2021 (3) TMI 15 - AT - Income Tax

Estimation of income - bogus purchases - CIT-A restricting the addition to 12.5% as against the entire bogus purchases disallowed - HELD THAT - The total purchases shown to be made from the aforesaid parties could not be held to be entirely bogus. It needs to be appreciated that in order to achieve the reported sales/turnover, there must be some corresponding purchases, whether effected from the alleged entry providers or from the grey market without bills. Thus, there ought to be some purchases made and hence, entire disallowance is not justified. No infirmity in the order passed by the Ld. CIT(A) in restricting the addition to 12.5% as against the entire bogus purchases disallowed by the Assessing Officer. Grounds raised by the revenue are dismissed.

Issues Involved:
1. Reopening of assessment under Section 147.
2. Genuineness of purchases.
3. Treatment of alleged bogus purchases.
4. Determination of profit element in bogus purchases.
5. Judicial precedents and their application to the case.

Detailed Analysis:

1. Reopening of Assessment under Section 147:
The assessment was reopened under Section 147 of the Income Tax Act based on information received from the DGIT (Investigation), Mumbai, indicating that the assessee had availed accommodation entries from various dealers who provided such entries without actual transportation of goods.

2. Genuineness of Purchases:
The assessee, engaged in trading ferrous and non-ferrous metals, claimed that the purchases were genuine and supported by payments through account payee cheques. However, the Assessing Officer (AO) found the purchases unverifiable as the notices issued under Section 133(6) to the parties were returned unserved, and the assessee failed to produce the parties for verification.

3. Treatment of Alleged Bogus Purchases:
The AO treated 100% of the alleged bogus purchases amounting to ?64,996 as non-genuine. On appeal, the Learned Commissioner of Income Tax (Appeals) [Ld. CIT(A)] restricted the addition to 12.5% of the alleged bogus purchases, considering various judicial pronouncements and the evidence presented.

4. Determination of Profit Element in Bogus Purchases:
The Ld. CIT(A) noted that while the purchases from the alleged parties could not be entirely bogus, there was a possibility of over-invoicing or purchases from the grey market without proper billing. The Ld. CIT(A) referred to several judicial precedents, including the cases of M/s. Kanchwala Gems vs. JCIT and CIT vs. Nikunj Eximp Enterprises (P.) Ltd., which established that only the profit element embedded in such purchases should be taxed, not the entire purchase amount.

5. Judicial Precedents and Their Application to the Case:
The Ld. CIT(A) cited various judicial pronouncements, including decisions by the Hon'ble Bombay High Court and the Hon'ble High Court of Gujarat, which supported the view that in cases involving bogus purchases, only a part of such purchases could be disallowed, particularly when the corresponding sales were not doubted. The Ld. CIT(A) concluded that an estimation of 12.5% profit on the alleged bogus purchases would be appropriate, resulting in an addition of ?8,125 to the total income, and providing relief for the balance amount of ?56,871.

Conclusion:
The Tribunal upheld the order of the Ld. CIT(A), finding no infirmity in restricting the addition to 12.5% of the alleged bogus purchases. The appeal of the revenue was dismissed, and the order pronounced on 03.02.2021 confirmed the decision to estimate the profit element at 12.5%, providing partial relief to the assessee.

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