2023 (10) TMI 1442 - AT - Income Tax

Estimation of income - bogus purchases - AO has considered the profit element and estimated the income @ 12.5% - HELD THAT - As relying on case of the assessee itself pertaining to assessment year 2011-12 we direct the AO to restrict the disallowance to the extent of 5% of the purchases. Accordingly, the appeal of the assessee is partly allowed.

Summary

Issues:
- Disallowance of trading purchases based on suspicion of being non-genuine.
- Application of profit estimation on non-genuine purchases.
- Comparison of disallowance percentages in similar cases.

Analysis:
1. The appeal was filed against an order by the NFAC for A.Y. 2010-11, challenging the adhoc estimated disallowance of 12.5% on trading purchases made from dealers suspected to be non-genuine. The assessing officer added Rs. 946,165 to the total income based on information from the Sales Tax Department regarding accommodation entries of purchases from specific parties.

2. The appellant contended that the disallowance lacked factual and legal basis as the authorities did not dispute the stock tally, sales, or payments made through normal banking channels. The appellant also raised concerns about the violation of natural justice principles due to lack of information sharing or cross-examination of alleged parties. The appellant sought deletion of the disallowance.

3. The CIT(A) dismissed the appeal, leading to the appellant approaching the ITAT. During the proceedings, the appellant cited a previous ITAT decision involving a similar issue for the assessment year 2010-11, where the addition was restricted to 5% of non-genuine purchases. The ITAT considered the profit element and directed the AO to limit the disallowance to 5% of the total purchases, following the precedent set by the previous case.

4. The ITAT's decision was based on the principle of estimating the profit element embedded in disputed purchases, considering the lack of proof of delivery from tainted suppliers. By restricting the disallowance to 5% of the purchases, the ITAT aimed to ensure fairness and consistency in similar cases. The appellant's appeal was partly allowed in line with the precedent and judicial precedence, emphasizing the need for proportionate and justified disallowances in such matters.

5. The ITAT's decision highlighted the importance of maintaining accurate records and justifying profit estimations on non-genuine purchases. By aligning with previous judgments and setting a standard disallowance rate, the ITAT aimed to balance the interests of the revenue authorities and the taxpayer, ensuring a fair and reasonable outcome in disputed purchase cases.

6. In conclusion, the ITAT partially allowed the appellant's appeal by restricting the disallowance to 5% of the total purchases, emphasizing the need for consistency and fairness in assessing non-genuine transactions. The decision aimed to uphold the principles of natural justice and ensure a balanced approach in determining income adjustments based on suspicion of non-genuine purchases.