2017 (11) TMI 211 - AT - Income Tax

Addition on account of bogus purchases - Held that - Hon ble Gujarat High Court in the case of Bholanath Polyfab Pvt. Ltd 2013 (10) TMI 933 - GUJARAT HIGH COURT held that when the assessee made purchases and sold the finished goods as a natural corollary not the entire amount covered under such purchases would be subject to tax but only the profit element embedded therein. Keeping in view the nature of business of the assessee and the fact that the assessee is making some local purchases without any transportation bills lorry receipts etc, the possibility of making purchases in gray market on cash cannot be ruled out. Therefore, keeping in view the net profit rate shown by the assessee at 7.41% and the totality of facts and circumstances into consideration we direct the Assessing Officer to disallow 5% of the above purchases to meet the anomalies and could cover up the leakages of Revenue. Appeal of the Revenue is partly allowed.

Issues Involved:
1. Reopening of assessment under Section 147 of the Income Tax Act.
2. Addition on account of bogus purchases amounting to ?43,67,589.
3. Evidence provided by the assessee to substantiate the genuineness of purchases.
4. Reliance on information from the Sales Tax Department and statements from alleged hawala bill providers.
5. Non-confrontation and lack of cross-examination of the alleged bogus parties.
6. Judicial precedents regarding additions based on statements and assumptions.
7. Determination of profit element in alleged bogus purchases.

Issue-wise Detailed Analysis:

1. Reopening of assessment under Section 147 of the Income Tax Act:
The assessment was reopened based on information from the Sales Tax Department and DGIT (Investigation), Mumbai, which indicated that the assessee was a beneficiary of bogus purchase bills from hawala bill providers. The reopening was aimed at verifying the genuineness of these purchases.

2. Addition on account of bogus purchases amounting to ?43,67,589:
The Assessing Officer (AO) added ?43,67,589 to the assessee's income, deeming the purchases as bogus due to the lack of supporting documents like lorry receipts, proof of transport, and octroi receipts. The AO concluded that the parties from whom the purchases were made were dubious, based on statements from individuals before the Sales Tax Department.

3. Evidence provided by the assessee to substantiate the genuineness of purchases:
The assessee submitted various documents, including invoices, delivery challans, goods received notes, bank certificates, and confirmations from suppliers, to prove the genuineness of the purchases. The Commissioner of Income Tax (Appeals) [CIT(A)] accepted these documents as sufficient evidence of genuine transactions.

4. Reliance on information from the Sales Tax Department and statements from alleged hawala bill providers:
The AO relied on information from the Sales Tax Department and statements from individuals who admitted to providing accommodation bills without actual sales or purchases. However, the CIT(A) found that these statements were not directly linked to the assessee, and no independent enquiry was conducted by the AO to corroborate this information.

5. Non-confrontation and lack of cross-examination of the alleged bogus parties:
The CIT(A) noted that the assessee was not provided with copies of the statements from the alleged bogus parties, nor was given an opportunity to cross-examine them. This lack of confrontation and cross-examination was a significant factor in the CIT(A)'s decision to delete the addition.

6. Judicial precedents regarding additions based on statements and assumptions:
Several judicial precedents were cited, including decisions from the Hon'ble Jodhpur Tribunal, Hon'ble Bombay High Court, and Hon'ble Gujarat High Court, which held that additions based solely on statements without cross-examination or independent enquiries are not sustainable. These precedents supported the CIT(A)'s decision to delete the addition.

7. Determination of profit element in alleged bogus purchases:
While the CIT(A) deleted the entire addition, the Tribunal noted that the possibility of purchases from the gray market could not be ruled out. Therefore, to cover potential revenue leakages, the Tribunal directed the AO to disallow 5% of the alleged bogus purchases, considering the net profit rate shown by the assessee.

Conclusion:
The Tribunal partly allowed the Revenue's appeal, directing a 5% disallowance of the alleged bogus purchases to address potential anomalies and revenue leakages. The decision emphasized the importance of providing the assessee with an opportunity for cross-examination and the necessity of independent enquiries to substantiate claims of bogus transactions.

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