2021 (7) TMI 1471 - AT - Income Tax

Estimation of income - bogus purchases - CIT(A) partly confirmed the addition on account of bogus purchases @ 12.5% - HELD THAT - We note that in this case the net profit of the assessee returned during the year was 1.44% whereas the GP was 6.25%. We are not in agreement with the conclusion of Ld. CIT(A) on the application of GP rate of 12.5% as the assessee has already returned a GP of 6.25% since the applicable VAT is 4% and if a reasonable margin 2% is added to the VAT rate and GP rate declared is reduced then it comes to less than 2%. Thus it would be reasonable if a rate of 2% is applied on the bogus purchases. Accordingly we modify the order of Ld. CIT(A) and direct the AO to apply a rate of 2% of the bogus purchases.

Summary

ISSUES PRESENTED and CONSIDERED

The primary issue considered by the Tribunal in these appeals was the determination of the appropriate profit rate to be applied to alleged bogus purchases made by the assessee. Specifically, the Tribunal examined whether the rate of 12.5% applied by the CIT(A) was justified, or if a lower rate was more appropriate given the specific circumstances of the assessee's business operations.

ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents

The legal framework involved the application of the Income Tax Act, particularly sections 143(1) and 147, which deal with the processing of returns and the reopening of assessments, respectively. The Tribunal also referred to the precedent set by the Hon'ble Gujarat High Court in CIT vs. Simit P. Sheth, which established that only the profit element in bogus purchases should be taxed, not the entire amount.

Court's Interpretation and Reasoning

The Tribunal considered the nature of the assessee's business as a wholesale dealer and supplier of paper, which typically operates on low profit margins. The Tribunal noted that the CIT(A) had relied on the Gujarat High Court's decision to apply a 12.5% profit rate on the bogus purchases. However, the Tribunal found this rate excessive given the assessee's reported gross profit (GP) and net profit (NP) margins.

Key Evidence and Findings

The evidence presented included the assessee's financial statements, which showed a GP of 6.25% and an NP of 1.44% for the relevant assessment year. The Tribunal also considered the information from the Sales Tax Department, which identified the suppliers as hawala operators, thereby questioning the genuineness of the purchases.

Application of Law to Facts

Applying the legal principles from the Simit P. Sheth case, the Tribunal concluded that it was unreasonable to apply a 12.5% profit rate on the bogus purchases. Instead, the Tribunal determined that a 2% rate was more appropriate, taking into account the VAT rate of 4% and a reasonable margin of 2%, which aligned more closely with the assessee's actual profit margins.

Treatment of Competing Arguments

The Tribunal carefully considered the arguments from both the assessee and the Revenue. The assessee argued for a reduction in the profit rate, citing its low profit margins. Conversely, the Revenue contended that the entire amount of bogus purchases should be added to the income due to lack of evidence substantiating the genuineness of transactions. The Tribunal found the assessee's argument more persuasive given the specific financial context.

Conclusions

The Tribunal concluded that a 2% profit rate on the bogus purchases was justified and directed the Assessing Officer (AO) to apply this rate, thereby partially allowing the assessee's appeals.

SIGNIFICANT HOLDINGS

Core Principles Established

The Tribunal reinforced the principle that only the profit element in bogus purchases should be taxed, not the entire purchase amount. This principle aligns with the precedent set in CIT vs. Simit P. Sheth.

Final Determinations on Each Issue

The Tribunal determined that the appropriate profit rate to be applied to the bogus purchases was 2%, rather than the 12.5% applied by the CIT(A). This decision was based on the assessee's actual profit margins and the need to ensure a realistic assessment of taxable income.

In conclusion, the Tribunal's decision to apply a 2% profit rate on the bogus purchases reflects a careful consideration of the assessee's business context and the legal precedents guiding the taxation of such transactions. All appeals by the assessee were partly allowed, with the Tribunal modifying the CIT(A)'s order accordingly.