at 12.50% of the value of alleged bogus purchases for the assessment years in question.