2017 (8) TMI 748 - AT - Income Tax

Bogus purchases made from three parties - notices issued u/s 133(6) were returned by the postal authorities with the remark, not known - profit estimation - Held that - Though assessee has proved the initial onus cast upon him, but failed to substantiate the purchase with further evidence in the form of producing the parties in person as required by the AO. Therefore, considering the overall facts and circumstances of the case, we are of the view that instead of taxing the total alleged bogus purchases, the profit element embedded in such purchases only needs to be taxed. In this case, assessee has declared a gross profit of 2% to 6% in the preceding financial years. We further observe that the assessee might have saved the tax portion embedded in such purchases. If we take into account the average gross profit declared by the assessee and the probable savings on account of tax portion on bogus purchases, the assessee might have saved a profit of 6-7% on those alleged bogus purchases. Therefore, considering the facts and circumstances of the case and also to meet the ends of justice, we deem it appropriate to direct the AO to estimate profit of 7% on alleged bogus purchases from those parties. Addition towards difference in credit balances in 3 parties accounts - Held that - We observe that it is quite possible in business transactions that there may be variance in bill of customers and final payment made against such bills because of various reasons. As requested by the assessee, the AO ought to have provided an opportunity to the assessee to reconcile the difference before making additions. We further notice that the assessee has filed a paper book with necessary evidences explaining the difference noticed by the AO in those parties accounts. Therefore, considering the overall facts and circumstances, we are of the view that the issue needs to be verified by the AO in the light of the details filed by the assessee. Hence, we set aside the issue to the file of the AO and direct him to verify the reconciliation filed by the assessee before making any addition towards difference in sundry creditors accounts. Appeal filed by the assessee partly allowed for statistical purpose.

Summary

Issues:
1. Addition towards alleged bogus purchases made from three parties.
2. Addition towards difference in credit balances in 3 parties' accounts.

Analysis:

Issue 1: Addition towards alleged bogus purchases made from three parties
The appellant, engaged in a trading business, faced scrutiny due to huge sundry debtors and creditors. The Assessing Officer (AO) disallowed purchases from certain parties, deeming them as bogus, leading to additions in the appellant's income. The AO's decision was based on returned notices u/s 133(6) and lack of further evidence. The CIT(A) upheld the AO's decision. However, the ITAT found the AO's approach flawed as no irregularities in the appellant's books were proven. The ITAT directed the AO to tax only the profit element on alleged bogus purchases, estimating a 7% profit on such transactions due to tax savings. The ITAT emphasized the need for further evidence but acknowledged the initial onus discharged by the appellant.

Issue 2: Addition towards difference in credit balances in 3 parties' accounts
The AO noted discrepancies in credit balances of certain parties, leading to additions in the appellant's income. The appellant argued that the differences could be due to various legitimate reasons like price variations and discounts. The ITAT found the AO's decision hasty, as reconciliation was requested by the appellant and necessary evidence was provided. The ITAT directed the AO to verify the reconciliation filed by the appellant before making any additions towards the differences in sundry creditors' accounts. This issue was set aside for further verification.

In conclusion, the ITAT partly allowed the appeal, emphasizing the importance of thorough verification and evidence in assessing alleged bogus purchases and differences in credit balances. The judgment aimed to ensure fairness and accuracy in determining the appellant's taxable income.