2022 (11) TMI 133 - AT - Income Tax

Estimation of income - bogus purchases - CIT(A) restricted the addition to the extent of 5% of aggregate of purchases shown from the entity of Shri Gautam Jain Group - HELD THAT - Disallowance to the extent of 5% is on lower side particularly when the assessee has shown negligible net profit. The assessee has shown return income of Rs.5,11,120/-only on the turnover of more than Rs.113.00 Crore (Aprox). Thus, in order to meet out the possibility of revenue leakage 6% of the addition of aggregate of disputed purchase will meet the end of justice. We may refer that this combination, where the assessee is beneficiary of similar disputed purchases, either from Rajender Jain, Bhanwar Lal Jain, Gautam Jain or PK Jain, we have consistently restricted or increased the similar addition to 6% of such purchases. Taking the consistent view, the disallowance restricted by ld CIT(A) @ 5% are increased to 6% of the total aggregate of impugned / bogus purchase. Appeal of the Revenue is partly allowed.

Summary

Issues:
1. Addition of Rs.6,17,02,781 on account of bogus purchases
2. Failure to appreciate the nature of purchases and profit suppression
3. Upholding the Assessing Officer's order regarding bogus purchases

Analysis:
1. The appeal by Revenue challenged the order of the Commissioner of Income-tax (Appeals) dated 29.11.2018, arising from an assessment order under section 143(3) of the Income-Tax Act for the assessment year 2013-14, focusing on the addition of Rs.6,17,02,781 due to alleged bogus purchases. The Revenue contended that the Commissioner erred in restricting the addition to 5%.

2. The case involved a proprietary concern engaged in diamond trading, where the Assessing Officer suspected bogus purchases based on information related to accommodation entries from a specific group. Despite the assessee's claims of genuine purchases supported by documentation, the Assessing Officer treated the entire aggregate purchase amount as bogus, leading to the disputed addition.

3. The Commissioner, in line with previous decisions, restricted the disallowance to 5% of the purchases from the concerned group, considering the low gross profit ratio. The Commissioner's decision was influenced by various case laws and High Court rulings emphasizing taxing only the profit element embedded in disputed purchases. The Revenue's appeal challenged this decision.

4. Despite the absence of the assessee during the Tribunal proceedings, the Revenue's arguments centered on the assessee's failure to prove the genuineness of purchases, contrasting with the Commissioner's reliance on case law to limit the disallowance. The Revenue sought to restore the Assessing Officer's order based on the alleged lack of evidence provided by the assessee.

5. The Tribunal noted the lack of specific findings by the Assessing Officer on the evidence furnished by the assessee, highlighting the accepted sales but disputed purchases. Considering the notorious nature of the entry provider group and the absence of physical stock during investigation, the Tribunal increased the disallowance from 5% to 6% of the total disputed purchase amount to prevent revenue leakage.

6. The Tribunal's decision to increase the disallowance percentage aimed to address the negligible net profit shown by the assessee in light of the substantial turnover, aligning with consistent approaches in similar cases involving disputed purchases. The Tribunal differentiated the facts of the current case from the precedent cited by the Revenue, ultimately partly allowing the Revenue's appeal.

In conclusion, the Tribunal partly allowed the Revenue's appeal by increasing the disallowance percentage on the disputed purchases, emphasizing the need to prevent revenue leakage in cases involving questionable transactions.