2024 (12) TMI 1431 - HC - Income Tax

Estimation of income - bogus purchase - purchase of waste paper from grey market - HELD THAT - There is no infirmity in the impugned orders passed by the CIT (A) and the Tribunal, considering the fact that the Assessing Officer has not invoked the provision of Section 145 of the Act to reject the books of account and therefore, the estimate profit determined on the bogus purchases made by the assessee at the rate of 7.5% requires no interference. Similarly, for the Assessment Year 2015-16, similar additions are made which is restricted to 7.5% of the profit on the bogus purchase.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

Whether the Income Tax Appellate Tribunal was justified in confirming the reduction of disallowance of bogus purchases from substantial amounts to significantly lower figures for the assessment years in question.
Whether the Tribunal was justified in inferring purchases from the grey market without supporting evidence.
Whether the Tribunal was justified in confirming the reduction of additions made on account of bogus purchases despite findings by the Gujarat Commercial Tax Department that the sales of the supplier were bogus and its TIN was cancelled ab initio.

2. ISSUE-WISE DETAILED ANALYSIS

Issue A: Reduction of Disallowance of Bogus Purchases

Relevant Legal Framework and Precedents: The issue revolves around the application of Section 260A of the Income Tax Act, 1961, concerning appeals to the High Court. The Tribunal's decision was based on precedents including CIT Vs. Simit P. Sheth and CIT Vs. Bholanath Poly Fab (P.) Ltd.
Court's Interpretation and Reasoning: The Tribunal upheld the CIT(A)'s decision to reduce the disallowance by considering the profit element embedded in the purchases rather than disallowing the entire amount.
Key Evidence and Findings: The Tribunal noted that the VAT Department found no abnormalities during inspections, and the Excise Department's verification did not result in adverse remarks.
Application of Law to Facts: The Tribunal applied the principle that only the profit element should be added to the income in cases where purchases are deemed to be from the grey market.
Treatment of Competing Arguments: The appellant-revenue argued for the entire disallowance, whereas the Tribunal found merit in considering only the profit element.
Conclusions: The Tribunal concluded that the CIT(A)'s approach was justified and did not require interference.

Issue B: Inference of Grey Market Purchases

Relevant Legal Framework and Precedents: The Tribunal relied on the rationale that in absence of direct evidence, the practice of making purchases from the grey market could be inferred based on circumstantial evidence and industry practices.
Court's Interpretation and Reasoning: The Tribunal inferred purchases from the grey market based on discrepancies noted by the AO and the cancellation of the supplier's TIN.
Key Evidence and Findings: The Tribunal considered the VAT Department's findings and the absence of any defect in the books of accounts.
Application of Law to Facts: The Tribunal applied the principle that the absence of direct evidence does not preclude the inference of grey market purchases.
Treatment of Competing Arguments: The Tribunal dismissed the appellant-revenue's argument for lack of direct evidence, emphasizing the circumstantial evidence.
Conclusions: The Tribunal upheld the inference of grey market purchases as reasonable under the circumstances.

Issue C: Justification of Reducing Additions Despite Commercial Tax Findings

Relevant Legal Framework and Precedents: The Tribunal considered the findings of the Gujarat Commercial Tax Department but emphasized the principles established in similar cases like PCIT Vs. Sandeep Kumar Chandak.
Court's Interpretation and Reasoning: The Tribunal reasoned that the findings of the Commercial Tax Department did not necessitate the disallowance of the entire purchase amount.
Key Evidence and Findings: The Tribunal noted that the VAT Department accepted the payment of tax and interest without imposing penalties, indicating acceptance of the situation.
Application of Law to Facts: The Tribunal applied the principle that only the profit element should be added, considering the circumstances and the absence of defects in the books of accounts.
Treatment of Competing Arguments: The Tribunal rejected the appellant-revenue's argument for full disallowance, emphasizing the lack of defects in the respondent's financial records.
Conclusions: The Tribunal upheld the CIT(A)'s decision to reduce the additions, finding it consistent with legal principles and precedents.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "The Tribunal has rightly come to the conclusion that merely because the input tax credit availed on purchases made by the assessee was not admissible and the assessee paid the tax under the provisions of the Value Added Tax Act, the entire purchases cannot be disallowed."
Core Principles Established: The judgment reinforces the principle that in cases of alleged bogus purchases, only the profit element should be added to the income, not the entire purchase amount.
Final Determinations on Each Issue: The appeals were dismissed, and the Tribunal's decision to uphold the CIT(A)'s reduction of disallowance was affirmed.

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