2019 (3) TMI 800 - AT - Income Tax

Bogus purchases - addition @ 12.5% on the value of the alleged bogus purchases - Hawala transactions - estimation of profit - AO has drawn conclusion that the assessee had actually purchased materials from open market, but procured bills from the hawala parties - HELD THAT - Under the Income tax Act, the profit earned from the business transactions is alone taxable. Since the sales has been accepted, the corresponding purchases is required to be deducted for the purpose of arriving at profit. The assessee has shown that it has purchased materials from certain dealers, but the same has not been accepted for the reason that the said dealers have admitted before the Sales tax authorities that they have not supplied materials. Even though the AO has presumed that the assessee might have received cash back from such dealers, the same has not been substantiated with any material. On the basis of available facts, the AO has drawn such presumption and in the absence of any material to support the view so taken, it may not be proper to presume that unaccounted cash would have been introduced. Another important factor, which has been rejected by the AO is the submission of the assessee that they were getting credit period of 90 days for making payment to the suppliers. If the same is factored in, then the addition computed by the AO would go down drastically. CIT(A) was justified in directing the AO to assess the profit element embedded in the alleged bogus purchases by taking the rate of profit as 12.50%. As noted earlier, his view also gets support from the decision rendered in the case of Simit P Sheth 2013 (10) TMI 1028 - GUJARAT HIGH COURT . Hence we do not find any infirmity in the orders passed by him and accordingly we uphold the same. - Decided against revenue

Issues Involved:
1. Legitimacy of the alleged bogus purchases.
2. Application of peak credit theory by the Assessing Officer (AO).
3. Validity of the 12.5% addition rate directed by the Commissioner of Income Tax (Appeals) [CIT(A)].
4. Reliance on self-serving statements of suppliers.
5. Treatment of unaccounted cash and credit period for payments.

Detailed Analysis:

Issue 1: Legitimacy of the Alleged Bogus Purchases
The Revenue conducted search and seizure operations on M/s. Satra Properties (I) Ltd. and the assessees, identifying the latter's concerns as bogus billers. The AO examined the purchases made by the assessees from several parties identified as Hawala operators, who provided accommodation bills without supplying materials. Despite issuing summons, these parties did not appear, except for one representative who claimed actual supply of materials. The AO concluded that the purchases were bogus, as supported by the suppliers' admissions before the Sales Tax authorities.

Issue 2: Application of Peak Credit Theory by the AO
The AO presumed that the assessees used unaccounted cash for these purchases and proposed to assess the peak amount of bogus purchases. The peak amounts were calculated based on the highest outstanding balances during the relevant periods. For Milan H. Sanghavi (HUF), the peak amount was ?386.83 Lakhs, and for Milan H. Sanghavi, it was ?326.37 Lakhs. The AO assessed these amounts as income for the respective years but made no additions for other years.

Issue 3: Validity of the 12.5% Addition Rate Directed by the CIT(A)
The CIT(A) disagreed with the AO's peak credit theory, noting that the AO accepted the sales declared by the assessees, which implied actual purchases. The CIT(A) directed the AO to make additions at 12.5% of the value of the bogus purchases, citing the savings from VAT and the rotation of capital. This rate was supported by the Gujarat High Court's decision in CIT vs. Simit P. Sheth.

Issue 4: Reliance on Self-Serving Statements of Suppliers
The assessees argued that the AO's reliance on self-serving statements made by suppliers before the Sales Tax authorities was unjustified. They pointed out that payments were made through account payee cheques, and one supplier confirmed actual supply. The CIT(A) considered these aspects and found the AO's presumption of unaccounted cash introduction unsupported by material evidence.

Issue 5: Treatment of Unaccounted Cash and Credit Period for Payments
The AO's presumption that the assessees received cash back from suppliers was not substantiated with evidence. The assessees' claim of a 90-day credit period for payments, if considered, would significantly reduce the peak credit amount. The CIT(A) found the AO's rejection of this claim unjustified and directed a profit-based addition instead.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to assess the profit element at 12.5% of the value of the alleged bogus purchases, rejecting the AO's peak credit theory due to lack of supporting evidence for unaccounted cash introduction. The Tribunal found no infirmity in the CIT(A)'s orders, which were consistent with judicial precedents, and dismissed the Revenue's appeals.

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