2021 (5) TMI 422 - AT - Income Tax

Estimation of income - Bogus purchases - AO disallowed an amount being 12.5% of the alleged non genuine purchases - HELD THAT - Considering the fact that the assessee is a trader in non ferrous metal on which the normal profit rate as per industry norms varies between 2% to 5%, the disallowance made at 12. 5% appears to be on a much higher side. Therefore, direct the assessing officer to restrict the disallowance to 5% of the non genuine purchases. Ground is partly allowed. AO is also directed to give due credit for the advance-tax paid by the assessee after verifying facts and materials on record and in accordance with law. - Decided partly in favour of assessee.

Summary

Issues: Disallowance of non genuine purchases

Analysis:
The appeal was filed by the assessee against the order of the Commissioner of Income-tax (Appeals) for the assessment year 2010-11. During the hearing, no one represented the assessee, leading to an ex parte disposal of the appeal after hearing the Departmental Representative and reviewing the materials on record. The dispute centered around the disallowance of purchases claimed to be non genuine, amounting to ?97,33,680 from fifteen parties identified as hawala operators. The assessing officer, based on information from the Sales-tax department, reopened the assessment under section 147 of the Act. The assessee provided various documents like ledger accounts, purchase bills, and bank statements to prove the genuineness of purchases. However, the assessing officer found the evidence insufficient as direct evidence like stock register and delivery challans were missing. Despite notices to selling dealers remaining unserved, the assessing officer disallowed ?12,16,710 (12.5% of alleged non genuine purchases), a decision upheld by the Commissioner (Appeals).

The ITAT Mumbai, after hearing the Departmental Representative and examining the material on record, acknowledged that while the purchases were deemed non genuine, the assessee had indeed purchased goods from other sources and made corresponding sales. Therefore, the disallowance was limited to the profit element embedded in the purchases, estimated at 12.5%. However, considering the normal profit rate for traders in non ferrous metal ranging from 2% to 5%, the ITAT deemed the 12.5% disallowance excessive. Consequently, the ITAT directed the assessing officer to restrict the disallowance to 5% of the non genuine purchases. Additionally, the assessing officer was instructed to give credit for advance-tax paid by the assessee after verifying the facts and materials on record in compliance with the law. As a result, the appeal was partly allowed, with the order pronounced on 25/02/2021.