2021 (12) TMI 497 - AT - Income Tax

Estimation of income - bogus purchases - detailed verification of the parties were considered as bogus based on the statement of Shri Dilip S. Doshi based on the information from Investigation Wing, Mumbai - AO found that four parties who were supplied the material to the assessee are bogus and accordingly he disallowed 100% of the purchases from these parties and assessee has partly claimed the expenditure in the profit and loss account and partly charge to work-in-progress - HELD THAT - CIT(A) analysed the findings of the Assessing Officer and submissions of the assessee in detail and he came to conclusion that the Assessing Officer has taken note of the transactions as bogus. However, AO failed to acknowledge that the assessee has declared corresponding sales. CIT(A) came to the proper conclusion that only profit element embedded in the purchases alone should be disallowed not the whole purchases, since the assessee has already declared corresponding income in its financial statement - CIT(A) has disallowed the suppressed profit on the purchases claimed by the assessee to the extent of 12.5%. The decision of the Ld. CIT(A) is supported by the decision in the case of CIT Vs. Simit P. Sheth 2013 (10) TMI 1028 - GUJARAT HIGH COURT proposed that only profit element embedded in such purchased could be added to the assessee s income. Therefore, we do not see any reason to interfere with the findings of the Ld. CIT(A). Accordingly, the grounds raised by the Revenue is dismissed.

Summary

Issues:
- Disallowance of expenses claimed by the assessee
- Allegations of hawala transactions and bogus entities
- Disallowance of purchases made from certain entities
- Appeal against the order of the Commissioner of Income Tax (Appeals)
- Dispute over the disallowance percentage of purchases

Issue 1: Disallowance of expenses claimed by the assessee
The Assessing Officer disallowed certain expenses claimed by the assessee under the head 'repairs and maintenance' and from work-in-progress of vessels A2, A3 & A4, totaling to a significant amount. The disallowance was based on allegations of hawala transactions and accommodation bills without actual goods or services provided. The Assessing Officer's decision was challenged by the assessee before the CIT(A), who set aside the findings of the AO. The CIT(A) concluded that only the suppressed profit margin embedded in the purchases should be disallowed and subjected to tax, not the entire amount. This decision was supported by various case laws and principles of estimating suppressed profits in such cases.

Issue 2: Allegations of hawala transactions and bogus entities
The Investigation Wing of the Income Tax Department provided information indicating that the assessee was involved in hawala transactions through bogus entities. The Assessing Officer found that certain entities were non-existent and treated the purchases made from them as bogus. Despite the assessee's submissions and claims of the entities' genuineness, the Assessing Officer presumed the parties to be non-existent as they did not respond to notices under section 133(6) of the Act. The AO relied on case laws to treat these purchases as bogus, leading to a substantial disallowance.

Issue 3: Disallowance of purchases made from certain entities
The Revenue appealed against the CIT(A)'s decision to restrict the disallowance to 12.5% of the purchases from the alleged bogus entities. The Revenue contended that the AO had gathered evidence showing accommodation entries and the assessee's failure to produce documentary evidence of actual receipt and consumption of goods. However, the ITAT upheld the CIT(A)'s decision, emphasizing that only the profit element embedded in the purchases should be disallowed, considering that the assessee had declared corresponding sales. The ITAT supported its decision by referencing relevant case law, ultimately dismissing the Revenue's appeal.

In conclusion, the ITAT Mumbai upheld the CIT(A)'s decision to disallow only the suppressed profit margin on the purchases made from alleged bogus entities to the extent of 12.5%, rejecting the Revenue's appeal and dismissing the case in favor of the assessee.