2021 (8) TMI 861 - AT - Income Tax

Bogus purchases - estimation of profit - purchases made from grey market - HELD THAT - We find that there is no dispute that the assessee had made purchases from tainted suppliers. We find that though these parties had filed an affidavit before the Sales Tax department that they are genuinely engaged in the business, the assessee herein could not prove the genuineness of purchases made from those parties with conclusive evidences. It could be safely concluded that assessee could have made purchases only from grey market in order to have savings from VAT and incidental profit element thereon. It would be just and fair to bring to tax only the profit element embedded in the value of such disputed purchases in as much as the ld. CIT(A) accepted the fact that the goods made by the assessee from the aforesaid suppliers had been actually consumed by it in the projects. For the purpose of determination of profit element embedded in the value of such disputed purchases, since the assessee had made purchases from the grey market, we hold that it could have saved in VAT portion and incidental profit element thereon making cash purchases. AO is directed to determine the profit element embedded in the value of disputed purchases in the aforesaid manner as given in the table. Accordingly, the grounds raised by the assessee as well as by the Revenue are partly allowed.

Summary

Issues: Disallowance of bogus purchases

Analysis:
The judgment by the Appellate Tribunal ITAT Mumbai involved cross appeals concerning the disallowance made on account of bogus purchases for the assessment year 2010-11. The only issue to be decided was the disallowance of purchases made from certain dealers suspected to be non-existent and engaged in providing accommodation bills. The assessee, a private limited company, was involved in a project named Bhoomi Mall in Navi Mumbai. The Assessing Officer observed that the purchases made from specific dealers were non-genuine based on information from the Sales Tax department. The assessee, however, provided various documents to prove the genuineness of the purchases, including ledger accounts, tax invoices, delivery challans, and bank statements. The assessee also argued that due to VAT defaulters being the suppliers, it was beyond their control to produce them before the AO. The CIT(A) considered the impact of disallowing the purchases on the gross profit rate of the business and made an addition based on the difference in the GP rate.

The Tribunal noted that the assessee had indeed made purchases from tainted suppliers, and despite affidavits filed by the suppliers claiming genuineness, the assessee failed to conclusively prove the legitimacy of the purchases. It was inferred that the purchases were likely made from the grey market to save on VAT and gain an incidental profit element. The Tribunal directed the AO to determine the profit element embedded in the disputed purchases by considering VAT savings and incidental profit. The profit element was calculated for each supplier, and the total sum to be added back was determined. Consequently, the Tribunal partly allowed the grounds raised by both the assessee and the Revenue.

In conclusion, the appeal of the assessee was allowed, and the appeal of the revenue was dismissed by the Tribunal's judgment pronounced on 16/08/2021.