2020 (8) TMI 235 - AT - Income Tax

Estimation of income - Bogus purchases - GP rate estimation - addition made by the AO by directing the AO to adopt the GP rate of 25% as against 30% taken by assessee - HELD THAT - Payments have been made through banking channel and the assessee has substantiated the purchases by providing various documents such as purchase invoice, copy of ledger account, evidence for having made payment through banking channels, VAT return duly reflecting the said purchases, etc. Merely because some of the parties did not respond to the notice issued u/s 133(6) of the IT Act, the same cannot go against the assessee to make such huge addition especially when purchases from those parties were accepted in the preceding year and no reopening of assessment u/s 147 or 263 has taken place. We find, the Jaipur Bench of the Tribunal in the case of Kedia Exports Pvt. Ltd. 2020 (6) TMI 566 - ITAT JAIPUR has held that once the past year results have attained finality and not in dispute, the same can form the basis for estimating the GP rate for the current year. The rejection of books of account by invoking the provisions of section 145(3) of the Act shall lead to the estimation of income of the assessee based on some reasonable and proper criteria. Adoption of GP rate of 4.5% on the turnover under the facts and circumstances of the case will meet the ends of justice. We hold and direct accordingly. The AO is directed to recomputed the addition accordingly. The grounds raised by the assessee are accordingly partly allowed.

Summary

Issues Involved:
1. Legitimacy of Sundry Creditors and Purchases
2. Rejection of Books of Accounts under Section 145(3)
3. Gross Profit (GP) Rate Estimation

Detailed Analysis:

1. Legitimacy of Sundry Creditors and Purchases:

The assessee, a company engaged in wholesale trading, declared sundry creditors amounting to ?2.35 crores, which is 23% of its total purchases of ?9.75 crores. The Assessing Officer (AO) issued notices under Section 133(6) to verify these creditors, but many notices were returned as unclaimed or the parties were not found at the given addresses. Despite the assessee providing some purchase bills and addresses, subsequent notices were also returned or went unanswered. Field inquiries by the Inspector revealed that the business premises were residential, and no business activities were observed. Statements from the directors confirmed the business activities at the said premises, but no satisfactory explanation was provided regarding the Inspector's findings. As a result, the AO concluded that the assessee's books of account were unreliable and estimated the Gross Profit (GP) on unverifiable purchases.

2. Rejection of Books of Accounts under Section 145(3):

The AO rejected the assessee's books of accounts under Section 145(3) due to the unverifiable nature of purchases amounting to ?5,75,55,073/-. The AO estimated a GP rate of 30% on these purchases but adjusted it to 27% considering the average GP rate of the last three years, resulting in an addition of ?1,55,39,870/- to the assessee's income. The assessee argued that the purchases were genuine, supported by VAT returns, bank statements, and confirmations from creditors. However, the CIT(A) was not convinced and reduced the GP rate to 25%, giving a relief of ?11,55,101/-.

3. Gross Profit (GP) Rate Estimation:

The Tribunal noted that the AO accepted the assessee's sales and that the purchases were made through banking channels. The past GP rates were 2.9% for A.Y. 2012-13 and 4.28% for A.Y. 2014-15. The Tribunal found that the AO did not provide any comparable cases to justify the higher GP rate. The Tribunal cited the Jaipur Bench's decision in Kedia Exports Pvt. Ltd., which held that past results could form the basis for estimating the GP rate. Considering the totality of the facts, the Tribunal concluded that a GP rate of 4.5% on the turnover of ?9,93,23,196/- was reasonable. The AO was directed to recompute the addition accordingly.

Conclusion:

The Tribunal partly allowed the appeal, directing the AO to adopt a GP rate of 4.5% on the turnover, thereby providing a balanced resolution considering the assessee's past performance and the unverifiable nature of certain purchases. The decision was pronounced on 07.08.2020.