2024 (5) TMI 640 - AT - Income Tax

Estimation of income - bogus purchases - CIT(A) in restricting the disallowance to 12.5% instead of Entire addition made by the ld. AO - HELD THAT - We find that AO has made addition on account of entire purchases which is wholly unjustified, because once the source of purchases have been debited in the books of accounts and corresponding quantity of material purchased had been recorded in the books and corresponding quantity of sales has also been accepted then, it cannot be held that purchases are outside books. It could be the case of purchases made from hawala dealers for inflating the cost and suppressing GP rate. If parties have not confirmed the transaction then in such a case the principle laid down in the case of PCIT vs. Vishwashakti construction 2023 (5) TMI 278 - BOMBAY HIGH COURT wherein GP rate of 12.5% has been held to be reasonable in such cases, is applied in the present case also, then CIT (A) is justified. Appeal of the Revenue is dismissed.

Summary

Issues:
The appeal by the Revenue against the order passed by NFAC, Delhi for the quantum of assessment u/s. 143(3) r.w.s. 147 for the A.Y. 2009-10.

Issue 1: Challenge to Disallowance

The Revenue challenged the action of the ld. CIT(A) in restricting the disallowance to 12.5% of the purchases instead of the entire amount of Rs. 15,77,629/-.

Details for Issue 1:

The assessee initially declared a total income of Rs. 4,72,510/- and the case was reopened u/s. 147 based on information regarding a racket involving auditors issuing purchases. The ld. AO added the entire amount of Rs. 15,77,629/- u/s. 69C due to issues with one party not being served a notice u/s. 133(6) and the other party not conducting the reported business. However, the ld. CIT (A) restricted the addition by estimating a GP rate of 12.5% on the total bogus purchases from both parties.

After considering the arguments from both sides and reviewing the impugned order, it was found that the AO's addition of the entire purchases was unjustified. The Tribunal noted that once the source of purchases was debited in the books of accounts and corresponding sales were recorded, it cannot be concluded that the purchases were outside the books. The Tribunal suggested that the case may involve purchases from hawala dealers to inflate costs and suppress GP rates. Referring to a principle established by the Hon'ble Bombay High Court in a specific case, a GP rate of 12.5% was deemed reasonable in such scenarios. Therefore, the decision of the CIT (A) to restrict the addition was deemed justified, leading to the dismissal of the Revenue's appeal.

In conclusion, the appeal by the Revenue was dismissed, and the order was pronounced on 20th March, 2024.