2020 (1) TMI 10 - AT - Income Tax

Bogus purchases - addition made by the AO @12.5% - HELD THAT - The assessee is undoubtedly beneficiary of hawala purchases from the group related to Bhanwarlal Jain on whom search was conducted and it was candidly accepted during the search that the whole group is engaged in providing bogus billings. We partly agree with the view taken by the authorities below that only a rate can be applied to bring the profit element in the bogus purchases to tax. Pertinent to mention that the assessee has filed evidences to prove that the purchases were made and consequent to this the AO has rightly applied the rate on bogus purchases. However the quantum of rate applied is excessive and unreasonable in view of the trade of the assessee. Rate of profit prevalent in assessee s trade we are of the view that it would be reasonable if a rate of 3% is applied to the alleged bogus purchases. Accordingly we set aside the order of the CIT(A) and direct the AO to apply a rate of 3% on bogus purchases - Appeal filed by the assessee is partly allowed.

Summary

Issues:
Confirmation of addition to alleged bogus purchases at different rates by AO and CIT(A) - Applicability of profit rate on bogus purchases.

Analysis:
In this case, the appellant, engaged in the manufacturing and export of cut and polished diamonds, challenged the confirmation of addition to alleged bogus purchases by the CIT(A) at 8% instead of the 12.5% applied by the AO. The assessments were reopened under Section 147 based on information regarding hawala purchases from a group under investigation. The AO deemed the purchases as bogus despite the appellant submitting various details to prove their genuineness. The CIT(A) considered the submissions and restricted the addition to 8% of the bogus purchases, citing a precedent from the Mumbai Benches. The appellant argued that the profit margin in their trade is low, and the addition was unjustified, presenting evidence such as stock tally, payment details, and invoices. The appellant referenced several decisions to support their arguments.

During the proceedings, the appellant's representative highlighted the meagre profit margins in the diamond trade and contended that the addition made by the AO and confirmed by the CIT(A) was excessive. The representative argued that applying a high rate of addition would result in an unrealistic gross profit in the diamond trade. The appellant relied on various decisions to support their stance. On the other hand, the Departmental Representative supported the CIT(A)'s order, emphasizing the reasonableness of the addition made to tax the profit on the alleged bogus purchases.

After considering the arguments, the tribunal noted that the appellant was indeed involved in hawala purchases from a group under investigation for providing bogus billings. While acknowledging the need to tax the profit element on the bogus purchases, the tribunal found the rate applied by the authorities excessive and unreasonable given the nature of the appellant's trade. Considering the prevalent profit rate in the appellant's trade, the tribunal deemed a 3% rate on bogus purchases as reasonable. Consequently, the tribunal set aside the CIT(A)'s order and directed the AO to apply a 3% rate on the alleged bogus purchases. As a result, the appeal filed by the appellant was partly allowed.

In conclusion, the tribunal's decision addressed the issue of confirming additions to alleged bogus purchases at varying rates by the AO and CIT(A), emphasizing the importance of applying a reasonable profit rate in such cases. The tribunal's analysis considered the specific trade of the appellant and adjusted the rate of addition accordingly, providing relief to the appellant by reducing the percentage applied on the bogus purchases.