2017 (11) TMI 310 - AT - Income Tax

Bogus purchases - AO has estimated net profit of 25% on total alleged bogus purchases - Held that - It is fair and reasonable to estimate 12.5% net profit on alleged bogus purchases. The CIT(A), after considering relevant facts has rightly directed the AO to estimate the net profit of 12.5% on the alleged bogus purchases. We do not find any error or infirmity in the order of CIT (A). Payment of additional VAT on alleged bogus purchases - whether credits need to be given for VAT payment out of net profit estimated on total alleged bogus purchases - Held that - The issue needs to be examined by the AO in the light of the claim of assessee that it has paid additional VAT on purchases from those six parties. Hence we set aside the issue to the file of the AO for the limited purpose of verification whether the assessee has paid additional VAT on purchases from those six parties on denial of input tax credit by Sales-tax department. If the claim of the assessee is found to be correct, then the AO is directed to allow credit for payment of VAT on purchases from those six parties out of net profit determined on the alleged bogus purchases.

Summary

Issues:
1. Assessment of net profit on alleged bogus purchases.
2. Consideration of VAT paid on alleged bogus purchases.

Analysis:

Issue 1: Assessment of net profit on alleged bogus purchases
The appeal was filed against the order of CIT(A) pertaining to the assessment year 2011-12. The assessee, engaged in trading iron & steel, was alleged to have entered into bogus purchase transactions with six parties. The AO concluded that purchases from these parties were bogus and estimated net profit at 25% on total purchases. The CIT(A) scaled down the estimation to 12.5% based on judicial precedents. The assessee contended that the net profit estimation was high compared to their business nature, requesting a further reduction. The Tribunal noted that the assessee failed to prove the purchases as genuine, supported by the sales-tax department's actions. However, as no discrepancies were found in the books or stock details, the Tribunal held that only the profit element embedded in such purchases should be taxed. Citing precedents, the Tribunal determined 12.5% net profit on the alleged bogus purchases, upholding the CIT(A)'s decision.

Issue 2: Consideration of VAT paid on alleged bogus purchases
The assessee claimed to have paid additional VAT on purchases from the six parties after finalization of assessment orders by the Sales-tax department, which denied input tax credit. The Tribunal acknowledged the need to examine this claim and directed the AO to verify if the assessee indeed paid additional VAT on these purchases. If verified, the AO was instructed to allow credit for VAT payment from the net profit estimated on the alleged bogus purchases. Consequently, the Tribunal partly allowed the appeal for statistical purposes, setting the issue for further verification by the AO.

In conclusion, the Tribunal upheld the CIT(A)'s decision on net profit estimation while directing a review of the VAT payment issue, emphasizing the importance of verifying additional VAT payments made by the assessee on the alleged bogus purchases.