2017 (12) TMI 858 - AT - Income Tax

Bogus purchases - Held that - Facts of the present case clearly indicate that assessee has engaged in transaction in the grey market. Making transactions in the grey market gives the assessee savings of taxes etc at the expense of Exchequer. In similar situation following the honourable Gujarat High Court decision in the case of Simit P Seth (2013 (10) TMI 1028 - GUJARAT HIGH COURT) disallowance of 12.5% of the bogus purchase has been found to be meeting the end of justice.

Summary

Issues Involved:
1. Reopening of assessment based on information from the Sales Tax Department.
2. Sustaining addition of 12.5% of alleged bogus purchases.
3. Assessee's failure to produce parties for verification and cross-examination.
4. Validity of the evidence and burden of proof.
5. Treatment of sales and purchases in the books of accounts.
6. Applicability of case laws and precedents.

Detailed Analysis:

1. Reopening of Assessment:
The assessee challenged the reopening of the assessment, arguing that it was based on information from the Sales Tax Department, which was akin to a newspaper report and not substantial evidence. However, the tribunal upheld the reopening, stating that the information received from DGIT(Inv.), Mumbai, provided tangible and cogent material showing that the assessee was a beneficiary of bogus purchase entries. The tribunal cited the Supreme Court decision in CIT(A) Vs. Rajesh Jhaveri Stock Brokers P. Ltd, 291 ITR 500, emphasizing that at the initiation stage, what is required is a reason to believe, not the established fact of escapement of income.

2. Sustaining Addition of 12.5% of Alleged Bogus Purchases:
The Commissioner of Income Tax (Appeals) restricted the addition to 12.5% of the alleged bogus purchases, considering it a reasonable estimation of the profit derived from such transactions. The tribunal upheld this decision, referencing the Gujarat High Court decision in the case of Bholenath Poly Fab Pvt. Ltd and other similar cases where a 12.5% profit element was considered reasonable for such tainted purchases.

3. Assessee's Failure to Produce Parties for Verification and Cross-Examination:
The assessee failed to produce the parties for verification, which led to the Commissioner of Income Tax (Appeals) stating that the question of cross-examination does not arise. The tribunal supported this view, noting that the burden of proof lies on the assessee to establish the genuineness of the transactions, which the assessee failed to do.

4. Validity of the Evidence and Burden of Proof:
The tribunal emphasized that the burden of proof lies on the assessee to prove the genuineness of the purchases as per Sections 101 and 103 of the Indian Evidence Act, 1872. The assessee's inability to produce the parties or provide substantial evidence led to the conclusion that the purchases were bogus. The tribunal referenced several case laws, including Nund & Samant Co Pvt Ltd. vs CIT, to support this position.

5. Treatment of Sales and Purchases in the Books of Accounts:
The assessee argued that the sales made from the alleged bogus purchases were genuine and booked in the regular books of accounts. However, the tribunal noted that mere preparation of documents for purchases cannot controvert the overwhelming evidence that the providers of these bills were bogus and non-existent. The tribunal cited the Supreme Court decisions in Sumati Dayal vs. CIT and CIT vs. Durga Prasad More to support this view.

6. Applicability of Case Laws and Precedents:
The tribunal considered various case laws and precedents, including the Gujarat High Court decision in N K Industries vs. Dy CIT, which upheld 100% disallowance of bogus purchases. However, the tribunal found that a 12.5% disallowance was more appropriate in this case, following the decision in Simith P. Seth. The tribunal also noted that the jurisdictional High Court in Nikunj Eximp Enterprises allowed 100% of the purchases when the sales were not doubted, but the facts of that case were different.

Conclusion:
The tribunal dismissed the appeals by both the assessee and the Revenue, upholding the reopening of the assessment and the addition of 12.5% of the alleged bogus purchases. The tribunal emphasized the importance of tangible evidence and the burden of proof lying on the assessee to establish the genuineness of the transactions. The decision was pronounced in the open court on 11.12.2017.