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2017 (8) TMI 118 - AT - Income TaxIssue of bogus purchases - net profit rate application - Held that - We find that the assessee is engaged in the business of Fabrication on contract basis. For this he makes purchases and sales and the sales made by him are not at all doubted. It is also a fact that the assessee has procured bills from hawala parties and made payments by account payee cheques to these parties. Further, the assessee also produced the stock register for raw material and purchases. Once this is a fact that the payments are by account payee cheques, the stock register is maintained and produced the bills from hawala parties, the assessee has used the material for sale which he might have purchased from grey market. It is common presumption which has not be rebutted by the Revenue. Hon ble Supreme Court in the case of Kanchwala Gems (2006 (12) TMI 83 - SUPREME COURT) wherein Hon ble Supreme Court has held that the disallowance of bogus purchases is to be restricted to certain percentage of profit, wherein it is held that the purchases from grey market is made. Accordingly, we direct the AO to apply net profit rate @ 8% of the bogus purchases made by the assessee and recompute the income accordingly. These appeals of the assessee are partly allowed.
Issues involved:
1. Addition of entire bogus purchases without evidence and rejection of books of accounts. 2. Reopening under section 147. 3. Adjudication of the issue of bogus purchases added by the AO and confirmed by CIT(A). Issue 1: Addition of Entire Bogus Purchases and Rejection of Books of Accounts: The appeals by the assessee challenged the order of CIT(A) confirming the AO's action of adding the entire bogus purchases without any evidence and rejecting the books of accounts. The assessee decided not to pursue the issue of reopening and rejection of books of account. The sole remaining issue was the addition of bogus purchases. The AO received information from the Sales Tax Department indicating that certain parties were entry providers for bogus bills. The parties admitted to providing bogus bills without actual transactions. Despite the assessee providing bills and payment details, the AO's notices to these parties were returned as 'not known,' leading to the addition of the purchases as bogus income. CIT(A) upheld this action, considering the normal purchase and hawala purchase, and applied a net profit rate of 8% to estimate the income. The CIT(A) sustained the entire bogus purchases as additions to income in all three years. Issue 2: Reopening under Section 147: The assessee chose not to pursue the issue of reopening under section 147 in all three years, leading to its dismissal as not pressed. Issue 3: Adjudication of Bogus Purchases Added by AO and Confirmed by CIT(A): The Tribunal found that the assessee, engaged in fabrication on a contract basis, procured bills from hawala parties and made payments via account payee cheques. The Tribunal noted that the sales made by the assessee were not in doubt, and the stock register for raw material and purchases was produced. Given the payments through account payee cheques and production of bills, the Tribunal directed the AO to apply a net profit rate of 8% to the bogus purchases and recalculate the income. This decision was based on the precedent set by the Hon'ble Supreme Court in the case of Kanchwala Gems, where it was held that disallowance of bogus purchases should be limited to a certain percentage of profit, especially when purchases from the grey market are involved. Consequently, the appeals of the assessee were partly allowed. In conclusion, the Tribunal partially allowed the appeals of the assessee, directing the AO to recompute the income by applying a net profit rate of 8% to the bogus purchases.
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