2017 (11) TMI 1282 - AT - Income Tax

Bogus purchases - addition u/s 40(A)(3) - proof of unaccounted payments - Held that - We find from the facts of the case that the assessee had obtained bogus bills from various hawala parties but payments are made by account payee cheques and recorded in the books of account. It means that the payments are accounted for and not unaccounted. The assessee to avail the benefit of VAT and to obtain other benefits like lower market price of goods purchased material from grey market and obtained these bogus bills. This fact has not denied by either Revenue or Assessee. In such facts, the provisions of section 40(A)(3) of the Act cannot be invoked because the payments are accounted for and material is purchased which is accounted for and sales are not doubted by the Revenue. The only alternative left with is to assess the profit rate on the bogus bill obtained by assessee and purchases are made from grey market. In such circumstances, we estimate the profit rate at 5% of the bogus bills of purchase, as estimated in similar circumstances by co-ordinate Bench in the case of ITO vs. Priti Gold (India) Private Ltd. 2017 (11) TMI 1197 - ITAT MUMBAI . - Decided in favour of assessee.

Summary

Issues:
Cross appeals regarding addition of alleged bogus purchase and application of peak credit.

Analysis:
1. Common Issue: The cross appeals revolve around the addition of ?2,96,65,590 on account of alleged bogus purchase and the application of peak credit. The Assessing Officer (AO) added ?5,46,03,927 as peak credit for the bogus purchases. The assessee contended that the credit period was between 45 to 180 days, but the Commissioner of Income Tax (Appeals) restricted the addition to ?2,96,65,590 based on a credit limit of 45 days. The Revenue challenged this restriction, arguing that the AO's working of peak credit was based on seized material and should not have been deleted.

2. Assessee's Grounds: The assessee raised two grounds challenging the CIT(A)'s decision. Firstly, they argued that the addition was made without considering the facts and circumstances of the case. Secondly, they contested the disallowance of purchase amounting to ?2,96,65,590, which was 41% of the alleged accommodation purchase of ?7,10,73,950. The Revenue also raised two grounds, claiming that the CIT(A) erred in deleting an addition of ?2,49,38,337 without appreciating the facts and in not disallowing payments under section 40A(3) of the Income Tax Act.

3. Factual Background: The assessee, engaged in jewellery and precious stones business, filed its return for the assessment year 2007-08. Subsequently, the AO reopened the assessment based on information received regarding accommodation bills from certain brokers. The AO found that the assessee had inflated its purchases through bogus bills obtained from various parties. The AO computed the peak credit of bogus purchases at ?5,46,03,927, leading to the addition of this amount to the assessee's income.

4. CIT(A) Decision: The CIT(A) restricted the addition to ?2,96,65,590, considering a credit limit of 45 days for the purchases. The CIT(A) also addressed the AO's contention regarding disallowance under section 40A(3), stating that the addition was based on unexplained cash and not on disallowance of purchases. The Revenue challenged the CIT(A)'s decision on both the peak addition and the non-application of section 40A(3), while the assessee contested the retained peak addition.

5. Appellate Tribunal Decision: The Appellate Tribunal noted that the payments for the purchases were made by account payee cheques and recorded in the books of account, indicating that they were accounted for. As a result, the provisions of section 40A(3) could not be invoked. The Tribunal estimated a profit rate of 5% on the bogus bills of purchase, following precedents and settlement commission decisions in similar cases. Therefore, the Tribunal directed the AO to apply a profit rate of 5% on the bogus purchases of ?7,10,73,950, partially allowing the assessee's appeal and dismissing the Revenue's appeal.

6. Conclusion: The Tribunal partially allowed the assessee's appeal and dismissed the Revenue's appeal, directing the AO to apply a 5% profit rate on the bogus purchases. The decision was pronounced on 16-11-2017.