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2020 (1) TMI 700 - HC - Income TaxUnsubstantiated purchases - CIT(A) applying net profit of 5.76% - CIT (Appeals) and the Tribunal opined that without actually consuming the raw materials, the work done by the Appellant could not have been possible - HELD THAT - Assuming that the Respondent-Assesssee the purchasers from whom the purchases were made were bogus, in view of the finding of fact that the material was consumed, the question would be of extending the percentage of net profit on total turnover. This would be a matter of calculations by the concerned authority. In this context, if the CIT(Appeals) and the Tribunal chose to follow the percentage arrived by the Settlement Commission in the Respondent-Assessee s own case for the other years, this exercise cannot be considered as irregular or illegal. No substantial question of law
Issues:
Challenge to order of Income Tax Appellate Tribunal for Assessment Year 2009-10 regarding unsubstantiated purchases and net profit calculation. Analysis: 1. The Appellant challenged the order of the Income Tax Appellate Tribunal regarding unsubstantiated purchases of ?1,69,48,368 and the application of a net profit of 5.76% on the total contract amount for the Assessment Year 2009-10. 2. The Respondent, a Civil Contractor, filed an income tax return for the same year, declaring a total income of ?48,65,060. The assessment was completed initially in 2011 under Section 143(3) and later reopened under Section 147 due to information from the Sales Tax Department about bogus purchase entries of ?1,69,48,368. The reassessment in 2014 determined the total income as ?2,18,13,430. 3. The Commissioner of Income Tax (Appeals) partly allowed the Respondent's appeal, sustaining an addition of ?50,44,947 and deleting ?1,19,03,421 out of the questioned amount. The Commissioner noted that the Respondent had approached the Settlement Commission for subsequent years, settling additional income based on a net profit rate of 5.76% on the total contracted amount. 4. The Appellant argued that certain purchases were questioned based on information from the Sales Tax Department, alleging involvement with Hawala dealers. The Appellant contended that the mere use of crossed cheques for payment did not prove the genuineness of the purchases. It was also highlighted that only specific purchases were under scrutiny. 5. The Respondent's counsel cited precedents to argue that even if purchases were deemed bogus, the entire amount should not be disallowed, and some benefit should be given to the Respondent. The issue of genuine material purchased was emphasized, asserting that the purchases were necessary for the work done. 6. The High Court reviewed the orders of the Commissioner of Income Tax (Appeals) and the Tribunal. It was noted that the work done by the Respondent was contract-based with the Municipal Corporation, where bills were verified by Corporation Engineers before payment release. The completion of contract work and material consumption were not in doubt. 7. Referring to a Division Bench case, the High Court emphasized that purchases could not be rejected without affecting sales for a trader. The Tribunal's decision to limit additions to maintain the Gross Profit rate on purchases was deemed correct. Considering the consumption of material, the question shifted to extending the net profit percentage on total turnover. 8. The High Court concluded that no substantial question of law arose in the Appeal, as the percentage of net profit calculated based on Settlement Commission's decision for other years was deemed valid. Therefore, the Appeal was dismissed.
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