2017 (12) TMI 1392 - AT - Income Tax

Bogus purchases - estimation of income - Held that - In the case of CIT vs. Simit P. Sheth (2013 (10) TMI 1028 - GUJARAT HIGH COURT) has held that where purchases were not bogus but were made from parties other than those mentioned in the books of account, not entire purchase price but only profit element embedded in such purchases can be added to income of the assessee. That being the position, not the entire purchase price but only the profit element embedded in such purchases can be added to the income of the assessee. As mentioned hereinbefore the assessee failed to substantiate his claim of expenditure of ₹ 2,25,72,581/- made from 30 parties in AY 2009-10; ₹ 2,43,30,038/- from 20 parties in AY 2010-11 and ₹ 2,81,43,532/- from 41 parties in AY 2011-12. Having regard to the above, we direct the AO to estimate profit @ 12.5% of the above purchases for the impugned assessment years. - Decided partly in favour of assessee.

Summary

Issues:
1. Addition on account of alleged bogus purchases
2. Methodology for calculating gross profit
3. Substantiation of expenditure claims

Analysis:
1. The appeals were against the Commissioner of Income Tax (Appeals) order regarding alleged bogus purchases. The Assessing Officer received information about these purchases and issued notices to verify their genuineness. The parties involved were found to be engaged in providing accommodation entries only. The AO made additions as unexplained expenditure under section 69C of the Income Tax Act for multiple assessment years. The CIT(A) restricted the disallowance to 25% of the purchase price based on the average G.P. ratio of the assessee for previous years.

2. The assessee argued that the CIT(A) should have considered the average G.P. of the last 3-4 years instead of a flat 25% disallowance. The Tribunal referred to case law stating that only the profit element embedded in such purchases can be added to the income of the assessee. Considering the facts, the Tribunal directed the AO to estimate profit at 12.5% of the purchases for the relevant assessment years.

3. The assessee failed to substantiate the expenditure claims made from various parties in different assessment years. Despite the arguments presented, the Tribunal upheld the addition of profit elements from the purchases as unexplained expenditure. The appeals were partly allowed based on the revised profit estimation.

This judgment highlights the importance of substantiating expenditure claims, the methodology for calculating profit elements from purchases, and the significance of considering past performance for determining additions in income tax assessments.