2018 (9) TMI 779 - AT - Income Tax

Disallowance of bogus purchases - CIT(A) has applied the profit rate at the rate of 15%, which according to us is on higher side going by the nature of business of the assessee i.e. dealing in gift items - Held that - Additional profit rate of 10% of unproved bogus purchases be further added to income of the assessee which will meet the end of justice in view of the decision of Hon ble Gujarat High Court in the case of CIT vs. Smith P. Seth 2013 (10) TMI 1028 - GUJARAT HIGH COURT . Hence, we direct the AO to recompute the profit after applying additional profit rate of 10% on unproved bogus purchases and compute the income accordingly. The appeal of the assessee is partly allowed.

Summary

Issues involved:
Disallowance of bogus purchases at a specific rate.

Analysis:
The appeal pertains to the disallowance of bogus purchases by the Commissioner of Income Tax (Appeals) [CIT(A)], restricting it to 15% of the alleged amount. The Assessing Officer (AO) framed the assessment under section 143(3) read with section 147 of the Income Tax Act, 1961, for the Assessment Year 2009-10. The appellant contested the disallowance of ?3,42,090 out of total bogus purchases amounting to ?22,80,601.

The appellant, engaged in the business of dealing in gift items, faced allegations of making purchases from hawala parties providing bogus bills. Despite submitting documentary evidence during assessment and appellate proceedings, the genuineness of purchases was questioned by the AO. The CIT(A) upheld a 15% disallowance of ?3,42,090, emphasizing the failure to establish the authenticity of purchases from identified suppliers, deemed non-genuine by tax authorities.

The Tribunal noted the higher profit rate applied by the CIT(A) at 15% and considered the consistent higher gross profit rate in the appellant's business. Referring to a comparative chart of gross profit ratios, the Tribunal directed an additional 10% profit rate on unproved bogus purchases, citing the decision in CIT vs. Smith P. Seth. Consequently, the AO was instructed to recompute the income after applying the additional profit rate, partially allowing the appellant's appeal.

In conclusion, the Tribunal partially allowed the appeal, directing a reevaluation of the profit by adding a 10% rate on unproved bogus purchases. The decision aimed to ensure a fair assessment of income in line with judicial precedents, emphasizing the need to substantiate transactions and profit margins in business dealings.