2017 (11) TMI 1143 - AT - Income Tax

Addition of bogus purchases - profit estimation - assessee was not allowed cross examination of the parties on whose bases addition made - Held that - The estimation of the profit element involved in making of the purchase under consideration had fairly been adopted by the CIT(A) @25% after considering certain important factors, viz. (i). the gross profit declared by the assessee as deliberated upon by the CIT(A) in the backdrop of the profit percentage involved in the trade line of the assessee did not inspire much of confidence; and (ii). the assessee had himself offered that addition within the range of 12.5% to 25% of the aggregate value of the purchase transactions under consideration may be made as regards the profit embedded in respect of the purchase transactions under consideration. We have given a thoughtful consideration to the estimation of the profit element as regards the bogus purchases under consideration at 25% by the CIT(A), and are persuaded to be in agreement with him. We are of the considered view that the CIT(A) after rejecting the books of account of the assessee, had therein deliberated on the gross profit of the assessee as against that reflected in the trade line being of the view that the same did not inspire much of confidence, had thus discarded the same by observing that the profit involved in the trade line of the assessee was found to be comparatively more. Thus, the aforesaid observations of the CIT(A) laid down the very foundation of his conviction that the purchases debited by the assessee in his books of account were inflated. We find that no attempt had been made by the ld. A.R before us to either dislodge the said observation of the CIT(A), or to prove that the same was perverse We find that the A.O after making independent inquiries and conclusively proving that the assessee had failed to substantiate the genuineness and veracity of the purchase transactions and therein discharge the onus as stood cast upon him, had only thereafter concluded that the purchase transactions under consideration were found to be ingenuine. We are of the considered view that no infirmity as regards sustaining of the observations of the A.O and the addition emerging there from does arise from the order of the CIT(A), solely for the reason that the assessee was not allowed cross examination of the aforementioned parties- Decided against assessee.

Summary

Issues Involved:
1. Disallowance of Purchases
2. Genuineness and Veracity of Purchase Transactions
3. Validity of Reassessment Proceedings
4. Estimation of Profit Percentage on Bogus Purchases
5. Right to Cross-Examination

Detailed Analysis:

1. Disallowance of Purchases:
The assessee challenged the CIT(A)'s decision confirming the disallowance of 25% of the purchases amounting to ?1,07,13,732 for A.Y. 2010-11 and ?68,97,619 for A.Y. 2011-12. The revenue, on the other hand, contended that the CIT(A) erred in restricting the disallowance to only 25% and argued for the restoration of the entire disallowance made by the Assessing Officer (A.O).

2. Genuineness and Veracity of Purchase Transactions:
The A.O based the disallowance on information from the DGIT (Inv.), Mumbai, indicating that the assessee had obtained accommodation entries from MVAT dealers issuing bogus sale/purchase bills. The A.O directed the assessee to produce documentary evidence and the parties involved, which the assessee failed to do. Consequently, the A.O disallowed the entire purchases, deeming them unverifiable. The CIT(A) upheld the A.O's findings but concluded that the purchases were made from unknown entities rather than the listed bogus parties, thus restricting the disallowance to the profit element involved.

3. Validity of Reassessment Proceedings:
The CIT(A) upheld the validity of the reassessment proceedings initiated under Sec. 147 based on the information received from the DGIT (Inv.), Mumbai. The assessee's challenge to the reassessment proceedings was dismissed.

4. Estimation of Profit Percentage on Bogus Purchases:
The CIT(A) estimated the profit element at 25% of the total bogus purchases. This estimation was based on the nature of the assessee's business and the gross profit margins typically involved. The CIT(A) noted that the assessee had suggested an addition within the range of 12.5% to 25% as an alternative contention. The Tribunal upheld this estimation, agreeing that the CIT(A) had fairly considered the factors involved.

5. Right to Cross-Examination:
The assessee argued that the A.O did not allow cross-examination of the parties whose statements were used to draw adverse inferences. The Tribunal acknowledged the principle that adverse inferences drawn from third-party statements require an opportunity for cross-examination. However, it held that in this case, the A.O's independent inquiries and the assessee's failure to substantiate the purchase transactions justified the disallowance. The Tribunal found no infirmity in the CIT(A)'s decision, despite the lack of cross-examination.

Conclusion:
The Tribunal dismissed the appeals of both the assessee and the revenue for A.Y. 2010-11 and A.Y. 2011-12. It upheld the CIT(A)'s order restricting the disallowance to 25% of the total bogus purchases, concluding that the assessee had failed to discharge the onus of proving the genuineness of the purchase transactions. The Tribunal also rejected the contention that the lack of cross-examination invalidated the assessment, given the assessee's failure to substantiate the transactions independently.