2019 (4) TMI 856 - AT - Income Tax

Bogus purchases - assessee purchased goods from certain dealers, who have been identified as hawala dealers by the Sales tax department of Government of Maharashtra - profit estimation - G.P rate of 12.50% estimated by the Ld CIT(A) - HELD THAT - We notice that the assessee has taken all possible steps and produced relevant documents to prove the genuineness of purchases made from M/s RTIL. On the contrary, the various evidences furnished by the assessee has not been disproved by the assessing officer. Hence the view taken by the AO was not based on any material. A.R furnished a chart showing the G.P rate earned on the purchases made from M/s RTIL, G.P rate earned from other purchases and overall G.P rate declared by it. We notice that the overall G.P rate declared by the assessee is 0.10%, while the G.P rate declared on purchases made from M/s RTIL and others was 0.06% and 0.11%. We notice that the assessee is operating on low margin and hence the G.P rate of 12.50% estimated by the Ld CIT(A) is very much on the higher side. There is no material to substantiate the view taken by the AO and hence the entire addition should be deleted. However, the assessee has not cited any reason as to why the G.P rate on purchases made from M/s RTIL is lower than that earned from other purchases. Hence, in order to put this issue at rest, we modify the order passed by Ld CIT(A) on this issue and direct the AO to estimate the G.P on purchases made from M/s RTIL at 0.11% , i.e., the rate of G.P, the assessee earned from other purchases and sustain the addition to that extent. - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Addition of ?197.94 lakhs relating to alleged bogus purchases.
2. Rejection of books of account under Section 145(3) of the Income Tax Act.
3. Estimation of Gross Profit (G.P) rate on alleged bogus purchases.

Issue-wise Detailed Analysis:

1. Addition of ?197.94 lakhs relating to alleged bogus purchases:
The primary issue revolves around the addition of ?197.94 lakhs sustained by the CIT(A) relating to alleged bogus purchases. The assessee, engaged in trading steel and metal items, was linked to purchases from hawala dealers through M/s Ragini Trading & Investments P Ltd (RTIL). The Assessing Officer (AO) noted that RTIL had purchased goods from parties identified as hawala dealers by the Sales Tax Department. The AO held that the purchases made by the assessee from RTIL were not genuine and disallowed the entire purchase amount of ?5268.07 lakhs. However, the CIT(A) observed that the assessee did not purchase directly from hawala dealers but from RTIL, which was regularly assessed to tax. The CIT(A) concluded that only the profit element embedded in the purchase transactions should be brought to tax and estimated the profit at 12.50% of the purchases.

2. Rejection of books of account under Section 145(3) of the Income Tax Act:
The AO rejected the books of account under Section 145(3) of the Act, citing the failure of the assessee to produce inward-outward registers and delivery challans for the purchases made from RTIL. The AO relied on various Supreme Court judgments to support the rejection, emphasizing that the onus to prove the expenses lies with the assessee and that payment by account payee cheque alone does not establish the genuineness of purchases. The AO also observed that the real test for the genuineness of transactions is the "Preponderance of Probabilities" and surrounding circumstances.

3. Estimation of Gross Profit (G.P) rate on alleged bogus purchases:
The CIT(A) estimated the profit at 12.50% of the purchases made from RTIL, based on similar cases where purchases were made from hawala dealers. The CIT(A) allowed credit for the Gross Profit (G.P) already shown by the assessee in the regular books of accounts. The assessee contended that it operated on a thin margin, with an overall G.P rate of only 0.10%, and argued that the G.P rate of 12.50% was unjustified. The Tribunal noted that the assessee had furnished all relevant details to prove the genuineness of purchases and that the AO's view was not based on any material evidence. The Tribunal modified the CIT(A)'s order, directing the AO to estimate the G.P on purchases made from RTIL at 0.11%, the rate of G.P the assessee earned from other purchases, and sustain the addition to that extent.

Conclusion:
The Tribunal partly allowed the appeal filed by the assessee, modifying the CIT(A)'s order to estimate the G.P on purchases made from RTIL at 0.11% and sustain the addition to that extent. The Tribunal emphasized that the assessee had taken all possible steps to prove the genuineness of purchases and that the AO's view was based on surmises and conjectures without any material evidence. The order was pronounced in the open court on 12th April 2019.