2017 (5) TMI 1822 - AT - Income Tax

Estimation of income - bogus purchases - CIT(A) in restricting the addition to 12.5% of such purchases - HELD THAT - Undisputedly, the assessee is executing civil contract work awarded mostly by MCGM. The CIT(A) has noted that without purchasing materials/goods it would not have been possible on the part of the assessee to execute the contract work with the MCGM. The assessee is executing work of a government authority. Therefore, there cannot be any manner of doubt with regard to the nature of work or the quantum of work carried out by the assessee. It is evident from record that the AO is not disputing the turnover of contract work executed by the assessee. Therefore, unless the assessee procured the materials/goods, though may not be from the declared sources but from some other sources, it would not have been possible on the part of the assessee to execute work awarded by MCGM. That being the case, the entire purchases made by the assessee cannot be added back as income but only profit element embedded therein can be treated as income of the assessee. No infirmity in the order of the CIT(A) in estimating profit at 12.5%. - Decided against revenue.

Summary

Issues:
1. Department's appeal against the CIT(A)'s decision to restrict addition made on alleged bogus purchases to 12.5%.
2. Assessee's cross-objection regarding the same matter.

Analysis:
1. The case involved an appeal by the department and a cross-objection by the assessee against the order of the CIT(A) for the assessment year 2009-10. The department's grievance was focused on the CIT(A)'s decision to limit the addition on alleged bogus purchases to 12.5% of such purchases.

2. The assessee, a partnership firm engaged in civil construction, initially declared a total income of Rs.92,36,071 for the relevant assessment year. The AO reopened the assessment under section 147 of the Act based on information suggesting inflated purchases through accommodation entries. It was found that purchases worth Rs.4,50,08,383 from twenty-three parties were bogus, as per the Sales Tax Department's investigation. The AO added back the alleged bogus purchases to the income. The CIT(A), after reviewing the facts and submissions, directed the AO to restrict the addition to 12.5% as profit on the bogus purchases. The department challenged this decision.

3. The ITAT observed that the assessee's work primarily involved civil contract work awarded by a government authority, MCGM. It was noted that without purchasing materials, the execution of the contract work would not have been possible. The AO did not dispute the turnover of the contract work. Therefore, the ITAT concluded that only the profit element embedded in the purchases could be treated as income, not the entire amount. Thus, the ITAT upheld the CIT(A)'s decision to estimate the profit at 12.5% and dismissed the departmental appeal.

4. During the proceedings, the assessee's cross-objection was not pressed by the learned AR, leading to its dismissal. Consequently, both the departmental appeal and the assessee's cross-objection were dismissed by the ITAT in its order pronounced on May 3, 2017.