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2017 (8) TMI 916 - AT - Income TaxReopening of assessment - additions u/s 69C - purchases made from the so-called hawala operators - reasonable profit estimation - Held that - Though the assessee has produced certain details to prove the purchases from the said parties as genuine, in view of the fact that the assessee could not prove the existence of the parties and also could not rebut the finding of the AO in the backdrop of report of Maharashtra Sales-tax department, the said purchases could not be accepted as genuine. But keeping in view the fact that the AO has not doubted sales declared by the assessee and also not pointed out any defects in the books of account or stock registers, a reasonable inference can be drawn that the assessee has obtained bills from the hawala operators to cover up the purchases from the grey market. What needs to be taxed is only the profit element embedded in such purchases and not entire purchases shown to have been made from those hawala operators. Reasonable profit in case of these transactions - Various Courts and Tribunals have upheld estimation of net profit ranging from 12.5% to 25% depending upon facts of each case. The Hon ble Gujarat High Court in the case of Vijay Proteins Ltd vs CIT (2015 (1) TMI 828 - GUJARAT HIGH COURT) has upheld estimation of net profit at 25% on bogus purchases. The Hon ble Gujarat High Court in the case of Smit P Sheth (2013 (10) TMI 1028 - GUJARAT HIGH COURT) has observed that no uniform yardstick can be applied to estimate net profit because of varied nature of business. Therefore, we are of the view that only profit element embedded in bogus purchases needs to be taxed and not the entire purchases from the above parties. The CIT(A), after considering the relevant facts of the case has estimated the net profit at 12.5% on total bogus purchases. We do not find any infirmity in the order of CIT(A); hence, we are inclined to uphold the order of CIT(A) and dismiss the appeals filed by the revenue. We direct the AO to estimate net profit of 12.5% on bogus purchases.
Issues involved:
- Reopening of assessment under section 147 - Allegations of purchasing materials from hawala operators - Addition under section 69C of the Income Tax Act - Appeal before CIT(A) challenging assessment order - CIT(A)'s decision to estimate net profit on bogus purchases - Revenue's appeal before ITAT against CIT(A)'s order - Estimation of net profit on bogus purchases by ITAT Reopening of assessment under section 147: The case involved the reopening of assessment under section 147 of the Income Tax Act due to income chargeable to tax escaping assessment. The Assessing Officer (AO) based the reopening on information received from the Directorate General of Income Tax (Investigation) regarding the assessee's purchases from parties involved in providing bogus bills without actual delivery of goods. Allegations of purchasing materials from hawala operators: During the assessment proceedings, the AO alleged that the assessee purchased materials from parties listed by the Maharashtra Sales-tax Department as hawala operators providing accommodation bills without actual goods delivery. The AO issued notices to parties from whom the assessee claimed to have purchased materials, which were mostly returned unserved. Addition under section 69C of the Income Tax Act: The AO, based on the information received and statements recorded, made additions under section 69C of the Act, as he believed the purchases from hawala operators were not genuine. The AO contended that the assessee inflated purchases by obtaining accommodation bills. Appeal before CIT(A) challenging assessment order: The assessee appealed before the Commissioner of Income Tax (Appeals) [CIT(A)] challenging the AO's additions. The assessee argued that purchases were genuine, supported by proper bills and payments made through cheques. The CIT(A) observed that the AO solely relied on third-party information without conducting further inquiries. CIT(A)'s decision to estimate net profit on bogus purchases: The CIT(A) directed the AO to estimate net profit at 12.5% on total purchases from hawala operators, considering the facts and circumstances of the case. The CIT(A) emphasized the need to tax only the profit element embedded in such purchases and not the entire amount. Revenue's appeal before ITAT against CIT(A)'s order: The revenue appealed to the Income Tax Appellate Tribunal (ITAT) against the CIT(A)'s order. The revenue argued that the entire purchases should be added if proven bogus, citing a Supreme Court decision. The ITAT considered the evidence and upheld the CIT(A)'s decision to tax only the profit element on bogus purchases. Estimation of net profit on bogus purchases by ITAT: The ITAT upheld the CIT(A)'s decision to estimate net profit at 12.5% on bogus purchases for certain assessment years. For another assessment year, the ITAT upheld the CIT(A)'s decision to estimate net profit at 25% on total bogus purchases, as the assessee did not appeal against this decision. The ITAT dismissed all appeals filed by the revenue, maintaining the estimated net profit percentages on bogus purchases.
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