2017 (9) TMI 651 - AT - Income Tax

Suppressed profit on account of bogus transaction - bogus purchases - lorry receipts were not produced - best judgment assessment - Held that - The restriction of disallowance to 12.5% of the bogus purchases as was done by learned CIT(A) towards embedded profits in obtaining inflated bills from these alleged bogus dealers while actual material was sourced from some other sources is a fair and reasonable estimate which is a plausible view taken by learned CIT(A) and we are not inclined to interfere with the same. Under these circumstances, some estimates has to be made but the same has to be fair and honest. In our view, the view taken by learned CIT(A) in its appellate order is a plausible view and estimates made by the learned CIT(A) could not be said to be not an honest or fair estimate. The assessee has also not filed any appeal against the appellate order of the ld. CIT(A) which is accepted by the assessee and the same has attained finality so far as the assessee is concerned . Based on our above discussions and reasoning, we are not inclined to interfere with the appellate order of learned CIT(A) which we confirm/affirm. Revenue fails in this appeal. We order accordingly.

Summary

Issues Involved:
1. Legitimacy of the suppressed profit estimation at 12.5% of net purchases.
2. Validity of the purchases made from alleged bogus parties.
3. Adequacy of evidence provided by the assessee to substantiate the purchases.
4. Reopening of assessment under Section 147 of the Income-tax Act, 1961.
5. Comparison of Gross Profit (GP) and Net Profit (NP) ratios across assessment years.

Detailed Analysis:

1. Legitimacy of the Suppressed Profit Estimation at 12.5% of Net Purchases:
The Revenue challenged the CIT(A)'s decision to estimate suppressed profit at 12.5% of net purchases, arguing that the assessee was a manufacturer who consumed the purchases in its business, and a one-to-one correlation between purchases and sales could not be established. The CIT(A) observed that the motive behind obtaining bills from bogus dealers was to inflate purchase prices and suppress true profits. The Tribunal upheld the CIT(A)'s decision, stating that the estimation of 12.5% was a fair and reasonable estimate of the embedded profits in obtaining inflated bills from bogus dealers.

2. Validity of the Purchases Made from Alleged Bogus Parties:
The AO received information that the assessee had obtained bogus purchase bills from parties listed as hawala dealers by the Maharashtra Sales Tax (VAT) Department. Notices issued to these parties returned unserved, and the parties were not traceable. The AO made a 100% disallowance of the purchases, which the CIT(A) reduced to 12.5% on account of suppressed profits. The Tribunal noted that the assessee could not produce the parties before the authorities and observed that the purchases were not genuine.

3. Adequacy of Evidence Provided by the Assessee to Substantiate the Purchases:
The assessee submitted purchase bills, delivery challans, stock registers, and bank statements to substantiate the purchases. However, the AO found discrepancies in the stock statements and noted that the lorry receipts and process charts were not produced. The CIT(A) observed that the assessee had explained the consumption and sale of the material for production of finished goods, but the onus to prove the genuineness of the purchases was not fully discharged. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had brought sufficient material to prove consumption/utilization of the material, but the purchases were still found to be from bogus dealers.

4. Reopening of Assessment under Section 147 of the Income-tax Act, 1961:
The AO reopened the assessment under Section 147 based on information received about bogus purchases. The reasons for reopening were provided to the assessee, and the reopening was within four years from the end of the assessment year. The Tribunal found that the reopening was justified as the AO had reasons to believe that income had escaped assessment due to bogus purchases.

5. Comparison of Gross Profit (GP) and Net Profit (NP) Ratios Across Assessment Years:
The assessee provided comparative GP and NP ratios for assessment years 2008-09 to 2012-13, showing a fall in GP and NP ratios for the year under consideration (A.Y. 2009-10). The AO observed that excluding the alleged bogus purchases would result in a GP ratio comparable to other years. The assessee explained that the fall in GP and NP ratios was due to increased turnover and outsourced work. The Tribunal noted that the GP and NP ratios were fairly comparable and that the CIT(A) had considered these factors in estimating the suppressed profit at 12.5%.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to estimate suppressed profit at 12.5% of the net purchases from bogus dealers, finding it to be a fair and reasonable estimate. The appeal of the Revenue was dismissed, and the appellate order of the CIT(A) was affirmed.