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2016 (11) TMI 885 - AT - Income TaxAddition as profit on purchases - Held that - Assessee actually made the purchases from third parties and the invoices being inflated was the conclusion of the learned CIT(A) and accordingly addition was sustained by the learned CIT(A). It has not been brought on record that the Revenue has filed any appeal with the tribunal against the decision of learned CIT(A). The Revenue has accepted the profit rate of 10.43% earned by the assessee in the preceding year, while in the instant year the net profit rate was 9.22%. The turnover in the instant year is ₹ 90,70,063/- . Hence in our considered view , interest of justice will be best served keeping in view factual matrix of the case if the additions to the extent are made to the income of the assessee to make the profit comparable with that of the preceding year of 10.43%. We order accordingly.
Issues Involved:
1. Whether the addition of ?3,96,333/- as profit on purchases of ?31,70,670/- confirmed by the CIT(A) was justified. 2. Whether the purchases claimed by the assessee were genuine or bogus. 3. Whether the assessee's books of account could be considered complete and correct. 4. The appropriate percentage of disallowance for the alleged bogus purchases. Detailed Analysis: 1. Addition of ?3,96,333/- as Profit on Purchases of ?31,70,670/-: The CIT(A) confirmed the addition of ?3,96,333/- (12.5% of ?31,70,670/-) based on the finding that the purchases were from hawala operators and not genuine. The assessee argued that the net profit ratio would be abnormally high at 44% if the entire bogus purchases were added. The CIT(A) followed the decision of the Hon'ble Gujarat High Court in CIT vs. Simith P. Sheth and restricted the disallowance to 12.5%, resulting in a net profit ratio of approximately 12.9%, which was deemed reasonable compared to the previous year's 10.43%. 2. Genuineness of Purchases: The AO received information from the DGIT (Inv.), Pune, indicating that the assessee was a beneficiary of bogus invoices issued by hawala dealers. The Sales Tax Department's investigation revealed that these dealers did not conduct genuine business and only issued fake bills. The assessee failed to produce the vendors or provide sufficient documentary evidence to prove the genuineness of the purchases. Consequently, the AO treated the purchases as unproved and added ?31,70,670/- to the assessee's income under Section 69-C of the Act. 3. Completeness and Correctness of Books of Account: The AO observed that the assessee's books of account were not complete and correct, as the assessee could not produce relevant documents such as octroi receipts, lorry receipts, stock register, and escort receipts. The AO rejected the books of account under Section 145(3) of the Act and made additions based on the unproved purchases. 4. Appropriate Percentage of Disallowance: The CIT(A) held that the assessee likely made purchases in the open market but obtained bills from hawala operators, leading to inflated invoices. The CIT(A) concluded that a 12.5% disallowance on the unproved purchases was appropriate, resulting in an addition of ?3,96,333/-. The Tribunal agreed with this approach, noting that the Revenue accepted a net profit rate of 10.43% in the preceding year. To ensure consistency, the Tribunal adjusted the additions to make the profit comparable to the previous year's rate. Conclusion: The Tribunal partly allowed the appeal, confirming the CIT(A)'s decision to restrict the addition to ?3,96,333/- (12.5% of the unproved purchases). The judgment emphasized the importance of maintaining a reasonable profit margin and consistency with previous years' profit rates. The Tribunal found that the CIT(A)'s approach served the interest of justice, given the factual matrix of the case. The order was pronounced in the open court on 9th November 2016.
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