2017 (2) TMI 906 - AT - Income Tax

Bogus purchases - Held that - CIT(A) was justified in holding that the assessing officer was not justified in disallowing the purchases made from the suspicious dealers treating them as bogus. After having held so, the Ld CIT(A) has proceeded to sustain the addition to the extent of 12.50% of the purchases on the ground that the profit element on the alleged unverifiable purchases should be added. Question of making any profit on purchases would arise only if there is a possibility for the assessee to purchase inferior quality material from the grey market and obtaine accommodation bills from the dealers. The work executed by the assessee has not been rejected by the Government authorities and he continues to get work from them on account of quality of work. We are of the view that there is merit in the contentions of the assessee that the Ld CIT(A) has sustained addition to the extent of 12.5% only on the basis of surmises. The addition of alleged bogus purchases made in all the three years cannot be sustained. Accordingly we direct the AO to delete the additions relating to purchases made in all the three years under consideration. - Decided in favour of assessee

Issues Involved:
1. Disallowance of purchases treating them as bogus.
2. Reliance on statements from suspicious dealers.
3. Evidence provided by the assessee to prove the genuineness of purchases.
4. Opportunity for cross-examination.
5. Profit element on alleged unverifiable purchases.

Detailed Analysis:

1. Disallowance of Purchases Treating Them as Bogus:
The Assessing Officer (AO) disallowed a portion of purchases made by the assessee, treating them as bogus based on information from the Maharashtra Sales Tax Department that certain dealers issued bogus bills without actual delivery of goods. The AO found that the assessee purchased goods from these suspicious dealers and reopened the assessment for A.Y. 2009-10 and 2010-11, and took up scrutiny for A.Y. 2011-12. The AO disallowed the purchases, totaling Rs. 2.35 crores for A.Y. 2009-10, Rs. 7.99 crores for A.Y. 2010-11, and Rs. 3.34 crores for A.Y. 2011-12.

2. Reliance on Statements from Suspicious Dealers:
The AO relied on statements from the suspicious dealers to the Sales Tax Department, which indicated that they issued accommodation bills without supplying any material. The AO also referred to statements from the assessee and his project engineer, who admitted that certain purchases lacked supporting documents. However, the assessee argued that these statements were not specific to his transactions and were made by the dealers to serve their own purposes.

3. Evidence Provided by the Assessee to Prove the Genuineness of Purchases:
The assessee provided copies of bills, payment details, and delivery challans to prove the genuineness of the purchases. The assessee also argued that the materials were delivered directly to the work sites and that the payments were made through banking channels. The learned CIT(A) noted that the assessee had furnished necessary documents, including VAT registration of suppliers, letter of confirmation, payment details, invoices, and stock reconciliation.

4. Opportunity for Cross-Examination:
The assessee contended that the AO did not allow him to cross-examine the suspicious dealers, which violated the principles of natural justice. The Tribunal agreed, noting that the AO did not make any independent enquiry with the dealers or show that they specifically admitted the transactions with the assessee were bogus. The Tribunal cited the Bombay High Court's decision in CIT Vs. M/s Ashish International, which held that the addition towards alleged bogus purchases was not justified when the AO did not allow the assessee to cross-examine the suspicious dealer.

5. Profit Element on Alleged Unverifiable Purchases:
The learned CIT(A) restricted the addition to 12.5% of the alleged bogus purchases, reasoning that only the profit element on the unverifiable purchases should be added. However, the Tribunal found that the CIT(A) sustained the addition on surmises and conjectures without bringing any material on record. The Tribunal noted that the gross profit rate and net profit rate declared by the assessee had increased substantially during the three years under consideration, indicating that the purchases were genuine.

Conclusion:
The Tribunal concluded that the AO was not justified in disallowing the purchases made from the suspicious dealers as bogus. The Tribunal directed the AO to delete the additions relating to purchases made in all three years under consideration. The appeals filed by the revenue were dismissed, and the appeals and cross-objections filed by the assessee were allowed.

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