2022 (11) TMI 180 - AT - Income Tax

Bogus purchases - quantification of the profit - Assessee procuring the goods at a discounted value from the open/grey market - affirmation on oath in statements recorded u/s. 131 by the proprietors of the concerns/brokers during investigation by the Income Tax Department, thereby admitting and confessing on oath that these concerns are bogus entities indulging in accommodation entries and providing bogus bills - CIT-A deleted the addition - HELD THAT - Entire exercise for quantifying the profit which the assessee would have made by procuring the goods in question at a discounted value from the open/grey market, i.e., by bringing the GP rate of the bogus purchases at the same rate as that of other genuine purchases, is that by so doing the monetary benefit which would have accrued to the assessee but withheld by him in his financial statements by booking the purchases at an inflated value on the basis of bogus purchase bills would stand neutralized. Broken Rice (Kanki) (10,500 quintals) - As in the case of the assessee before us the rate of bogus purchases of broken rice (kanki) i.e. Rs. 1415.62 per quintal (average rate) is lower than the rate of genuine purchases of broken rice (kanki) i.e. Rs. 1437.47 per quintal (average rate), therefore, as a consequence thereto by taking the sale rate (average) as static the GP rate of bogus purchases of broken rice (kanki) as in comparison to the GP rate of genuine purchases of broken rice(Kanki) is already on the higher side, therefore, no addition on the said count could have validly been made in its hand. We, thus, in terms of our aforesaid observations vacate the addition of 3.92% of the value of bogus/unproved purchases of broken rice (10500 quintals) as sustained by the CIT(Appeals). Accordingly, the A.O is directed to vacate the addition of Rs. 5,82,668/- Rs. 1,48,64,000/- X 3.92% sustained by the CIT(Appeals). Rice (27350 quintals) - As per the judgment of M/s. Mohhomad Haji Adam Company 2019 (2) TMI 1632 - BOMBAY HIGH COURT the profit made by the assessee by procuring the goods from the open/grey market is to be determined by bringing the GP rate of the bogus/unproved purchases to the same rate as that of the other genuine purchases. As the aforesaid addition had been sustained by the CIT(Appeals) @ 3.92% of the value of the impugned bogus purchases of rice, the same, thus brings the purchase price (average rate) of the bogus purchase of rice to an amount of Rs. 1642.14 (supra), which, however is still in excess of the purchase of genuine rice (average rate) of Rs. 1636.76 per quintal by an amount of Rs. 5.38 per quintal. We, thus, in terms of our aforesaid observations direct the A.O to make an addition of Rs. 1,47,143/- i.e. 27350 quintals (bogus purchases) X Rs. 5.38/- per quintal . Paddy (4470 quintals) - As in the case of the assessee before us the rate of bogus purchase of paddy i.e. Rs. 1142.60 per quintal (average rate) is lower than the rate of genuine purchase of paddy i.e. Rs. 1232.32 per quintal (average rate), and thus, as a consequence thereto by taking the sale rate (average) as static the GP rate of bogus purchases of paddy as in comparison to the GP rate of genuine purchases of paddy is already on the higher side, therefore, no further addition on the said count could have validly been made in his hand. We, thus, in terms of our aforesaid observations vacate the addition of 3.92% of the value of bogus/unproved purchases of paddy (4470 quintals) as sustained by the CIT(Appeals). Accordingly, the A.O is directed to vacate the addition of Rs. 2,00,210/- Rs. 51,07,400/- X 3.92% out of that sustained by the CIT(Appeals). We, thus partly uphold the order of the CIT(Appeals) as regards the additions that have been sustained by him towards the profit which the assessee would have made by procuring the aforesaid goods i.e. broken rice (kanki)/rice/paddy from the open/grey market. Thus, the grounds of appeal raised by the revenue are partly allowed.

Issues Involved:
1. Deletion of addition related to bogus purchases.
2. Ignoring statements recorded under oath.
3. Ignoring judicial precedents.
4. Justification of GP ratio estimation.
5. Acceptance of fresh evidence.
6. Actual purchases from bogus dealers.
7. Applicability of Supreme Court decision in Mcdowell and Co. Ltd.
8. Lack of inquiry by CIT(A) and Tribunal.
9. Justification of restricting addition to 3.92%.
10. Nexus between conclusion and primary facts.

Detailed Analysis:

1. Deletion of Addition Related to Bogus Purchases:
The revenue contended that the CIT(A) was unjustified in deleting Rs. 1,43,22,138/- out of the total addition of Rs. 1,71,16,444/- related to bogus purchases. The CIT(A) had sustained the addition at 3.92% of the bogus purchases, considering the overall GP rate of 4.08% disclosed by the assessee. The Tribunal found that the basis adopted by the lower authorities for quantifying the inflated purchases was devoid of reasoning. The Tribunal referred to the Bombay High Court's decision in Pr. Commissioner of Income Tax-17 Vs. M/s. Mohhomad Haji Adam & Company, which held that the addition should bring the GP rate of bogus purchases to the same rate as genuine purchases. Accordingly, the Tribunal modified the addition based on the GP rate of genuine purchases.

2. Ignoring Statements Recorded Under Oath:
The revenue argued that the CIT(A) ignored the statements recorded under oath by brokers admitting to providing bogus bills. The Tribunal did not explicitly address this issue in the judgment but focused on the quantification of the profit from bogus purchases.

3. Ignoring Judicial Precedents:
The revenue claimed that the CIT(A) ignored the ratio of ITAT Mumbai in Soman Sun City vs. JCIT and the Bombay High Court in Shoreline Hotel(P) Ltd. vs. CIT. The Tribunal did not directly address these precedents but relied on the Bombay High Court's decision in M/s. Mohhomad Haji Adam & Company for its reasoning.

4. Justification of GP Ratio Estimation:
The assessee challenged the CIT(A)'s estimation of the GP rate at 8% without considering the past history of 7.06% GP for the preceding year. The Tribunal noted that the CIT(A) had adopted an ad-hoc GP rate and sustained the addition at 3.92% of the value of bogus purchases. The Tribunal then recalculated the addition based on the GP rate of genuine purchases, resulting in a lower addition.

5. Acceptance of Fresh Evidence:
The revenue argued that the CIT(A) accepted fresh evidence without allowing the AO to examine it, violating Rule 46A of the IT Rules. The Tribunal did not specifically address this procedural issue but focused on the substantive issue of quantifying the bogus purchases.

6. Actual Purchases from Bogus Dealers:
The revenue contended that the assessee did not make actual purchases from bogus dealers but only issued cheques followed by immediate cash withdrawal. The Tribunal, however, focused on the profit estimation from bogus purchases rather than the actual transaction details.

7. Applicability of Supreme Court Decision in Mcdowell and Co. Ltd.:
The revenue argued that the CIT(A) ignored the Supreme Court's decision in Mcdowell and Co. Ltd. vs. Commercial Tax Officer. The Tribunal did not explicitly address this argument but relied on the Bombay High Court's decision for its reasoning.

8. Lack of Inquiry by CIT(A) and Tribunal:
The revenue argued that the CIT(A) and Tribunal failed to conduct proper inquiry. The Tribunal, however, conducted a detailed analysis of the profit estimation from bogus purchases and modified the addition accordingly.

9. Justification of Restricting Addition to 3.92%:
The revenue contended that the CIT(A) erred in restricting the addition to 3.92%. The Tribunal recalculated the addition based on the GP rate of genuine purchases, resulting in a lower addition for certain items and no addition for others.

10. Nexus Between Conclusion and Primary Facts:
The revenue argued that the CIT(A) erred in holding the decision in favor of the assessee without a nexus between the conclusion and primary facts. The Tribunal conducted a detailed analysis and recalculated the addition based on the GP rate of genuine purchases.

Conclusion:
The Tribunal partly upheld the CIT(A)'s order and modified the addition related to bogus purchases based on the GP rate of genuine purchases. The appeals of both the revenue and the assessee were partly allowed in terms of the Tribunal's observations. The Tribunal directed the AO to vacate certain additions and make specific recalculations based on the detailed analysis provided.

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