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2017 (10) TMI 771 - AT - Income TaxBogus purchase - disallowance at the rate of 25% of the hawala purchase - Held that - In the present appeal, the assessee, before AO as well as before the CIT (Appeal) duly furnished the ledger account, Bank statement of suppliers, item-wise quantitative details. While adjudicating the case of the assessee, the Ld. Commissioner of Income Tax (Appeal) has already analyze the details/factual matrix as is evident from para 8.11 onwards of the impugned orders. AO made the addition of the total amount but the Ld. AO was of the view that the disallowance at the rate of 25% of the hawala purchase will be reasonable, which is more than the suppressed production. The assessee has also not filed any appeal against the impugned order. The assessee duly co-related the sale and purchases by declaring GP @ 9.76% of the purchases. CIT(Appeal) has already restricted the disallowance to 25%, thus, we find no infirmity in his conclusion. The interest of Revenue under the material facts has already been safeguarded, therefore, the stand of the Ld. Commissioner of Income Tax (Appeal) is affirmed. Finally, the appeal of the Revenue is dismissed.
Issues Involved:
1. Deletion of addition by the First Appellate Authority. 2. Substantiation of the assessee's claim. 3. Estimation of income and the application of guesswork. 4. Determination of whether purchases were genuine or inflated. Detailed Analysis: 1. Deletion of Addition by the First Appellate Authority: The Revenue challenged the First Appellate Authority's order, which deleted the addition made by the Assessing Officer. The First Appellate Authority relied on the decisions from the Hon'ble Apex Court in Kanchwala Gems vs JCIT and the Hon'ble High Court decisions in Vijay Protein and Sanjay Oilcakes. The Tribunal noted that the assessee had accepted the order and had not filed any appeal against it. The Tribunal affirmed the First Appellate Authority's decision, highlighting that the assessee had correlated sales with purchases and declared a Gross Profit (GP) rate of 9.76%. 2. Substantiation of the Assessee's Claim: The assessee's defense was based on the correlation of sales with purchases and the declared GP rate. The Tribunal considered various judicial precedents, including the Hon'ble Gujarat High Court's decision in Sanjay Oilcakes Industries vs CIT, which supported the view that disallowance to the extent of 25% was fair and reasonable. The Tribunal also referred to the Hon'ble Apex Court's observation in Kachwala Gems vs JCIT that an element of guesswork is inevitable in cases where estimation of income is warranted. 3. Estimation of Income and the Application of Guesswork: The Tribunal acknowledged that in cases involving estimation of income, some degree of guesswork is unavoidable. This principle was supported by the Hon'ble Apex Court in Kachwala Gems vs JCIT. The Tribunal also referred to the Hon'ble Gujarat High Court's decision in CIT vs Bholanath Poly Fab. Pvt. Ltd., which held that the profit margin embedded in the purchases should be subjected to tax rather than the entire amount. 4. Determination of Whether Purchases Were Genuine or Inflated: The Tribunal examined multiple cases to address whether purchases were genuine or inflated. Key cases included: - CIT vs Vijay M. Mistry Construction Ltd.: The Tribunal and the Commissioner (Appeals) both found that the purchases were genuine but inflated, warranting a disallowance of 25%. - CIT vs Ashish International Ltd.: The Tribunal found that the assessee was not given an opportunity to cross-examine the concerned party, leading to the deletion of the addition. - CIT vs Nikunj Exim Enterprises Pvt. Ltd.: The Tribunal held that the purchases were genuine despite the suppliers not appearing before the authorities. - CIT vs M.K. Brothers: The Tribunal concluded that there was no sufficient evidence to prove that the purchases were bogus. The Tribunal also referred to the Mumbai Bench decision in DCIT vs Rajeev G. Kalathil, where the addition was deleted due to lack of evidence of cash trails and proof of movement of goods. Conclusion: The Tribunal affirmed the First Appellate Authority's decision to restrict the disallowance to 25%, finding no infirmity in the conclusion. The Tribunal emphasized that the interest of Revenue had been safeguarded and dismissed the appeal of the Revenue. This order was pronounced in the presence of representatives from both sides at the conclusion of the hearing on 17/08/2017.
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