2020 (12) TMI 767 - AT - Income Tax

Bogus purchases - unverifiable purchases to the extent of 3% of value thereof as against 10% made by the ld. AO in the assessment - HELD THAT - CIT(A) had considered the entire modus operandi of the assessee and had accepted the fact that the assessee had indeed made sales out of the disputed purchases and hence, it could be safely presumed that the assessee could have only made purchases from the grey market in order to have some saving in indirect taxes and incidental profits thereon. We find that the ld. CIT(A) had also placed reliance on Mercury International 2016 (8) TMI 1519 - ITAT MUMBAI case wherein under identical facts and circumstances, this Tribunal had restricted the profit element embedded in the value of disputed purchases at 3%. We find that the ld. DR before us was not able to provide any other contrary decision before us. Hence, we do not find any infirmity in the order of the ld. CIT(A) and accordingly, the grounds raised by the revenue are dismissed.

Summary

Issues:
Restriction of disallowance on unverifiable purchases to 3% instead of 10%.

Analysis:

Issue 1: Restriction of Disallowance
The appeals in question arose from an order by the Commissioner of Income Tax (Appeals) against an assessment made under section 143(3) of the Income Tax Act, 1961. The primary issue to be decided was whether the Commissioner was justified in limiting the disallowance on unverifiable purchases to 3% of their value, as opposed to the 10% disallowed by the Assessing Officer. The assessee, a partnership firm engaged in Ship Chandelling and General Merchants of shipping supplies, had made sales to Shipping Corporation of India with low margins. The Assessing Officer had identified certain suppliers as tainted dealers based on information from the Sales Tax department. Despite the assessee providing details of purchases, VAT registration, supplier information, and payment evidence, the Assessing Officer contended that the assessee failed to prove the actual movement of goods or maintain a stock register. The Assessing Officer assumed that purchases were made in the grey market to derive profits from tax savings, estimating a 10% profit element on net purchases. However, the Commissioner, considering the assessee's sales pattern and lack of dispute on corresponding sales, restricted the profit element to 3% based on the Tribunal's precedent in a similar case. The Commissioner's decision was supported by the absence of contradictory decisions presented by the Revenue. As a result, the appeals of the Revenue were dismissed, affirming the Commissioner's order for both assessment years.

Conclusion:
The judgment focused on the justification of limiting the disallowance on unverifiable purchases to 3% instead of 10%. It highlighted the assessee's sales pattern, lack of dispute on sales, and the absence of contradictory decisions as key factors in the decision-making process. The Tribunal's reliance on precedent and the absence of evidence challenging the Commissioner's decision led to the dismissal of the Revenue's appeals for both assessment years.