2018 (7) TMI 1723 - AT - Income Tax

Bogus purchases - profit estimation - Held that - Hon ble High Court of Gujarat in the case of CIT Vs. Simit P. Sheth (2013 (10) TMI 1028 - GUJARAT HIGH COURT) after deliberating at length on the profit element that would be involved in making of purchases by an assessee from the open/grey market, had adopted the same at 12.5% of the aggregate value of such bogus purchases. We are oblivious of the fact that in the absence of supporting documentary evidence the determination of the discounted price at which the goods would have been procured by an assessee from the open/grey market, as in comparison to the price for which the same would be available in the regular market and booked by the assessee in its books of account, would have to be subjected to a process of estimation. In all fairness the extent of inflation of the purchase price by the assessee by procuring bogus purchase bills from the aforementioned parties, as held by the Hon ble High Court of Gujarat in the case of Simit P. Sheth (supra), can safely be taken at 12.5%.

Summary

Issues Involved:
Disallowed purchases claimed by the assessee due to lack of evidence and genuineness.

Detailed Analysis:

Issue 1: Disallowance of Purchases
The case involved an appeal by the revenue against an order passed by the CIT(A)-20, Mumbai, related to the disallowance of purchases made by the assessee company in the A.Y 2009-10. The assessee had declared a total income of &8377;1,35,46,240, but the AO disallowed purchases amounting to &8377;1,01,67,848 due to lack of evidence and genuineness. The AO could not verify the purchases' authenticity as confirmations from the parties were not obtained, and the assessee failed to produce necessary documentary evidence. The AO concluded that the parties were non-genuine, and no purchases were made. The CIT(A) agreed that the purchases were bogus but restricted the addition to 6% of the value as a profit element. The revenue appealed this decision.

Issue 2: Judicial Interpretation
The ITAT Mumbai, after hearing both parties, observed that while the assessee failed to prove purchases from specific parties, the stock register and cheque payments indicated actual receipt of goods. The ITAT concluded that the assessee made purchases from the open/grey market, not the mentioned parties. Therefore, the addition should be restricted to the profit element involved. However, the ITAT disagreed with the CIT(A)'s quantification of the profit element at 6% and referred to a Gujarat High Court case where the profit element was determined at 12.5% of the bogus purchases' value. The ITAT upheld the addition of &8377;12,70,956 (12.5% of &8377;1,01,67,648) for the bogus purchases.

Conclusion:
The ITAT partly allowed the revenue's appeal, sustaining the addition of &8377;12,70,956 for the bogus purchases. The judgment clarified the need for evidence to substantiate purchases and the quantification of the profit element involved in such transactions based on judicial precedents.