2018 (2) TMI 1201 - AT - Income Tax

Bogus purchases - profit estimation - Held that - The assessee has failed to discharge the primary onus of proving the purchases as it could not produce sufficient evidences to show actual delivery of material and also could not produce confirmatory letters from the alleged bogus suppliers and thus failed to substantiate the purchases. The assessee is a trader and there could be no sales without purchases. Addition, which could be made, was to account for profit element embedded in these purchase transactions to factorize profit earned by assessee against purchase of material in the grey market and undue benefit of VAT against bogus purchases, which Ld. CIT(A) has rightly done. Therefore, addition of 12.5% of bogus purchases to be reasonable one and see no reason to interfere with the conclusion of the Ld. CIT(A). - Decided against revenue

Summary

Issues:
Appeal against relief provided to assessee for certain bogus purchases for Assessment Year 2009-10.

Analysis:
The appeal by Revenue challenges the relief granted to the assessee against certain bogus purchases for the assessment year 2009-10. The assessee, a corporate entity engaged in trading iron & steel, was assessed under section 143(3) read with Section 147. The income was determined significantly higher than the returned income due to alleged bogus purchases, which came to light after reassessment proceedings initiated based on information from the Sales Tax Department. The notices and summons issued to the alleged suppliers remained un-served, leading to the disallowance of total purchases by the assessee.

The assessee contested the disallowance before the Ld. CIT (A) and partially succeeded. The Ld. CIT (A) considered the assessee's arguments regarding the necessity of purchases for sales and restricted the disallowance to 12.5% after analyzing the GP/NP rate of the assessee over three years. The Revenue, however, contended that the mere payment through banking channels was insufficient to establish the genuineness of purchases, and the onus to prove the purchases lay with the assessee.

After hearing both sides, the tribunal acknowledged that the assessee failed to provide sufficient evidence to prove the genuineness of purchases. However, considering the nature of the business as a trader where sales are dependent on purchases, the tribunal upheld the Ld. CIT (A)'s decision to restrict the disallowance to 12.5% to account for the profit element in the transactions. The tribunal found this addition reasonable and declined to interfere with the Ld. CIT (A)'s conclusion, ultimately dismissing the Revenue's appeal.

In conclusion, the tribunal upheld the decision to restrict the disallowance of bogus purchases to 12.5% based on the profit element involved in the transactions. The tribunal recognized the necessity of purchases for sales in the trading business and found the Ld. CIT (A)'s decision appropriate in this context.