2017 (11) TMI 1234 - AT - Income Tax

Estimating net profit margin of 12.5% in respect of bogus purchases - Held that - After discussing various judicial pronouncements and applying the same to the facts of instant case, the CIT(A) reached to the conclusion that estimation of profit at 17.5% were meeting the end of justice, accordingly AO was directed to reduce 5% of average GP shown by assessee from the estimated profit of 17.5% of total bogus purchase. Accordingly, net addition sustained was to the tune of 12.5% of bogus purchases. The detailed finding so recorded by CIT(A) are as per material on record and the same was not controverted by learned DR by bringing any positive material on record. Accordingly, we do not find any infirmity in the order of CIT(A) for upholding the net addition of 12.5%. - Decided against revenue

Issues Involved:
1. Estimation of net profit margin on bogus purchases.
2. Legitimacy of purchases and the burden of proof.
3. Application of Section 69C for unexplained expenditure.
4. Evaluation of documentary evidence and onus on the assessee.
5. Judicial precedents and their applicability.

Issue-wise Detailed Analysis:

1. Estimation of Net Profit Margin on Bogus Purchases:
The primary issue addressed in the judgment is the estimation of the net profit margin on alleged bogus purchases. The CIT(A) estimated a net profit margin of 12.5% on such purchases. The Tribunal upheld this estimation, noting that the CIT(A) had carefully considered various judicial precedents and the specific facts of the case. The CIT(A) concluded that the motive behind obtaining bogus bills was to inflate the purchase price to suppress true profits. The Tribunal found no infirmity in the CIT(A)'s order, which directed the AO to reduce 5% of the average GP from the estimated profit of 17.5%, resulting in a net addition of 12.5%.

2. Legitimacy of Purchases and the Burden of Proof:
The assessee argued that the purchases were genuine and that there could be no sales without corresponding purchases. However, the AO found that notices sent to the suppliers were returned unserved, and the Sales Tax Department had classified these suppliers as Hawala Dealers. The Tribunal noted that the onus of proving the genuineness of the purchases was on the assessee, who failed to produce key evidence such as purchase orders, transportation bills, and goods receipt notes. The Tribunal cited the Supreme Court's rulings in CIT v. Daulat Ram Rawatmull and CIT v. Durga Prasad More, emphasizing that the burden of proof lies on the party making the claim.

3. Application of Section 69C for Unexplained Expenditure:
The AO added the entire amount of ?1,15,95,928 as unexplained expenditure under Section 69C of the IT Act, arguing that the expenditure was not verifiable. The CIT(A) and the Tribunal, however, concluded that only the profit margin embedded in such purchases should be disallowed and subjected to tax. The Tribunal referenced the Gujarat High Court's decision in Bholanath Polyfab Pvt. Ltd., which held that not the entire amount but the profit element in bogus purchases should be taxed.

4. Evaluation of Documentary Evidence and Onus on the Assessee:
The Tribunal observed that the assessee had failed to provide independent and reliable evidence to prove the movement of consignment from the suppliers to the assessee. The Tribunal noted that merely making payments by account payee cheques does not establish the genuineness of the transactions. The Tribunal emphasized that the burden of proof is on the assessee to demonstrate the authenticity of the purchases, which the assessee failed to do.

5. Judicial Precedents and Their Applicability:
The Tribunal cited several judicial precedents, including Sanjay Oilcake Industries vs. CIT and CIT vs. Simit Sheth, to support the conclusion that only the profit margin in bogus purchases should be taxed. The Tribunal noted that the CIT(A)'s decision to estimate the profit margin at 17.5% and then reduce it by the average GP of 5% was consistent with these precedents. The Tribunal also referenced the case of Vijay Proteins, where a similar approach was taken to estimate the profit margin on bogus purchases.

Conclusion:
The Tribunal upheld the CIT(A)'s order, which estimated a net profit margin of 12.5% on the alleged bogus purchases. The Tribunal found that the assessee failed to discharge the burden of proof regarding the genuineness of the purchases and that the CIT(A)'s approach was consistent with judicial precedents. The appeals of the Revenue were dismissed.

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