2023 (6) TMI 559 - AT - Income Tax

Estimation of income - bogus purchases treating it as unexplained investment u/s. 69 - GR rate estimation - HELD THAT - AO while framing assessment had not drawn any adverse inferences as regards the GP rate of 15.30 % that was disclosed by the assessee during the year under consideration. For the reason that in case if the assessee would have only booked bogus expenses in the garb of the impugned purchases then its GP rate for the year under consideration would have witnessed a steep decline which is neither the case of the revenue nor a fact discernible from the records before me. Addition in the case of the assessee is liable to be restricted only to the extent of profit which it would have made by procuring the goods at a discounted value from the open /grey market. Quantification of the profit which the assessee would have made by procuring the goods at a discounted value from open/grey market - As decided in Mohhomad Haji Adam Company 2019 (2) TMI 1632 - BOMBAY HIGH COURT while upholding the order of the Tribunal had observed that the addition in the hands of the assessee as regards the bogus/unproved purchases is to be made to the extent of bringing the G.P rate of such bogus purchases at the same rate of other genuine purchases. Thus addition in the case of the assessee is liable to be restricted only to the extent of the profit which he would have made at a discounted value from the open/grey market as against the value at which the same had been booked by the assessee in its books of accounts and the quantification of the same shall be done by the A.O in terms of the aforesaid observations.

Summary

Issues:
Assessment of addition on account of bogus purchases under Sec. 69.

Analysis:
The appeal concerns the assessment year 2010-11 where the assessee, engaged in the business of manufacturing and trading, declared an income of Rs. 2,21,650. The issue arose when the Assessing Officer (A.O) initiated proceedings under Sec. 147 based on information regarding alleged bogus purchases of Rs. 7,15,594 from a tainted party. The A.O made additions to the income due to lack of evidence supporting the authenticity of the purchases. The Commissioner of Income-Tax (Appeals) upheld part of the addition, leading to the current appeal.

The A.O questioned the authenticity of the purchases and the lack of documentary evidence. The assessee failed to provide sufficient proof, leading the A.O to treat the purchases as bogus. The A.O also added unaccounted profit based on the alleged unrecorded sales corresponding to the purchases. However, during the appeal, it was revealed that the assessee had made substantial payments related to the purchases, contradicting the A.O's findings.

In the appeal before the Tribunal, it was highlighted that while the assessee failed to prove the authenticity of the purchases, the A.O's conclusion regarding the payment discrepancy was incorrect. The Tribunal noted that even though the purchases were not proven to be from the mentioned party, the sales were not disputed. Therefore, the Tribunal concluded that the assessee might have acquired the goods at a discounted value from the open market, directing the A.O to restrict the addition to the profit made from such discounted purchases.

Referring to a High Court case, the Tribunal emphasized that the addition related to bogus purchases should align with the Gross Profit rate of genuine purchases. Consequently, the Tribunal directed the A.O to quantify the addition based on this principle. The Tribunal criticized the A.O's basis for the addition, stating that the purchases were recorded in the regular books and paid through the bank account, making the A.O's reasoning fallacious.

Ultimately, the Tribunal partially allowed the appeal, restricting the addition to the profit made from discounted purchases. The Tribunal emphasized the need for accurate quantification by the A.O in line with the High Court's observations. The Tribunal's decision aimed to rectify the A.O's flawed reasoning and ensure a fair assessment of the alleged bogus purchases.

This detailed analysis highlights the complexities involved in assessing additions on account of alleged bogus purchases and the importance of substantiating transactions with proper documentation to avoid unwarranted additions to income.