2017 (8) TMI 322 - AT - Income Tax

Addition made on account of bogus purchases - Held that - Considering the profit rate declared by the assessee in earlier years and subsequent years, the CIT(A) after recording detailed finding reached to the conclusion that addition to the extent of 12.5% of the bogus purchase will serve the purpose of revenue leakage. As found that CIT(A) had applied various judicial pronouncements to the facts of the instant case and also the decision in the case of H M Esufali H Abdulla 1973 (4) TMI 49 - SUPREME Court accordingly reached to the conclusion that disallowance of 12.5% of the bogus purchases will compensate for the profit so suppressed by the assessee. The detailed finding so recorded by the CIT(A) has not been controverted, accordingly, no valid reason to interfere in the finding so recorded by the CIT(A) upholding the addition to the extent of 12.5% of bogus purchases.

Issues Involved:
1. Addition made on account of bogus purchases.
2. Reopening of assessment under section 148.
3. Onus on the assessee to prove the genuineness of purchases.
4. Estimation of income and best judgment assessment.
5. Rejection of books of accounts under section 145(3).
6. Judicial precedents and their applicability.

Detailed Analysis:

1. Addition Made on Account of Bogus Purchases:
The primary issue in this case pertains to the addition made by the AO on account of bogus purchases. The AO, based on information from the Sales Tax Department regarding persons providing bogus purchase bills, reopened the assessment and added the entire amount of bogus purchases as the assessee's income. The amounts added were ?16,05,936 for A.Y. 2009-10 and ?24,90,080 for A.Y. 2011-12 under section 69C of the Income Tax Act.

2. Reopening of Assessment Under Section 148:
The AO reopened the assessment by issuing notices under section 148 based on information from the Sales Tax Department. The CIT(A) restricted the addition to 12.5% of such purchases. The CIT(A) observed that the assessee failed to justify the genuineness of the purchases made from hawala parties by not providing confirmations, delivery challans, transport receipts, or producing the parties for examination.

3. Onus on the Assessee to Prove the Genuineness of Purchases:
The CIT(A) emphasized that it is the duty of the assessee to justify the genuineness of purchases by providing necessary supporting documents. The assessee's claim that payments were made through banking channels was not sufficient as the hawala parties admitted to refunding the balance cash after deducting their commission. The CIT(A) relied on various judicial precedents to conclude that the assessee failed to discharge the onus of proving the genuineness of the purchases.

4. Estimation of Income and Best Judgment Assessment:
The CIT(A) noted that in the absence of verifiable documents, the AO could not ascertain the correct amount of income, leading to the rejection of books under section 145(3). The CIT(A) referred to judicial decisions where disallowance of bogus purchases ranged from 12.5% to 100%. The CIT(A) concluded that disallowance of 12.5% of the bogus purchases would serve the purpose of revenue leakage, based on the facts of the case and judicial precedents.

5. Rejection of Books of Accounts Under Section 145(3):
The CIT(A) rejected the books of accounts under section 145(3) due to defects such as the absence of a quantitative day-to-day stock register, non-verifiable documents, and the inability to produce hawala parties. The CIT(A) observed that the assessee failed to maintain proper books of accounts and provide necessary details for verification.

6. Judicial Precedents and Their Applicability:
The CIT(A) referred to various judicial precedents, including the decisions of the Hon'ble Supreme Court in the cases of H M Esufali H Abdulla, Laxminarayan Madan Lal, and Kanchanwala Gems, to support the disallowance of 12.5% of the bogus purchases. The CIT(A) also considered the decisions of different High Courts and ITAT benches where disallowance of bogus purchases was upheld.

Conclusion:
The CIT(A) upheld the addition to the extent of 12.5% of the bogus purchases, considering it a reasonable estimation to compensate for the suppressed profit. The detailed findings of the CIT(A) were not controverted, and the ITAT Mumbai dismissed both the appeal of the Revenue and the cross-objections filed by the assessee, thereby upholding the CIT(A)'s order. The order was pronounced in the open court on 18/04/2017.

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