2024 (8) TMI 1500 - AT - Income Tax

Estimation of income - bogus purchases - HELD THAT - We find no infirmity in the order of the CIT (A) in which he has directed to restrict the addition to the extent of gross profit at the rate to be applied as the GP rate declared on the genuine purchases. Accordingly, the appeal of the revenue is dismissed and the AO is directed to recompute the addition to be by applying GP rate made in accordance with the directions of the Ld. CIT (A). Appeal of the revenue is dismissed.

Summary

Issues:
- Whether the Commissioner of Income-tax (Appeals) was justified in directing the Assessing Officer to make Gross Profit (GP) addition without appreciating certain facts and legal precedents?
- Whether the Appellate Tribunal was correct in dismissing the revenue's appeal and directing the re-computation of the addition based on the Gross Profit rate declared on genuine purchases?

Analysis:
The case involved an appeal by the revenue against the order of the Commissioner of Income-tax (Appeals) for Assessment Year 2011-12. The dispute arose from the Assessing Officer's decision to treat certain purchases made by the assessee company from specific entities as bogus and subsequently adding the entire amount of Rs. 40,56,526 under section 69C of the Income-tax Act, 1961. The Commissioner of Income-tax (Appeals) restricted the disallowance of Gross Profit (GP) rate to be applied on the bogus purchases based on legal interpretations and precedents.

In the grounds of appeal, the revenue questioned the justification of the Commissioner's direction to make GP addition without considering certain facts, including the investigation findings regarding the nature of the entities involved in the transactions. The Commissioner relied on legal judgments, such as the N.K. Industries case and the decision of the Hon'ble Gujarat High Court in the case of M/s N K Protein Ltd, to support the application of GP ratio on non-genuine purchases. The Commissioner emphasized that the corresponding sale must also be considered bogus for the purchase to be deemed as such.

The Commissioner's decision was further supported by references to other judicial decisions, such as the case of Principal Commissioner of Income-tax v. Nitin Ramdeoji Lohia and PCIT v. S.V. Jiwani, which highlighted the importance of considering the profit element embedded in purchases rather than adding back the entire purchase amount as income. The Tribunal concurred with the Commissioner's order and dismissed the revenue's appeal, directing the Assessing Officer to recompute the addition based on the GP rate declared on genuine purchases.

The Tribunal's decision was based on the principle that adding back purchases without questioning the sales is not justified, and the GP on bogus purchases should be determined in line with the GP ratio applied to genuine purchases. The Tribunal found no infirmity in the Commissioner's order and upheld the direction to restrict the addition to the GP rate declared on genuine purchases. Consequently, the revenue's appeal was dismissed, and the Assessing Officer was instructed to recompute the addition accordingly.

In conclusion, the Tribunal's judgment reaffirmed the importance of applying GP rates in line with legal precedents and judicial decisions in cases involving non-genuine purchases. The decision provided clarity on the methodology for determining additions based on GP ratios and emphasized the need to consider the profit element embedded in disputed purchases rather than adding back the entire amount as income.