2017 (12) TMI 532 - AT - Income Tax

Bogus purchases - estimating of profit - Held that - When the assessee made purchases and sold the finished goods as a natural corollary not the entire amount covered under such purchases would be subject to tax but only the profit element embedded therein. Similar view has been taken by the Hon ble Gujarat High Court in the case of CIT v. Simit P. Seth (2013 (10) TMI 1028 - GUJARAT HIGH COURT) that 12.5% disallowance out of the bogus purchases serves the interest of justice. Simply because the parties were not produced the entire purchases cannot be added as held by the Bombay High Court in the case of CIT v. Nikunj Eximp 2013 (1) TMI 88 - BOMBAY HIGH COURT .

Summary

Issues Involved:
1. Validity of reopening of assessment under Section 147 of the Income Tax Act.
2. Merits of the addition made based on alleged bogus purchases.
3. Percentage of disallowance on the alleged bogus purchases.

Detailed Analysis:

1. Validity of Reopening of Assessment:
The assessee contested the reopening of the assessment under Section 147 of the Income Tax Act, arguing that it was based solely on the list of "suspicious dealers" from the Sales Tax Department's website without concrete proof of bogus transactions. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the reopening, noting that the Assessing Officer (AO) received tangible material indicating that the assessee was a beneficiary of accommodation entries in the form of purchase bills. The AO issued a notice under Section 148 within four years from the end of the relevant assessment year, thus complying with the statutory requirements. The Tribunal agreed with the CIT(A), referencing the Supreme Court's decision in CIT(A) Vs. Rajesh Jhaveri Stock Brokers P. Ltd, which allows reopening based on a prima facie belief of income escapement.

2. Merits of the Addition Based on Alleged Bogus Purchases:
The AO, during the reassessment proceedings, issued notices under Section 133(6) to various suppliers, which either went unanswered or were returned undelivered. The AO concluded that the assessee did not purchase any goods from these parties and added the peak amount of investment made out of unaccounted money for these purchases under Section 69C. The CIT(A) confirmed the addition, noting that the assessee failed to produce any documentary evidence or confirmations from the alleged suppliers. The Tribunal upheld this finding, emphasizing that the assessee could not provide any transport details, delivery challans, or produce the suppliers, thereby substantiating the AO's conclusion of bogus purchases.

3. Percentage of Disallowance on the Alleged Bogus Purchases:
The CIT(A) sustained an addition estimated at 12.5% of the alleged bogus purchases, considering the motive to suppress true profit. The Tribunal referenced the Gujarat High Court's decision in the case of N K Industries vs. Dy. CIT, which upheld 100% disallowance for bogus purchases. However, the Tribunal also considered the jurisdictional High Court's decision in Nikunj Eximp Enterprises, which allowed 100% of the purchases when sales were not doubted. Balancing these precedents, the Tribunal found that a 12.5% disallowance was appropriate, reflecting the assessee's involvement in the grey market and the resultant tax savings and use of undisclosed sums.

Conclusion:
The Tribunal upheld the CIT(A)'s order on all counts, confirming the validity of the reopening under Section 147, the merit of the addition based on the alleged bogus purchases, and the 12.5% disallowance rate. The appeals by the assessee and the Revenue were dismissed, and the decision was pronounced in the open court on 07.12.2017.