2018 (11) TMI 262 - AT - Income Tax

Disallowance on account of bogus purchases - purchases/sales without any actual delivery of goods - hawala purchases - AO added 12.5% of such purchases - CIT(A) restricted the disallowance to 9%. - Held that - In the present case, the facts of the case indicate that assessee has made purchase from the grey market. Making purchases through the grey market gives the assessee savings on account of non-payment of tax and others at the expense of the exchequer. In such situation, on the facts and circumstances of the case, 12.5 % disallowance out of the bogus purchases meets the end of justice. However in this regard it is further noteworthy that when only the profits earned by the assessee on these bogus purchase transaction is to be taxed the gross profit already shown by the assessee and offered to tax should be reduced from the standard 12.5% being directed to be disallowed on account of bogus purchase, as otherwise there will be double jeopardy to the assessee. Accordingly, modify the order of the CIT(A) and direct that the disallowance in this case be restricted to 12.5 % of the bogus purchases as reduced by the gross profit rate already declared by the assessee on these transaction. - Decided partly in favour of assessee.

Summary

Issues:
1. Disallowance on account of bogus purchases - 9% sustained by CIT(A)

Analysis:
The appeal pertains to the disallowance of 9% on account of bogus purchases sustained by the Commissioner of Income Tax (Appeals). The assessee, engaged in trading ferrous and non-ferrous metals, filed its income tax return declaring total income. The Assessing Officer (AO) reopened the assessment based on information received regarding hawala transactions and bogus purchase bills. The AO added 12.5% of the total hawala purchases as income. The CIT(A) restricted the disallowance to 9%, considering the inability of the assessee to produce suppliers but reconciling purchases with sales. The assessee contended that the rate of 12.5% was high due to differences in sales tax rates. The ITAT noted the tangible material received by the AO, justifying the reopening based on incriminating evidence. The ITAT referenced legal precedents supporting the AO's reason to believe income escapement. The ITAT also considered a Gujarat High Court decision where disallowance was deleted due to documentary evidence. The ITAT concluded that a 12.5% disallowance out of bogus purchases was appropriate, considering the nature of the transactions and the need to avoid double taxation.

In summary, the ITAT upheld the reopening of the case based on tangible material indicating income escapement. It considered legal precedents and factual circumstances to decide on the disallowance percentage, ultimately directing a 12.5% disallowance on bogus purchases after adjusting for the gross profit already declared by the assessee. The appeal was partly allowed, modifying the CIT(A)'s order and pronouncing the judgment on 2nd November 2018.