2020 (4) TMI 223 - AT - Income Tax

Bogus purchases - addition to the extent of 12.5% by AO - CIT(A) directed to restrict the addition to the extent of 6.5% of alleged bogus purchases - HELD THAT - In case of bogus purchases where sales are accepted, quantitative details of purchases, sales and stock was filed with copy of delivery challans, the addition is required to be made only to the extent of lower GP declared by the assessee on bogus purchases as compared to G.P. on normal purchases. As per the G.P. statement chart placed on record we found that the GROSS PROFIT declared by assessee in respect of alleged bogus purchases was more than the GROSS PROFIT declared in the normal purchases. Under these facts circumstances, applying the judicial pronouncement laid down by Hon ble Jurisdictional High Court in M/S MOHOMMAD HAJI ADAM CO. 2019 (2) TMI 1632 - BOMBAY HIGH COURT we do not find any merits for the addition so upheld by CIT(A).- Decided in favour of assessee

Summary

Issues Involved:
1. Validity of reopening of assessment under sections 147/148 of the Income Tax Act.
2. Legitimacy of additions made on account of alleged bogus purchases.
3. Justification of the profit rate applied to the alleged bogus purchases.
4. Confirmation of interest charged under sections 234A, 234B, 234C, and 234D of the Act.

Issue-wise Detailed Analysis:

1. Validity of Reopening of Assessment under Sections 147/148:
The assessee contested the reopening of the assessment, arguing that it was based on "reason to suspect" rather than "reason to believe," and that there was no new tangible material justifying the notice under section 148. The assessee also claimed that the initiation of proceedings was bad in law, as it was not provided with copies of the material used against it or the opportunity for cross-examination. The Tribunal did not delve into the validity of reopening the assessments under section 147, as the issue was resolved on merits.

2. Legitimacy of Additions Made on Account of Alleged Bogus Purchases:
The Assessing Officer (AO) added 12.5% of the alleged bogus purchases to the assessee's income based on information from the Sales Tax Department indicating that the assessee had taken bogus purchase entries from 12 parties. The Commissioner of Income Tax (Appeals) [CIT(A)] reduced this addition to 6.5%, considering various judicial pronouncements and the specifics of the case. The Tribunal noted that the assessee provided substantial documentation to support the genuineness of the purchases, including ledger accounts, purchase invoices, bank statements, stock registers, and confirmations from the alleged bogus suppliers.

3. Justification of the Profit Rate Applied to the Alleged Bogus Purchases:
The CIT(A) justified restricting the profit rate to 6.5% by considering the VAT levied (4%) and the profit margin (2.5%). The Tribunal referenced the Hon'ble Bombay High Court's decision in the case of Pr. CIT vs. M/s Mohommad Haji Adam & Co., which held that in cases where sales are accepted and quantitative details of purchases, sales, and stock are provided, the addition should be limited to the differential gross profit (G.P.) percentage. The Tribunal found that the G.P. declared by the assessee on the alleged bogus purchases was higher than that on normal purchases, and thus, no further addition was warranted.

4. Confirmation of Interest Charged under Sections 234A, 234B, 234C, and 234D of the Act:
The assessee challenged the interest charged under sections 234A, 234B, 234C, and 234D. However, as the Tribunal decided the primary issue on merits, it did not specifically address the interest charges in its final order.

Conclusion:
The Tribunal concluded that the additions upheld by the CIT(A) lacked merit, as the G.P. on the alleged bogus purchases was higher than on normal purchases. Consequently, the appeals filed by the revenue were dismissed, and those filed by the assessee were allowed, directing the AO to delete the additions for all the years under consideration. The judgment was pronounced in the open court on 03/03/2020.