2024 (6) TMI 65 - AT - Income Tax

Estimation of income - bogus purchases - during the investigation it was found that these parties did not exist on the address mentioned at Nagpur - assessee has not maintained certain documents as highlighted by him to substantiate the purchases in light of inquiry - HELD THAT - One very important fact is that under the sales tax return, the purchases have been accepted and no discrepancy has been found on the quantity of purchases. If in the earlier years on similar turn over the GP rate has been ranging from 3.27 to 4.52 with an average GP of 3.49 and sales tax on coal is 4%, then there cannot be huge application of GP also. Accordingly, we apply GP rate of 8% on the purchases is reasonable as suppression of profit in a wholesale of coal cannot be 12% or more and since assessee has already disclosed GP rate of 3.27% accordingly, balance GP @ 4.73% on such alleged purchases is to made. The application of reasonable GP rate on such kind of bogus purchases has been upheld by the Hon ble Bombay High Court in the case of PCIT vs. Max Flex and Imaging Systems Ltd 2024 (5) TMI 1446 - BOMBAY HIGH COURT wherein held that where ld. AO is not disputed the sales made by the assessee then out of purchases only profit element in alleged bogus purchases amount can be treated as income. In another judgment of Hon ble Bombay High Court in the case of PCIT vs. JK Surface Coatings Pvt. Ltd. 2021 (10) TMI 1323 - BOMBAY HIGH COURT the same principle has been recreated. There is catena of similar judgments by the Hon ble Jurisdictional High Court wherein the High Court has held that the entire purchases cannot be added if the sales have not been disputed and trading results have been accepted. Accordingly, appeal of the assessee is partly allowed.

Summary

Issues:
Challenge of addition on account of alleged bogus purchases.

Analysis:
The appeal was filed against an order passed for the assessment year 2011-12, challenging the addition of Rs. 7,60,43,860 on account of disallowance of 100% alleged bogus purchases. The assessee, a wholesale trader in coal, had filed the return of income declaring total income from business at Rs. 8,38,714. The case was reopened under section 147 based on information received regarding accommodation entries towards bogus purchases. The Assessing Officer (AO) noted purchases made from specific entities, and upon inquiry, it was found that these parties did not exist at the addresses mentioned. The AO added the entire purchases amounting to Rs. 7,60,43,860, which was confirmed by the CIT(A).

The assessee argued that all purchases were recorded in the books of accounts and made through account payee cheques. The assessee contended that if the sales were not disturbed, adding the entire purchases would result in an unrealistic gross profit rate of 60%. The assessee relied on various High Court judgments to support the contention that only the profit element in alleged bogus purchases should be treated as income if the sales were not disputed. The AO did not challenge the sales made by the assessee, leading the Tribunal to conclude that adding the entire purchases without disputing the sales would result in an absurdly high gross profit rate for a wholesale coal dealer. The Tribunal applied a reasonable gross profit rate of 8% on the alleged purchases, considering the historical GP rates of the assessee and upheld by previous High Court judgments. The appeal of the assessee was partly allowed based on these considerations.

In conclusion, the Tribunal found that adding the entire amount of alleged bogus purchases without disputing the sales would lead to an unreasonable gross profit rate. By applying a reasonable gross profit rate on the purchases, only the profit element in the alleged bogus purchases was treated as income, in line with established judicial precedents. The appeal of the assessee was partly allowed based on these findings.