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2021 (1) TMI 41 - AT - Income TaxEstimation of income - Bogus purchases - CIT-A restricted addition to 12.5% as against 100% addition made by the Assessing Officer - HELD THAT - As decided in SIMIT P SHETH 2013 (10) TMI 1028 - GUJARAT HIGH COURT when the total sale is accepted by the Assessing Officer then entire purchases cannot be added to the income of the assessee. Therefore, only the profit element embedded in such purchases could be added to the income of the assessee. Since, the Ld. CIT (A) has restricted the addition to 12.5% by following the ratio laid down by the Hon ble Gujarat High Court discussed above, we do not find any reason to interfere with the findings of the Ld. CIT (A). In our considered view, the addition of 12.5% is reasonable to meet the ends of justice. Penalty u/s 271 (1) (c) - HELD THAT - CIT (A) has correctly deleted the penalty levied u/s 271 (1) (c) of the Act, by following the ratio laid down by the Hon ble Allahabad High Court in the case of Nareshchand Agarwal 2013 (6) TMI 68 - ALLAHABAD HIGH COURT wherein the Hon ble Court has held that where the addition is made on estimate basis, penalty u/s 271 (1) (c) cannot be imposed. - Decided in favour of assessee.
Issues Involved:
1. Legitimacy of the addition of bogus purchases. 2. Appropriateness of the penalty imposed under section 271(1)(c) of the Income Tax Act, 1961. Issue 1: Legitimacy of the Addition of Bogus Purchases In ITA No. 3526/MUM/2019 for the Assessment Year 2011-12, the primary issue revolves around the addition of ?13,83,676/- to the income of the assessee by the Assessing Officer (AO) due to alleged bogus purchases. The AO reopened the assessment based on information from the Sales Tax Department indicating that the assessee had obtained accommodation entries without actual supply of goods. Consequently, the AO made a 100% addition of the bogus purchases to the income of the assessee. The assessee appealed against this order, and the Commissioner of Income Tax (Appeals) [CIT(A)] restricted the addition to 12.5% of the alleged bogus purchases, following the precedent set by the Hon'ble Gujarat High Court in the case of CIT vs. Simit P. Sheth, which held that only the profit element embedded in such purchases should be added to the income. The CIT(A) reasoned that since the sales were not doubted, the assessee must have made purchases from undisclosed parties in the grey market at lower rates, and the profit margin of 12.5% was reasonable. The revenue appealed against this decision, arguing that the CIT(A) erred in restricting the addition to 12.5% without appreciating that the assessee could not establish the genuineness of the purchases and that the hawala operators had admitted to providing accommodation entries without actual supply of goods. The revenue also cited the Supreme Court decision in N.K. Proteins Ltd. Vs. DCIT, which confirmed a 100% addition for bogus purchases. Upon hearing rival submissions and reviewing the material on record, the Tribunal upheld the CIT(A)'s decision, noting that the AO had not doubted the sales and that there could be no sales without corresponding purchases. The Tribunal concluded that the assessee likely made purchases from the grey market and that only the profit element embedded in such purchases should be added to the income. Thus, the Tribunal found the 12.5% addition reasonable and dismissed the revenue's appeal. Issue 2: Appropriateness of the Penalty Imposed Under Section 271(1)(c)In ITA No. 3527/MUM/2019 for the Assessment Year 2010-11, the issue pertains to the penalty of ?4,99,906/- imposed by the AO under section 271(1)(c) of the Income Tax Act for furnishing inaccurate particulars of income and concealing income through bogus purchases. The AO had initially added the entire amount of bogus purchases to the income of the assessee and subsequently imposed the penalty. The assessee challenged the penalty order before the CIT(A), who deleted the penalty, citing various decisions of the ITAT that no penalty under section 271(1)(c) is leviable when additions are made on an estimated basis. The CIT(A) noted that the purchases were shown in the books of accounts, but the assessee could not produce the parties from whom the purchases were made. The CIT(A) emphasized that the AO had estimated the profit on alleged bogus purchases, and there was no conclusive proof that the purchases were entirely bogus or that there were no corresponding sales. The revenue appealed against the CIT(A)'s decision, arguing that the assessee failed to establish the genuineness of the purchases and that the penalty was justified as the assessee attempted to reduce profitability and evade taxes. However, the Tribunal upheld the CIT(A)'s decision, noting that the penalty could not be imposed when the addition was made on an estimated basis. The Tribunal referenced the Hon'ble Allahabad High Court's decision in Nareshchand Agarwal vs. CIT, which held that no penalty under section 271(1)(c) is imposable when additions are made on an estimated basis. Thus, the Tribunal found no reason to interfere with the CIT(A)'s findings and directed the AO to delete the penalty, dismissing the revenue's appeal. In conclusion, both appeals filed by the revenue were dismissed, and the orders of the CIT(A) were upheld. Order pronounced on 28th October, 2020 under rule 34 (4) of the Income Tax Appellate Tribunal Rules, 1963.
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