2020 (11) TMI 131 - AT - Income Tax

Estimation of income - bogus purchases - Purchases from grey market - CIT(A) sustaining 12.5% disallowance - HELD THAT - In this case the sales have not been doubted. It is settled law that when sales are not doubted, hundred percent disallowance for bogus purchase cannot be done. The rationale being no sales is possible without actual purchases. In the present case the facts of the case indicate that assessee has made purchase from the grey market. Making purchases through the grey market gives the assessee savings on account of non-payment of tax and others at the expense of the exchequer. As regards the quantification of the profit element embedded in making of such bogus/unsubstantiated purchases by the assessee it is the submission of the learned counsel of the assessee that it will be doubled prejudice if the gross profit already declared is not reduced from the standard 12.5% being disallowed on account of bogus purchases. Accordingly direct that disallowance in this case be restricted to 12.5% of the bogus purchase as reduced by the gross profit already declared by the assessee.

Summary

Issues:
1. Disallowance on account of bogus purchases
2. Validity of disallowance percentage
3. Evidence of purchases from grey market
4. Impact of non-production of suppliers
5. Applicability of High Court decision on bogus purchases

Issue 1: Disallowance on account of bogus purchases
The case involved an appeal by the Revenue and a cross objection by the assessee regarding a 12.5% disallowance on account of bogus purchases, as sustained by the learned Commissioner of Income Tax (Appeals) for the assessment year 2009-10. The assessee, engaged in trading computer parts, faced a 100% addition on account of bogus purchases, leading to a disallowance of ?18,92,775. The Assessment was reopened based on information from the sales tax Department regarding these purchases.

Issue 2: Validity of disallowance percentage
Upon appeal, the learned CIT(A) reduced the disallowance percentage to 12.5%. The ITAT considered the evidence provided by the assessee for the purchases and noted that while adverse inferences were drawn due to the non-production of suppliers, the sales were not doubted. The ITAT highlighted the settled law that a hundred percent disallowance for bogus purchases cannot be justified when sales are not doubted, as sales cannot occur without actual purchases.

Issue 3: Evidence of purchases from grey market
The ITAT referenced a jurisdictional High Court decision in a similar case to support its rationale. The High Court decision upheld a hundred percent allowance for purchases deemed bogus when sales were not doubted. However, in the present case, the purchases were made from the grey market, allowing the assessee to save on taxes at the expense of the exchequer. The ITAT considered the profit element embedded in such purchases and directed the disallowance to be restricted to 12.5% of the bogus purchase amount, adjusted by the gross profit already declared by the assessee.

Issue 4: Impact of non-production of suppliers
The inability of the assessee to produce the suppliers led to adverse inferences being drawn. However, the ITAT emphasized that the absence of doubt on sales was a crucial factor in determining the validity of the disallowance percentage for bogus purchases.

Issue 5: Applicability of High Court decision on bogus purchases
The ITAT found considerable merit in the submissions made regarding the quantification of the profit element in making bogus purchases. It referenced the High Court decision and directed the disallowance to be limited to 12.5% of the bogus purchase amount, after considering the gross profit already declared by the assessee. The Revenue's appeal was dismissed, and the assessee's cross objection was partly allowed based on these considerations.

This detailed analysis of the judgment highlights the key issues involved in the case and provides a comprehensive overview of the ITAT's decision regarding the disallowance on account of bogus purchases.