2016 (10) TMI 623 - AT - Income Tax

Disallowance of purchase on adhoc basis - gp determination - Held that - We find that the ld.CIT(A) while granting partial relief to the assessee has noted that assessee is trader of wastepaper and purchaser of waster-paper and assessee purchases it from small time vendors and in turn the waste-paper is supplied to the paper-mills. He has further given a finding that the purchase price of waste-paper is fixed by the Gujarat Paper Mills Association and the waste-paper traders have VAT registration and other required permissions and it files the details of turnover, etc. through the VAT returns before the VAT authorities. He has further noted that AO has not doubted the purchases made by the assessee nor has got on record any instance of waste-paper purchases made by the assessee found to be bogus or inflated. He has further noted that assessee had furnished quantitative details of purchase and stock alongwith tax audit report and had shown a GP of 7% and that in similar cases, the Central Circle Surat had estimated the Gross Profit and enhanced the rate between 0.5% to 0.75%. Considering the totality of the facts, he has given a finding that 15% margin in the trading business is not possible and thereafter he considered that the Net Profit rate could be between 2 to 3% and thereafter estimated the Net Profit rate at 3% as against 2.68% shown by the assessee. Before us, neither the Revenue nor the assessee has placed any material on record to controvert the findings of ld.CIT(A).

Summary

Issues Involved:
1. Deletion of disallowance of ?49,40,034/- made at 15% of total purchases.
2. Determination of Net Profit rate at 3% instead of 2.68% as disclosed by the appellant.

Detailed Analysis:

Issue 1: Deletion of Disallowance of ?49,40,034/- Made at 15% of Total Purchases

The Revenue appealed against the CIT(A)'s decision to delete the disallowance of ?49,40,034/- made by the AO at 15% of total purchases. The AO had disallowed this amount because the purchase vouchers were unverifiable, lacking names, addresses, and signatures of the parties, with all payments made in cash. The AO deemed the purchases not fully verifiable and thus disallowed 15% as non-verifiable.

The CIT(A) granted partial relief, noting that the assessee is a trader in waste paper, purchasing from small vendors (raddiwallas) and selling to paper mills. The purchase price is fixed by the Gujarat Paper Mills Association (GPMA), and the VAT registration and returns were in order. The CIT(A) observed that the AO did not bring any instance of bogus or inflated purchases and did not dispute the sales figures. The CIT(A) concluded that a 15% margin was not feasible in this high-volume, low-margin business and directed the AO to adopt a Net Profit rate of 3%.

Issue 2: Determination of Net Profit Rate at 3% Instead of 2.68%

The assessee cross-appealed against the CIT(A)'s direction to adopt a Net Profit rate of 3% instead of 2.68% as disclosed. The CIT(A) noted that similar cases in the Central Circle, Surat, had estimated Gross Profit and made additions of 0.5% to 0.75% of turnover. Considering the nature of the business and the unorganized sector of small-time collectors, the CIT(A) found a 15% margin unrealistic and estimated a Net Profit rate between 2-3%, concluding at 3%.

Tribunal's Findings:

The Tribunal reviewed the submissions, materials, and previous decisions. It upheld the CIT(A)'s findings, noting that the AO did not provide evidence of bogus or inflated purchases and did not dispute the sales figures. The Tribunal referenced similar cases where a lower Gross Profit rate was deemed appropriate and found no reason to interfere with the CIT(A)'s decision.

Conclusion:

The Tribunal dismissed both the Revenue's appeal and the assessee's cross-objection, maintaining the CIT(A)'s order to adopt a Net Profit rate of 3%.

Final Order:

The appeal of the Revenue and the Cross Objection filed by the assessee are dismissed. This Order was pronounced in Open Court on 31/08/2016.