2019 (10) TMI 712 - AT - Income Tax

Bogus purchases - HELD THAT - No sale without actual purchase of material keeping in view the assessee s nature of business. As noted by lower authorities, the assessee was in possession of primary purchase documents and the payments to suppliers were through banking channels. The sales turnover reflected by the assessee has not been disturbed / disputed by AO. At the same time, the assessee miserably failed to substantiate the purchases during assessment proceedings and could not produce any of the suppliers to confirm the transactions. Under such circumstances, the additions which could be sustained, was to account for profit element embedded in these purchase transactions to factorize for profit earned by assessee against possible purchase of material in the grey market and undue benefit of VAT against such bogus purchases, which Ld. first appellate authority has rightly done. However, finding the estimated rate to be on the higher sider, we reduce the same to 12.5% of alleged bogus purchases. The same comes to ₹ 1,43,821/-. The balance addition stands deleted. The impugned order stand modified to that extent. Appeal stands partly allowed.

Summary

Issues:
1. Addition of alleged bogus purchases
2. Confirmation of addition by CIT(A)
3. Failure to substantiate purchases during assessment proceedings
4. Estimation of profit element in purchase transactions
5. Reduction of estimated rate of addition

Issue 1: The primary issue in this case pertains to the addition of alleged bogus purchases amounting to ? 11.50 Lacs made by the Assessing Officer against the returned income of ? 2.14 Lacs for the Assessment Year 2010-11. The assessee, engaged in manufacturing pressure gauges, faced re-assessment proceedings initiated under section 147 based on information received from the investigation wing. The assessee claimed the purchases were genuine and used in the manufacturing process, supported by payments through banking channels. However, the purchases were disallowed as the suppliers could not be verified, leading to the addition in question.

Issue 2: The CIT(A) confirmed the addition of alleged bogus purchases, relying on the decision of the Hon’ble Gujarat High Court. The CIT(A) restricted the addition to 27.32%, the Gross Profit rate declared by the assessee. The assessee, aggrieved by this decision, appealed further to the Appellate Tribunal.

Issue 3: During the assessment proceedings, the assessee failed to substantiate the purchases and could not produce suppliers to confirm the transactions. Despite possessing primary purchase documents and making payments through banking channels, the lack of supplier verification led to the disallowance and subsequent addition to the income of the assessee.

Issue 4: The Tribunal, after considering the nature of the assessee's business and the lack of substantiation for purchases, focused on estimating the profit element embedded in the alleged bogus purchases. The Tribunal found the estimated rate of addition to be on the higher side and reduced it to 12.5% of the alleged bogus purchases, resulting in a reduced addition of ? 1,43,821. The balance addition was deleted based on the Tribunal's assessment of the profit earned by the assessee.

Issue 5: Ultimately, the Tribunal partly allowed the appeal, modifying the impugned order by reducing the estimated rate of addition and deleting the balance addition. The decision was pronounced in the open court on 11th September 2019, with the appeal being partly allowed in favor of the assessee.