2017 (9) TMI 1345 - AT - Income Tax

Bogus purchases - computation of bogus amount - Held that - Disallowance on account of bogus purchase is on higher side. In view of the fact that the AO has not disputed the sale/consumption of the material nor rejected the books of account. The addition was made on the basis of third party information. In our view, 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 and not the entire transaction. We are of the considered view that in order to fulfill the gap of revenue leakage, the disallowance of reasonable percentage of alleged bogus purchases would meet the end of justice. Considering the facts of the present case, we restrict the addition @ 12.5% of alleged bogus purchases (Rs. 69,60,124/-). The AO is directed accordingly.

Summary

Issues:
1. Reopening of assessment under section 147 of the Income Tax Act
2. Disallowance of purchases and estimation of profit
3. Rejection of books of accounts under section 145(3) of Income Tax Act
4. Application of Gross Profit percentage for disallowance
5. Use of scientific method for determining net profit
6. Disallowance of purchases on adhoc basis
7. Confusion in the order of the CIT(A)
8. Reliance on legal precedents by the CIT(A)
9. Giving relief to the assessee based on suppressed GP
10. Dispute over the addition of bogus purchases

Analysis:
1. The appeals were directed against the order of the CIT(A) for the Assessment Year 2010-11. The primary issues raised by the assessee included challenging the reopening of assessment under section 147, disallowance of purchases, rejection of books of accounts under section 145(3), estimation of profit, and lack of scientific method in determining net profit. The Revenue raised issues regarding legal precedents, relief given to the assessee based on suppressed GP, and the addition of bogus purchases.

2. The AO reopened the assessment based on information from the Sales Tax Department regarding alleged bogus bills. The AO disallowed 100% of the cost of the alleged bogus purchases, which was later restricted by the CIT(A) to 13.54% based on the GP declared in a subsequent AY. The Tribunal found the disallowance to be on the higher side and restricted it to 12.5% of the alleged bogus purchases, emphasizing that only the real income can be taxed.

3. The CIT(A) was criticized for not following legal precedents and for giving relief to the assessee based on suppressed GP. The Tribunal found the disallowance of purchases to be excessive and reduced it to 12.5% of the alleged bogus purchases, emphasizing the need to tax only the real income. The Revenue's appeal was dismissed, and the assessee's appeal was partly allowed.

4. The Tribunal concluded that the disallowance should be reasonable and restricted to a percentage of the alleged bogus purchases to ensure justice. The order was pronounced in September 2017, with the assessee's appeal partly allowed and the Revenue's appeal dismissed.