2020 (12) TMI 610 - AT - Income Tax

Bogus purchases - CIT-A sustaining addition @ 12.5% disallowance - HELD THAT - 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, we find that as held in M Haji Adam Co 2019 (2) TMI 1632 - BOMBAY HIGH COURT the addition in respect of bogus purchases is to be limited to the extent of bringing the gross profit rate on such purchases at the same rate as of other genuine purchases. We respectfully following the aforesaid judgement of the Hon ble High Court set aside the matter to the file of the assessing officer with the direction to restrict the addition as regards the bogus purchases by bringing the gross profit rate on such bogus purchases at the same rate as that of the other genuine purchases.

Summary

Issues:
- Disallowance of 12.5% on account of bogus purchases by the assessee
- Challenge by revenue for sustaining 12.5% disallowance instead of 100%
- Reopening of assessment due to information on bogus purchases
- 100% addition on account of bogus purchases made by the Income Tax Officer
- Failure to produce alleged bogus suppliers leading to adverse inference
- Gross profit sustainability and restriction of disallowance by CIT(A)
- Purchase from the grey market affecting tax payments
- Quantification of profit element in bogus purchases
- Application of High Court judgment on limiting addition for bogus purchases
- Setting aside the matter to the assessing officer for reevaluation

Analysis:
The judgment by the Appellate Tribunal ITAT Mumbai involved appeals by the assessee challenging the 12.5% disallowance on bogus purchases sustained by the CIT(A). The Revenue cross-appealed, contesting the 12.5% disallowance instead of a 100% addition. The assessment was reopened based on information regarding bogus purchases, with the Income Tax Officer initially making a 100% addition on this account for various assessment years. The AO rejected the claim of submitted documentary evidence due to missing lorry transportation receipts and inability to maintain detailed stock records, resulting in the disallowance. Despite no sales doubt, no notice was issued to alleged suppliers, leading to adverse inference for non-production.

Upon appeal, the CIT(A) noted unsustainable gross profits with the 100% disallowance and restricted it to 12.5% citing various case laws. The Tribunal found that the assessee provided purchase evidence, but adverse inference was drawn due to missing suppliers. Noting the non-doubtful sales, the Tribunal referred to legal precedents stating 100% disallowance without doubted sales is impermissible. The judgment referenced the Nikunj Eximp Enterprises case and highlighted the need for actual purchases for sales to occur.

Regarding purchases from the grey market, the Tribunal referenced a Bombay High Court judgment on limiting additions for bogus purchases to maintain gross profit rates. Following this, the Tribunal set aside the matter for reevaluation by the assessing officer to restrict additions based on gross profit rates of genuine purchases. The judgment emphasized granting the assessee a fair hearing and addressed the Revenue's reference to the NK Proteins case, which was already considered in the M Haji Adam & Co case.

In conclusion, the appeals were partly allowed for statistical purposes, and the matter was remanded to the assessing officer for reevaluation in line with the High Court's judgment on limiting additions for bogus purchases.