2019 (9) TMI 367 - AT - Income Tax

Bogus purchases - estimation of profit - addition @ 12.5% of alleged bogus purchases - HELD THAT - AO was not able to produce these parties before the authorities below and moreover these parties admitted before Sales Tax authorities that they were indulging in providing bogus bills without supplying material . The assessee could not discharge onus as cast by the provisions of the 1961 Act. Assessee has duly accepted the additions as were sustained by CIT(A) to the tune of 12.5% of alleged bogus purchases to end litigation as no appeal/Co was filed by the assessee challenging the additions as were confirmed/sustained by CIT(A). In such cases, profits embedded in these purchases are to be computed and such estimate has to be honest, fairs and reasonable because purchases are made from some other suppliers operating in grey market without bills while to complete books of accounts, the bills are obtained from the accommodation entry providers without taking physical delivery of material from these entry providers. No infirmity in the appellate order passed by Ld. CIT(A) estimating profits @12.5% of the alleged bogus purchases being profits embedded in these purchases, as additional income to be brought to tax in the hands of the assessee, as some guess work is required in estimating profits embedded in these alleged bogus purchases but the said guess work has to be reasonable , fair and honest guess work . There is not perversity in estimation made by learned CIT(A) nor it is unconscionable estimation and we are not inclined to interfere with appellate order passed by learned CIT(A), more-so the assessee has duly reconciled quantitative stocks reflected by these alleged purchases with sales made. The sales are not doubted by Revenue. The ratio of decision in the case of Kachwala Gems v. JCIT 2006 (12) TMI 83 - SUPREME COURT supports our decision. Revenue fails in its appeal.

Issues Involved:
1. Deletion of addition on account of bogus purchases.
2. Consideration of information from DIT(Inv.) and Sales Tax Department.
3. Admission by hawala dealers to Sales Tax Authorities.
4. Proof of delivery of material and stock register.
5. Estimation of profit on alleged bogus purchases.
6. Applicability of Supreme Court decision in N.K. Proteins Ltd. case.
7. Purchases from unrecorded parties and section 40A(3) provisions.
8. Applicability of 100% bogus purchases as profit under section 40A(3).

Detailed Analysis:

1. Deletion of Addition on Account of Bogus Purchases:
The Revenue challenged the deletion of ?45,12,259/- on account of bogus purchases by the CIT(A). The AO had initially added 100% of the alleged bogus purchases to the income of the assessee, amounting to ?51,56,867/-, citing that these were accommodation entries without actual delivery of goods.

2. Consideration of Information from DIT(Inv.) and Sales Tax Department:
The AO's addition was based on information from the Sales Tax Department, Maharashtra, and the DIT(Inv.), which indicated that the assessee had inflated its purchases through accommodation entries from hawala parties. The CIT(A), however, concluded that the assessee did make purchases, albeit not from the parties shown in the accounts but from other sources, and thus estimated the profit embedded in such purchases.

3. Admission by Hawala Dealers to Sales Tax Authorities:
The hawala dealers admitted before the Sales Tax Authorities that they had not sold any material to anybody and were only providing accommodation entries. The AO relied on these admissions to make the addition. However, the CIT(A) considered that the sales made by the assessee were not disputed and thus the purchases must have been made from some source.

4. Proof of Delivery of Material and Stock Register:
The AO noted that the assessee could not prove the delivery of material received from the hawala parties and failed to produce the stock register. The CIT(A), however, found that the assessee had provided sufficient documentary evidence such as purchase bills, bank statements, and sales bills corresponding to the purchases, and thus concluded that the purchases were genuine but from different sources.

5. Estimation of Profit on Alleged Bogus Purchases:
The CIT(A) estimated the profit at 12.5% on the total alleged bogus purchases, amounting to ?6,44,608/-, and provided relief of ?45,12,259/- to the assessee. This estimation was based on judicial precedents where only the profit element embedded in such purchases was subjected to tax.

6. Applicability of Supreme Court Decision in N.K. Proteins Ltd. Case:
The Revenue argued that the entire amount of bogus purchases should be added to the income, citing the Supreme Court decision in N.K. Proteins Ltd. However, the tribunal distinguished this case, noting that in N.K. Proteins, the taxpayer was found with blank signed cheques and bills of accommodation entry providers, which was not the case here. The tribunal upheld the CIT(A)'s estimation of profit at 12.5%.

7. Purchases from Unrecorded Parties and Section 40A(3) Provisions:
The AO contended that the purchases were made from parties not recorded in the books and only accommodation bills were obtained, thus attracting provisions of section 40A(3). The CIT(A) did not find sufficient evidence to support this claim and focused on the profit embedded in the purchases.

8. Applicability of 100% Bogus Purchases as Profit Under Section 40A(3):
The Revenue argued that the entire amount of bogus purchases should be treated as profit under section 40A(3). However, the CIT(A) and the tribunal found that only the profit margin embedded in the purchases should be taxed, as the sales were not disputed and the purchases were reconciled with the sales.

Conclusion:
The tribunal upheld the CIT(A)'s decision to estimate the profit at 12.5% of the alleged bogus purchases, amounting to ?6,44,608/-, and dismissed the Revenue's appeal for 100% addition of the bogus purchases. The tribunal found the CIT(A)'s estimation to be fair and reasonable, considering the factual matrix and judicial precedents. The assessee's reconciliation of purchases with sales and the absence of evidence of suppression of sales were significant factors in the decision.

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