2016 (7) TMI 836 - AT - Income Tax

Bogus purchases - applicability of sec 69/69A - Held that - In view of the foregoing, would require a restoration to the file of the assessing authority for a consideration of these aspects of the matter, i.e., the stock availability on each date; the capital invested in such an exercise; and the profit associated with the procurement of goods from other than the established sources (euphemistically called grey market ), while procuring bills of goods . We direct accordingly. He shall decide by issuing definite findings of fact, and after allowing the assessee due opportunity to explain and substantiate its case. The onus for the gain associated with the procurement of bills (and purchase of goods from the grey market), we may add, is on the Revenue. A finding qua quantitative reconciliation shall, however, have to precede the same, being the factual basis for the application of the hypothesis of the purchase from an alternate source. He shall decide, in terms of his findings, in accordance with law, and after allowing a reasonable opportunity to the assessee to substantiate his case. The addition for 1% of the impugned purchases (u/s. 69C) is, in any case, confirmed. Further, lest one considers us as having travelled outside the scope of the appeal, we may advert to the decisions, inter alia, in the case of Kapurchand Shrimal v. CIT 1981 (8) TMI 2 - SUPREME Court and Ahmedabad Electricity Co. Ltd. v. CIT 1992 (4) TMI 29 - BOMBAY High Court

Summary

Issues Involved:
1. Maintainability of the disallowance of/addition qua the impugned purchases as 'bogus' by the Revenue.
2. Applicability of sections 69/69A or 69C of the Income Tax Act, 1961.
3. Basis for restricting the allowance of the impugned purchases to 90% by the CIT(A).

Detailed Analysis:

1. Maintainability of the Disallowance of/Additions Qua the Impugned Purchases as 'Bogus' by the Revenue:
The primary issue in these appeals was whether the disallowance of purchases, deemed 'bogus' by the Revenue, was maintainable. The facts revealed that a survey conducted under section 133A on several group concerns led to the discovery of accommodation bills issued by Shri Rakesh Kumar Madanlal Gupta and his family members. These bills were used to inflate expenses without actual purchases. The Assessing Officer (A.O.) found that the purchases were not reflected in the stock register and lacked evidence of transportation, inferring that the purchases were made outside the books and added the investment in the impugned purchases under section 69 of the Act.

The CIT(A) noted that the A.O. did not provide an opportunity for cross-examination of Shri Rakesh Kumar Gupta, rendering the statements unreliable. The CIT(A) concluded that the assessee likely purchased goods from the grey market, justifying a partial disallowance of 10% of the impugned purchases. Both the assessee and the Revenue appealed this decision.

2. Applicability of Sections 69/69A or 69C of the Income Tax Act, 1961:
The Tribunal examined whether sections 69 or 69A were applicable. The A.O. applied section 69, while the CIT(A) disallowed the purchases under section 37(1). The Tribunal noted that the purchases were bogus, and the cash provided by the bill provider financed such purchases, justifying an addition of 1% of the purchase value under section 69C, as the cash retained by the seller was unexplained. The Tribunal emphasized that the source of payment for the actual purchases was from the assessee's books, thus sections 69/69A were not applicable beyond the 1% addition.

3. Basis for Restricting the Allowance of the Impugned Purchases to 90% by the CIT(A):
The Tribunal considered the CIT(A)'s decision to restrict the disallowance to 10% of the impugned purchases. The Tribunal acknowledged that the purchases from the grey market likely resulted in some benefit to the assessee, inferred from the behavior of engaging in such transactions. The Tribunal directed the A.O. to assess the capital employed in the stock corresponding to the impugned purchases and determine any addition under sections 69/69A for unexplained stock, considering the peak capital invested during the year.

The Tribunal also addressed the need to investigate the gain associated with procuring goods from the grey market, suggesting that the A.O. evaluate the tax benefit or lower purchase price as potential gains. The Tribunal restored the matter to the A.O. for a detailed examination of the stock availability, capital investment, and associated profit, directing the A.O. to issue definite findings of fact and allow the assessee to substantiate its case.

Conclusion:
The Tribunal concluded that the disallowance of 1% of the impugned purchases under section 69C was confirmed. The matter of capital employed in the stock and the gain associated with grey market purchases was remanded to the A.O. for further examination. The appeals by the assessee were partly allowed for statistical purposes, and the Revenue's appeals were partly allowed and partly allowed for statistical purposes. The Tribunal emphasized the need for a quantitative reconciliation and a holistic view of the matter in determining the final assessment.