2019 (7) TMI 2045 - AT - Income Tax

Estimation of income - bogus purchases - AO estimated the profit element from the purchases made by the assessee from various concerns of Bhanwarlal Jain at 5% of the entire purchases and the Ld. CIT(A) restricted the same to 3% - HELD THAT - As relying on M/s. Mohommad Haji Adam Co 2019 (2) TMI 1632 - BOMBAY HIGH COURT we direct the Assessing Officer to restrict the addition/disallowance only to the extent of bringing the Gross Profit rate on alleged bogus purchases at the same rate of the other genuine purchases declared by the assessee after calling for the details and verification of records. The assessee is directed to furnish the necessary information in this regard. Assessee appeal allowed for statistical purpose.

Summary

Issues:
1. Validity of reassessment order challenged by the assessee.
2. Estimation of profit element from alleged bogus purchases for different assessment years.
3. Calculation of Gross Profit on sales versus purchases.

Analysis:

Issue 1: Validity of reassessment order
The assessee challenged the reopening of assessment for A.Ys. 2008-09 & 2009-10, citing information received regarding entry providers operating for bogus purchases. The Assessing Officer concluded the assessee obtained accommodation entries without goods transportation. However, the Ld. CIT(A) restricted the profit element from such purchases at 3% based on submissions and relevant instructions.

Issue 2: Estimation of profit element from bogus purchases
The Assessing Officer estimated profit margin at 5% from purchases made by the assessee, while the Ld. CIT(A) limited it to 3% considering submissions and legal precedents. The Hon'ble High Court's decision was cited, emphasizing the need to calculate Gross Profit on sales, not purchases. The Tribunal upheld the CIT(A)'s decision and directed the AO to restrict additions based on genuine purchase rates.

Issue 3: Calculation of Gross Profit on sales vs. purchases
In another case, purchases of fabrics were found to be bogus, leading to additions by the AO. However, the CIT(A) and Tribunal disagreed with the AO's approach, restricting additions and emphasizing the correlation between purchases and sales for traders. The Tribunal's decision aligned with legal principles, rejecting the Revenue's contention for full addition and emphasizing the need for factual analysis.

The judgment highlighted the importance of factual findings, legal precedents, and proper reasoning in assessing profit elements from alleged bogus purchases. The decisions emphasized the correlation between purchases and sales, directing authorities to restrict additions based on genuine purchase rates and factual evidence.