2017 (10) TMI 523 - AT - Income Tax

Bogus purchases - G.P. determination - Held that - When sales are not doubted hundred percent disallowance for bogus purchase is not possible. This has been so held by honourable jurisdictional High Court in the case of Nikunj Eximp enterprises 2013 (1) TMI 88 - BOMBAY HIGH COURT . However we also note that facts of the case before the jurisdictional High Court were different from that in the present case. Facts of the present case clearly indicate that assessee has engaged in transaction in the grey market. Making transactions in the grey market gives the assessee savings of taxes etc at the expense of Exchequer. In similar situation following the honourable Gujarat High Court decision in the case of Simit P Seth (2013 (10) TMI 1028 - GUJARAT HIGH COURT) disallowance of 12.5% of the bogus purchase has been found to be meeting the end of justice in a number of cases at the Mumbai tribunal. Accordingly, we modify the order of learned CIT-A and hold that the disallowance in this case should be made at the rate of 12.5% of the bogus purchase

Summary

Issues Involved:
1. Addition of bogus purchases by the Assessing Officer.
2. Confirmation of findings by the CIT-A.
3. Disallowance percentage for bogus purchases.
4. Applicability of previous court decisions on similar cases.
5. Modification of CIT-A's order by the Tribunal.

Analysis:

1. Addition of Bogus Purchases:
The Assessing Officer made additions of 100% of the bogus purchases, amounting to ?71,58,777 for A.Y. 2009-10 and ?81,64,848 for A.Y. 2011-12. The AO conducted inquiries and received information suggesting that the purchases were bogus. The CIT-A confirmed these findings but granted relief by allowing a percentage of disallowance.

2. Confirmation of Findings by CIT-A:
The CIT-A confirmed the AO's findings that the purchases were bogus. For A.Y. 2009-10, the CIT-A sustained a disallowance of ?8,94,847 out of ?71,58,777. For A.Y. 2011-12, a disallowance of ?13,49,822 out of ?81,64,849 was sustained. The CIT-A considered the appellant's status as a wholesale trader and relied on relevant legal precedents to determine the disallowance percentages.

3. Disallowance Percentage for Bogus Purchases:
The Tribunal modified the CIT-A's order and held that the disallowance for bogus purchases should be at the rate of 12.5% in both cases. This decision was based on the evidence presented, including the lack of movement of goods and the nature of transactions in the grey market.

4. Applicability of Previous Court Decisions:
The Tribunal referenced a Gujarat High Court decision and noted that in cases where sales are not doubted, a 100% disallowance for bogus purchases may not be appropriate. The Tribunal also mentioned the importance of considering the specific facts of each case, such as engaging in transactions in the grey market, to determine the disallowance percentage.

5. Modification of CIT-A's Order by the Tribunal:
The Tribunal modified the CIT-A's order, emphasizing that the disallowance rate of 12.5% for bogus purchases was reasonable based on the evidence and legal considerations. The assessee's counsel agreed to this proposition, leading to the dismissal of certain appeals and partial allowance of one appeal.

In conclusion, the Tribunal's decision to set the disallowance rate at 12.5% for the bogus purchases in both assessment years was based on a thorough analysis of the evidence, legal precedents, and the specific circumstances of the case.