2021 (12) TMI 50 - AT - Income Tax

Estimation of income - Bogus purchases - e stimation of profit element - HELD THAT - We agree with the view of the lower authorities that there should be an estimation of profit element from these purchases and should be estimated reasonably as the assessee could not conclusively prove that the purchases made are from the parties as claimed, especially in the absence of any confirmations from them. Taking the totality of facts and circumstances, keeping in view the nature of business of the assessee i.e., Trading in Ferrous and Non-Ferrous metals and the submission of the Ld. Counsel for the assessee that the benefit what the assessee got by way of VAT is 4% and the probable profit element may be adopted at 1% totaling to 5%, it would be justified if the profit element embedded in those purchases are estimated at 6%. We direct the Assessing Officer to estimate the profit element from the non-genuine purchases at 6% and restrict the disallowance of purchases to 6% and compute the income accordingly - Appeal of the assessee is partly allowed.

Summary

Issues:
- Condonation of delay in filing appeal before ITAT
- Disallowance of purchases made from certain parties as non-genuine
- Enhancement of disallowance to 100% by CIT(A)
- Application of profit element on non-genuine purchases
- Estimation of profit element and computation of income

Condonation of Delay:
The appeal was filed three days beyond the due date, citing the serious illness of the assessee's mother and the previous chartered accountant's failure to advise on compiling details. The delay was condoned after considering the reasons provided.

Disallowance of Non-Genuine Purchases:
The Assessing Officer treated purchases of a significant amount as non-genuine due to lack of supporting documents, disallowing 12.5% of the total. The CIT(A) enhanced the disallowance to 100%, relying on a specific court decision. The ITAT disagreed with this enhancement, emphasizing the need for a reasonable estimation of the profit element in such purchases.

Application of Profit Element:
The ITAT highlighted that when sales are accepted as genuine, not the entire purchase amount can be deemed non-genuine. Referring to court decisions, it stressed the need to consider only the profit element embedded in such purchases for taxation purposes.

Estimation of Profit Element:
Considering the nature of the business and the lack of conclusive proof for the purchases, the ITAT directed the Assessing Officer to estimate the profit element at 6% on non-genuine purchases. This estimation was based on the benefit obtained from VAT and a probable profit element, leading to a partial allowance of the appeal.

Computation of Income:
The ITAT instructed the computation of income for the assessment year by restricting the disallowance of purchases to 6% based on the estimated profit element. The appeal was partly allowed, and the decision was pronounced as per ITAT Rules.

This judgment dealt with the condonation of appeal filing delay, the treatment of non-genuine purchases, the application of profit element, and the estimation of profit element for taxation purposes, providing detailed reasoning and legal references for each issue addressed.