2021 (12) TMI 52 - AT - Income Tax

Estimation of income - bogus purchases - CIT-A estimating profit @12.5% on alleged bogus purchases - HELD THAT - Assessee is trading in fabrics and that the purchases made from the aforesaid five suppliers were in respect of purchases of fabrics. It is not in dispute that the sales made out of purchases made from aforesaid five suppliers were not doubted by the Revenue. It is not in dispute that purchase of fabrics does not get eligible for levy of VAT. Hence, the profit element to be estimated on the value of ingenuine purchases should certainly exclude the VAT portion in the instant case and only incidental benefit that assessee derives by making purchases out of cash in the grey market should be ultimately brought to tax. As relying on M/S. MAX REALITIES LLP 2021 (8) TMI 861 - ITAT MUMBAI we direct the ld. AO to add only 1% of value of ingenuine purchases - Appeal of the assessee is partly allowed.

Summary

Issues:
Determining the justification of confirming the addition made by estimating profit on alleged bogus purchases.

Analysis:
The appeal in ITA No.1783/Mum/2020 for A.Y.2008-09 questioned the validity of the ld. CIT(A) confirming the addition by estimating profit at 12.5% on purported bogus purchases. The assessee, a company engaged in trading fabrics, garments, and sunglasses, filed a return declaring total income of ?16,33,487 for A.Y.2008-09. The assessment was reopened under section 147 of the Income Tax Act, 1961, due to observations made by the ld. AO regarding purchases from five parties amounting to ?5,67,01,954.

The ld. AO noted deficiencies in documentary evidence related to the purchases and concluded that the suppliers were entry providers, leading to accommodation bills. Despite the submission of stock registers and sales records by the assessee, the ld. AO estimated a profit percentage of 12.5% due to the nature of the trading industry. This decision was upheld by the ld. CIT(A).

During the proceedings, the ld. AR argued that the suppliers only provided fabrics, which are not subject to VAT, and proposed estimating the profit element at 1% of the value of the alleged bogus purchases. In contrast, the ld. DR emphasized the non-production of suppliers and unserved notices under section 133(6), indicating the failure to prove the purchases' authenticity.

The Tribunal acknowledged the nature of the purchases and sales, confirming that fabrics do not attract VAT. Following a previous decision, the Tribunal directed the ld. AO to add only 1% of the value of the alleged bogus purchases, amounting to ?5,67,019, and delete the remaining portion. Consequently, the appeal of the assessee was partly allowed, with the order pronounced on 08/10/2021.