2017 (12) TMI 1278 - AT - Income Tax

Addition made by applying the profit rate at 12.5% of the bogus purchase - assessee contended that only profit element is higher as the assessee deals in iron and steel and assessee is disclosed profit at 2% - Held that - We find reasonable profit rate of 5% will meet the end of justice for the reason that the assessee has already declared profit @ 2% on the sale made out of bogus purchases and assessee also filed the proofs of payments of sales tax/ VAT to the Maharashtra Sales Tax Department and once the assessee has paid the Sales Tax/ VAT to the Government, the profit will automatically decline. In view of these reasons, we direct the AO to re-compute income after applying profit rate @ 5% of the bogus purchase and appeal of the assessee is partly allowed.

Summary

Issues:
Appeal against CIT(A) confirming addition based on profit rate applied to bogus purchase.

Analysis:
The appeal arose from the CIT(A)'s order confirming the addition made by applying a profit rate of 12.5% to the bogus purchase. The assessee raised two grounds challenging the CIT(A)'s decision. The facts revealed that the assessee, engaged in the iron and steel business, was alleged to have made purchases from hawala parties providing bogus bills. The AO issued notices under section 133(6) to the parties, which were returned as 'left', and the assessee failed to produce these parties. The assessee submitted documentary evidence during assessment and appellate proceedings, arguing that sales cannot occur without purchases. However, the CIT(A) upheld the AO's decision to reject the books of account under section 145(3) based on apparent deficiencies. The CIT(A) referred to a Rajasthan High Court judgment to justify the rejection of accounts when found unreliable. The AO estimated the profit rate due to bogus purchases instead of disallowing the entire amount, acknowledging that sales cannot occur without purchases. The CIT(A) confirmed the addition, leading to the appeal.

In the appellate tribunal, the assessee contended that the profit element was higher due to dealing in iron and steel and requested a reduction in the profit rate, stating that the profit margins in this trade are low. The tribunal considered the facts and circumstances, determining that a profit rate of 5% would be reasonable. This decision was based on the assessee's declaration of 2% profit on sales from bogus purchases, along with proofs of payments of sales tax/VAT to the Sales Tax Department. The tribunal directed the AO to recompute the income by applying a 5% profit rate on the bogus purchase, partially allowing the appeal.

Therefore, the tribunal partly allowed the appeal, emphasizing the reduction in profit rate to 5% based on the circumstances presented and the assessee's declarations and evidence.