2017 (11) TMI 251 - AT - Income Tax

Bogus purchases addition - notices u/s 133(6) issued to the purchase parties returned unserved and that the assessee failed to produce these parties for verification - addition made on the basis of information received from Maharashtra Sales-tax department which informed that the parties are involved in providing accommodation entries without any business activity - Held that - Addition cannot be made towards alleged bogus purchases only on the basis of information received from Maharashtra Sales-tax department. At the same time, it is also an undisputed fact that the notices issued u/s 133(6) were returned unserved with remark, not known or unclaimed . The assessee has failed to furnish correct addresses of the parties. Under these circumstances, it is very difficult to accept that the purchases from those parties are explained to the satisfaction of the AO. Considering the facts and circumstances of the case and also being consistent with the view taken by the co-ordinate bench, we are of the view that only profit element embedded in purchases needs to be taxed. Hence, we direct the AO to estimate net profit of 12.5% on total purchases made from the above parties. Appeal filed by the assessee is partly allowed.

Summary

Issues:
1. Deletion of addition on account of bogus purchases
2. Burden of proof on genuineness of purchases

Analysis:
1. The appeal by the revenue challenged the deletion of an addition of &8377; 73,96,790 made on account of bogus purchases for the assessment year 2009-10. The revenue contended that the CIT(A) erred in deleting the addition without appreciating that the assessee failed to prove the identity and genuineness of the purchase transactions, as notices to the purchase parties returned unserved, and the onus to prove the purchases were genuine lay with the assessee. The AO concluded the purchases were bogus based on information from the sales-tax department and made the addition under section 69C of the Income-tax Act, 1961. The CIT(A) deleted the additions, emphasizing that the AO did not conduct proper enquiries and the assessee provided substantial evidence to prove the genuineness of the purchases.

2. The assessee, engaged in toy manufacturing, filed its return declaring income, which was later revised due to information received regarding bogus purchases. The AO reopened the assessment under section 147, alleging escaped income due to bogus purchases. The AO found the purchases from specific parties to be bogus, leading to the addition. The CIT(A) observed that the AO did not verify the supplies made by the assessee and failed to locate the alleged hawala parties. The CIT(A) noted that the assessee provided comprehensive documentation, including ledger accounts, vouchers, and bank statements, indicating genuine purchases. The ITAT agreed with the assessee, stating that additions based solely on third-party information were unjustified. The ITAT directed the AO to tax only the profit element of the purchases and estimated a net profit of 12.5% on the total purchases made from the identified parties.

In conclusion, the ITAT partially allowed the appeal, emphasizing the need for proper verification and evidence before making additions based on third-party information. The judgment highlighted the importance of proving the genuineness of transactions and directed the taxation of only the profit element in disputed purchases.