2017 (8) TMI 276 - AT - Income Tax

Addition of bogus purchases - ingenuity of expenditure - Held that - Under the Income Tax Act only the real income can be taxed by the Revenue. Even if the transaction is not verifiable, the only taxable is the taxable income component, not the entire transaction. The assessee is engaged in the business of trading of Chemicals after considering the rival contention of both the parties, we are of the opinion that in order to fulfill the gap of revenue leakage, the disallowance of reasonable percentage of such impugned purchase would meet the end of justice. Though the case was examined by ld. CIT(A) on the similar line and the ld. CIT(A) sustained the 30% of impugned purchases as per our view the 30% of the impugned purchases is at higher side. Considering the submission of both the parties, the addition is restricted to 12% of total impugned purchases (disputed purchases). The Hon ble Bombay High Court in CIT vs. Hariram Bhambhani 2015 (2) TMI 907 - BOMBAY HIGH COURT held that Revenue is not entitled to bring the entire sales consideration to tax but only the profit attributable to the total unrecorded consideration alone can be subject to tax. In view of the above discussion, we restrict the disallowance to 12% of the total impugned/bogus purchases. - Decided partly in favour of assessee.

Summary

Issues:
1. Re-opening of assessment
2. Disallowance of amount on account of bogus purchases

Analysis:
1. Re-opening of assessment:
The appeal was filed against the order of the Ld. Commissioner of Income-tax (Appeals) for Assessment Year 2010-11. The main issue under consideration was whether the re-opening of assessment was valid. The case was re-opened based on information received from the Sales Tax Department and DGIT Mumbai regarding accommodation entries in the form of purchases from bogus traders. The Assessing Officer (AO) completed the assessment by making an addition on account of bogus purchases. The appellant contended that the re-opening of assessment was not justified. However, the Tribunal upheld the re-opening, stating that it was based on fresh information and tangible material, making it valid under the Income Tax Act.

2. Disallowance of amount on account of bogus purchases:
The second substantial ground of appeal was related to the disallowance of a sum on account of bogus purchases. The appellant argued that the purchases were genuine and supported by documents such as invoices, ledger accounts, and bank statements. The appellant also mentioned regular business dealings with one of the parties in question. However, the AO disallowed the purchases as the appellant failed to provide details such as transportation bills and stock registers. The Tribunal noted that the appellant did not produce the parties for examination and failed to prove the genuineness of the purchases. The Tribunal considered the Gross Profit ratio of the appellant and decided to restrict the disallowance to 12% of the total disputed purchases, citing the principle that only the taxable income component should be taxed. The Tribunal partially allowed the appeal, reducing the disallowance amount.

In conclusion, the Tribunal upheld the re-opening of assessment based on fresh information and tangible material. Regarding the disallowance of bogus purchases, the Tribunal restricted the disallowance to 12% of the total disputed purchases, considering the principle of taxing only the taxable income component. The appeal was partly allowed by the Tribunal.