2021 (12) TMI 496 - AT - Income Tax

Estimation of income - Bogus purchases - AO received information from Maharashtra Sales Tax Department that certain parties are issuing accommodation entries/bogus bills which were availed by various assessee - AO estimated the profit rate at 12.5% of the bogus purchases - CIT- A enhanced the addition of bogus purchases to 100% as against the addition made by the Assessing Officer at 12.5% - HELD THAT - We noted that the assessee could not produce the parties or the addresses given by the assessee of the parties from whom assessee had made purchases remained unverified. The Income Tax Department issued notices under Section 133(6) of the Act to the parties from whom purchases were made, but same returned unserved. As noted that neither the Assessing Officer nor the CIT(A) tried to carry out any exercise of verification of these parties from the Sales Tax Department or by issuing notices by other modes despite the fact that a plethora of information was available with the Assessing Officer/CIT(A) as noted above. In such situation, the only remedy left is, even though we hold that assessee has received bogus bills from the parties, application of profit rate. The assessee is engaged in reselling of ferrous and non-ferrous metals and in such circumstances we have to apply profit rate suitable to the trade. In this nature of business, i.e. reselling of ferrous and non-ferrous metals, VAT is at 5% and assessee might have made purchases from the grey market for which assessee might have saved some element of profit. Hence, we estimate the profit rate at 5% of the bogus purchases and reverse the orders of the authorities below to that extent. Thus, the appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Disallowance of bogus purchases.
2. Estimation of profit rate on non-genuine purchases.
3. Enhancement of addition by CIT(A).

Detailed Analysis:

1. Disallowance of Bogus Purchases:
The primary issue in both appeals is the disallowance of bogus purchases amounting to ?2,67,82,700/- for the assessment years 2009-10 and 2010-11. The assessee, engaged in the business of reselling ferrous and non-ferrous metals, was found to have availed bogus bills from 14 parties identified by the Maharashtra Sales Tax Department as accommodation entry providers. Despite providing purchase bills, payment proofs, and stock registers, the assessee failed to produce delivery challans, transportation receipts, and other vital documents. Consequently, the Assessing Officer (AO) concluded that the purchases were non-genuine and estimated a profit rate at 12.5% of the bogus purchases, resulting in an addition of ?33,47,838/-.

2. Estimation of Profit Rate on Non-Genuine Purchases:
The AO’s decision to apply a profit rate of 12.5% on the total non-genuine purchases was based on the premise that the profit element embedded in such purchases should be considered as the profit earned from the bogus transactions. The assessee contended that only the profit element, not the entire purchase amount, should be added, given that the sales were not disputed. The Tribunal noted that in the business of reselling metals, the VAT rate was 5%, and the assessee might have made purchases from the grey market, saving some profit. Therefore, the Tribunal deemed it appropriate to estimate the profit rate at 5% of the bogus purchases, reversing the orders of the lower authorities to that extent.

3. Enhancement of Addition by CIT(A):
The CIT(A) enhanced the addition to 100% of the bogus purchases, disallowing the entire amount claimed as expenditure in the Profit & Loss account. The CIT(A) justified this by stating that the assessee failed to substantiate the purchases with sufficient proof and did not produce the suppliers for verification. The CIT(A) rejected the argument that sales could not have been made without purchases, emphasizing that it was the assessee's responsibility to establish the genuineness of the purchases. The CIT(A) also disregarded the precedent set by the Hon'ble Bombay High Court in the case of M/s. Mohommad Haji Adam & Co., stating that the decision was not based on arguments related to Section 37(1) of the Income Tax Act or the Indian Evidence Act.

Conclusion:
The Tribunal, after considering the facts and circumstances, concluded that the assessee had discharged its initial onus by providing substantial documentation. However, due to the inability to verify the parties and the returned notices, the Tribunal decided to apply a profit rate of 5% on the bogus purchases instead of the 12.5% estimated by the AO or the 100% enhancement by the CIT(A). Consequently, both appeals of the assessee were partly allowed, with the profit rate on non-genuine purchases set at 5%.

Order Pronounced:
The order was pronounced in the open court on 12th November 2021, with both appeals of the assessee being partly allowed.