2017 (3) TMI 948 - AT - Income Tax

Bogus purchases - Held that - Purchases to the tune of ₹ 73,84,489/- have been treated as bogus, however the sales contract receipts have not been disputed. The disallowance has resulted in a gross profit margin of 56%, which is unrealistic and not supported by the industry average or the past performance of the assessee. Further more it is also settled law that when sales are not doubted the entire corresponding purchases cannot be treated as bogus or having been not incurred. In these circumstances there is considerable cogency in the assessee counsel submission that total disallowance of impugned purchases is not justified as it will result in impossible gross margin. However, we find that at the same time it is also necessary for the assessee to maintain proper supporting documents to satisfy the assessing officer regarding the veracity of the purchases. In these circumstances in our considered opinion a 15% disallowance out of the impugned purchases would serve the interest of justice. The Ld. Counsel of the assessee fairly agreed to this proposition. Accordingly, we direct the Assessing Officer to disallow of 15% out of the purchase of ₹ 73,84,489/-

Summary

Issues: Disallowance of purchases as bogus

Analysis:
1. The assessing officer disallowed purchases amounting to &8377; 73,84,489 based on information from the Sales Tax Department regarding entry providers for bogus purchase bills.
2. The managing director failed to provide evidence to substantiate the purchases during the assessment proceedings.
3. The CIT-A upheld the disallowance, stating that the information from the sales tax department had evidentiary value and the managing director's admission supported the addition under section 131 of the Income Tax Act.
4. The appellant argued that the disallowance would lead to an unrealistic gross profit margin of 56% and referred to industry standards and past performance to support this claim.
5. The ITAT observed that while the purchases were treated as bogus, the sales receipts were not disputed, leading to an impractical gross profit margin.
6. The ITAT agreed with the appellant's contention and directed a 15% disallowance out of the total impugned purchases to balance justice and industry norms.
7. The second ground of appeal was dismissed as not pressed by the appellant's counsel.
8. The appeal by the revenue was allowed for statistical purposes, and the order was pronounced on 15.03.2017.