2021 (1) TMI 1002 - AT - Income Tax

Estimation of income - bogus purchases - CIT-A restricted addition at 12.5% being profit earned by assessee on unexplained/unverified purchases - HELD THAT - We noticed that the CIT(A) has applied profit rate at 12.5% by following the decision in the case of CIT vs. Simit P. Sheth 2013 (10) TMI 1028 - GUJARAT HIGH COURT wherein as held that where purchases were not bogus but were made from parties other than those mentioned in the books of account not entire purchase price but only profit element embedded in such purchases can be added to income of the assessee. As the CIT(A) has applied a reasonable profit rate we do not want to interfere in the same. Hence the order of CIT(A) is upheld in both the years and appeals of assessee are dismissed.

Issues Involved:
1. Disallowance of bogus purchases.
2. Profit rate applied to disallowed purchases.
3. Verification of purchases and suppliers' responses.
4. Cross-examination of suppliers.
5. Use of information from Sales Tax authorities.
6. Justification of purchase prices.
7. Estimation of additional profit from unverifiable purchases.

Issue-wise Detailed Analysis:

1. Disallowance of Bogus Purchases:
The common issue in these appeals concerns the CIT(A)'s order restricting the disallowance of bogus purchases to 12.5% of the total purchases, which were deemed unexplained expenditure under Section 69C of the Income Tax Act, 1961. The Assessing Officer (AO) had received information from the Sales Tax Department, Government of Maharashtra, indicating that the assessee was a beneficiary of bogus purchase bills from several parties. The AO disallowed the entire purchases from these parties, amounting to ?54,74,132/-, as the parties did not respond to notices issued under Section 133(6) of the Act.

2. Profit Rate Applied to Disallowed Purchases:
The CIT(A) restricted the profit rate at 12.5% on the alleged bogus purchases, observing that the entire disallowance of purchases was not justified. The CIT(A) noted that the purchases were used in the business, and without them, the corresponding turnover would not be possible. The CIT(A) relied on judicial pronouncements, including the case of CIT v. Nikunj Eximp Enterprises (P.) Ltd., to conclude that only the profit element embedded in such purchases should be brought to tax.

3. Verification of Purchases and Suppliers' Responses:
The AO's disallowance was based on the non-response of suppliers to notices and information from the Sales Tax authorities. However, the CIT(A) emphasized that the information from the Sales Tax authorities was only a piece of evidence to initiate an independent investigation. The CIT(A) found that the goods were used in the business, and the purchases could not be entirely bogus, although the unverifiable nature of the purchases from the parties in question was a major issue.

4. Cross-Examination of Suppliers:
The assessee argued that the disallowance was confirmed without allowing cross-examination of the suppliers. The CIT(A) did not specifically address this argument but focused on the overall unverifiable nature of the purchases and the need to estimate the additional profit from such transactions.

5. Use of Information from Sales Tax Authorities:
The CIT(A) observed that the AO primarily relied on the information received from the Sales Tax authorities without conducting an in-depth independent investigation. The CIT(A) noted that the purchases could not be summarily rejected based on this information alone and that there was a need to verify the correctness of the purchase prices.

6. Justification of Purchase Prices:
The CIT(A) highlighted that the purchase prices shown on the invoices from the parties in question could not be verified and might have been over-invoiced. The CIT(A) emphasized the necessity of verifying the purchase prices to ascertain the correctness of the profits shown by the assessee. The possibility of over-invoicing or purchases from the grey market without proper billing was considered.

7. Estimation of Additional Profit from Unverifiable Purchases:
The CIT(A) followed judicial precedents, including the case of CIT v. Simit P. Sheth, to conclude that only the profit element embedded in the alleged bogus purchases should be disallowed. The CIT(A) adopted a profit rate of 12.5% as a reasonable benchmark for estimating the additional profit from such unverifiable purchases. This approach was upheld by the Tribunal, which found the CIT(A)'s application of the profit rate reasonable and dismissed the assessee's appeals.

Conclusion:
In conclusion, the Tribunal upheld the CIT(A)'s order restricting the disallowance of bogus purchases to 12.5% of the total purchases, emphasizing the need to estimate the additional profit from unverifiable purchases rather than disallowing the entire amount. The Tribunal found the CIT(A)'s application of the profit rate reasonable and dismissed the assessee's appeals. The judgment highlights the importance of verifying purchase prices and the profit element in cases of alleged bogus purchases.

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