2018 (7) TMI 1474 - AT - Income Tax

Addition u/s 69C - method for determination of addition u/s 69C towards bogus purchases - Held that - Considering the facts and circumstances of the case and also consistent with the view taken by the co-ordinate bench in number of cases, we deem it appropriate to direct the AO to estimate 12.5% net profit on alleged bogus purchases including 2% net profit already estimated by the AO. Accordingly, we direct the AO to delete addition made towards peak amount of bogus purchases and direct him to estimate 12.5% net profit on total alleged bogus purchases.

Issues Involved:
1. Reopening of assessment under Section 143(3) of the Income Tax Act, 1961.
2. Rejection of books of accounts under Section 145(3) of the Income Tax Act, 1961.
3. Addition under Section 69C for alleged bogus purchases.
4. Addition for suppression of Gross Profit.

Issue-wise Detailed Analysis:

1. Reopening of Assessment under Section 143(3):
The assessee challenged the reopening of the assessment completed under Section 143(3) of the Income Tax Act, 1961. The assessment was reopened under Section 147 due to the alleged inflation of purchases by taking accommodation entries from suspicious/hawala dealers. The notice under Section 148 was issued based on information from the Sales-tax department indicating that the assessee had taken accommodation entries amounting to ?1,66,68,582. The assessee contended that the reopening was done without considering the facts and circumstances of the case. However, the Tribunal found that the reopening was justified due to the credible information received from the Sales-tax department.

2. Rejection of Books of Accounts under Section 145(3):
The assessee's books of accounts were rejected under Section 145(3) by the Assessing Officer (AO), which was confirmed by the CIT(A). The AO noted deficiencies in the purchase bills such as the absence of vehicle details, proof of payment of octroi, and ledger accounts of transporters. Additionally, the assessee did not maintain a stock register, which was confirmed by the auditor in the tax audit report. The Tribunal upheld the rejection of the books of accounts, agreeing with the lower authorities that the assessee failed to provide credible evidence to substantiate the purchases.

3. Addition under Section 69C for Alleged Bogus Purchases:
The AO made an addition of ?1,66,68,582 under Section 69C for alleged bogus purchases based on the peak theory. The assessee argued that the purchases were genuine and supported by purchase bills and payment proofs. However, the AO found that the purchase bills were incomplete and the parties involved were listed as hawala operators by the Sales-tax department. The Tribunal agreed with the AO and CIT(A) that the assessee failed to prove the genuineness of the purchases. However, the Tribunal held that only the profit element embedded in such purchases should be taxed, consistent with judicial precedents. Therefore, the Tribunal directed the AO to estimate a 12.5% net profit on the alleged bogus purchases, including the 2% already estimated by the AO.

4. Addition for Suppression of Gross Profit:
The AO made an addition of ?3,33,372 for suppression of gross profit, being 2% of the alleged bogus purchases. The CIT(A) upheld this addition, noting that the gross profit percentage after adding the bogus purchases was not unrealistic or unreasonable. The Tribunal concurred with the CIT(A) and directed the AO to include this 2% in the overall 12.5% net profit estimation on the alleged bogus purchases.

Conclusion:
The Tribunal partly allowed the appeal filed by the assessee. It upheld the reopening of the assessment and the rejection of the books of accounts. However, it modified the addition under Section 69C by directing the AO to estimate a 12.5% net profit on the alleged bogus purchases, including the 2% gross profit already estimated. The Tribunal emphasized that only the profit element embedded in the bogus purchases should be taxed, consistent with judicial precedents.

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