2020 (1) TMI 854 - AT - Income Tax

Bogus purchases - case of purchases made from unverifiable parties - not a case of simple trading but it is a case of contract wherein the purchases were supposed to be consumed - CIT(A) after rejecting the books of account estimated the profit at 30% of the impugned expenses/purchases - HELD THAT - Under Income Tax Act only real income can be taxed by the Revenue. We may further note that even if the transaction is not fully verifiable, due to any circumstances beyond the control of the assessee, the only taxable is the taxable income component. And in order to fulfill the gap of revenue leakage the disallowance of reasonable percentage of such purchases can meet the end of justice. Similar view was taken by Hon ble Bombay High Court in CIT Vs Hariram Bhambhani 2015 (2) TMI 907 - BOMBAY HIGH COURT that revenue is not entitled to brought the entire sales consideration to tax, but only the profit attributable on the total unrecorded sales consideration alone can be subject to income tax. Considering the aforesaid factual and legal discussion and the submission of ld. AR of the assessee that average Gross Profit for four preceding year declared by assessee were 13.01%. For the year under consideration, the assessee has declared Gross Profit at 20.26%, if the further disallowance @ 30% of the total purchases/expenses is upheld, the Gross Profit of assessee would be increased drastically i.e. more than 36%, which is unrealistic. Therefore, considering the totality of the facts and to avoid to possibility of revenue leakage, we are of the view that if the disallowance of alleged purchases/expenditure is restricted to 10%, that would meet the end of justice. - Decided partly in favour of assessee.

Issues Involved:
1. Deletion of addition on account of bogus purchases.
2. Applicability of the Supreme Court decision in N.K. Proteins Ltd.
3. Sustaining a disallowance on account of alleged bogus purchases.
4. Reopening of the case under section 148 of the Income Tax Act.
5. Assessment of income at a higher amount than declared by the assessee.
6. Rejection of the assessee's books of accounts.
7. Treatment of additions as non-taxable capital receipts.

Detailed Analysis:

1. Deletion of Addition on Account of Bogus Purchases:
The revenue challenged the deletion of ?75.29 crores made on account of bogus purchases. The assessee argued that the expenses were genuine and incurred for sub-contract work. The Assessing Officer (AO) disallowed the expenses based on the statement of Shri Somil Mukesh Parikh, who claimed that Khodiyar Industries Ltd. issued bogus bills. The CIT(A) restricted the disallowance to 30% of the total purchases, considering the decision of the Hon'ble Gujarat High Court in Vijay Proteins Ltd. and CIT vs. Simith P. Sheth. The Tribunal further reduced the disallowance to 10%, noting that the assessee had already declared a gross profit of 20.26%, and any further disallowance would result in an unrealistic gross profit margin of over 36%.

2. Applicability of the Supreme Court Decision in N.K. Proteins Ltd.:
The revenue contended that the decision in N.K. Proteins Ltd. was applicable, where the Supreme Court upheld the addition of the entire amount of bogus purchases. However, the Tribunal distinguished the facts of the present case from N.K. Proteins Ltd., noting that the present case involved a third-party statement and not direct evidence of bogus purchases. The Tribunal emphasized that only the taxable income component should be taxed, not the entire amount of purchases.

3. Sustaining a Disallowance on Account of Alleged Bogus Purchases:
The assessee argued that the disallowance of ?22.60 crores sustained by the CIT(A) should be deleted. The Tribunal, after considering the evidence and submissions, concluded that a disallowance of 10% of the total purchases would be reasonable to avoid revenue leakage. The Tribunal noted that the assessee had provided substantial evidence, including valuation reports and certificates from independent engineers, to support the genuineness of the work executed.

4. Reopening of the Case Under Section 148 of the Income Tax Act:
The assessee challenged the validity of reopening the case under section 148. The Tribunal upheld the reopening, relying on the Supreme Court decision in ACIT vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd., which held that if the AO has reasons to believe that income has escaped assessment, it confers jurisdiction to reopen the assessment. The Tribunal noted that the reopening was based on information from the ADIT (Investigation) and the statement of Shri Somil Mukesh Parikh.

5. Assessment of Income at a Higher Amount Than Declared by the Assessee:
The AO assessed the income at ?94.34 crores against ?19.04 crores declared by the assessee. The Tribunal found that the AO's assessment was based on the disallowance of bogus purchases. However, the Tribunal reduced the disallowance to 10% of the total purchases, resulting in a revised assessment of income.

6. Rejection of the Assessee's Books of Accounts:
The AO rejected the assessee's books of accounts under section 145(3), citing discrepancies and lack of supporting documents for the purchases. The Tribunal noted that the AO did not conduct any inquiry into the scope of work or verify the independent valuation reports provided by the assessee. The Tribunal partially upheld the rejection of books but reduced the disallowance to 10% of the purchases.

7. Treatment of Additions as Non-Taxable Capital Receipts:
The assessee argued that the additions should be treated as non-taxable capital receipts, as they were gratuitous payments not covered within the scope of income under section 2(24) of the Income Tax Act. The Tribunal did not specifically address this issue, as it focused on the reasonableness of the disallowance percentage.

Conclusion:
The Tribunal allowed the assessee's appeal in part, reducing the disallowance to 10% of the total purchases, and dismissed the revenue's appeal. The Tribunal also dismissed the cross-objection filed by the assessee as not pressed. The order was pronounced in the open court on 05/12/2019.

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