2015 (6) TMI 763 - AT - Income Tax

Bogus purchases - AO made the addition only on the basis of statement of Sh. Surendra Kumar Sharma which was retracted later on by stating that no bogus entries were provided either to the assessee or any other person - CIT(A) directed the AO to apply net profit rate of 5% on the said unverifiable purchases - Held that - AO made the addition merely on the basis of statement of one Sh. Surendra Kumar Sharma, Proprietor of M/s Riddhi Siddhi Enterprises which was later on retracted and it was stated that he was not indulged in providing the entries to the assessee or to any other person. The AO did not provide any opportunity to the assessee to cross examine Sh. Surendra Kumar Sharma. In the present case, it is also noticed that the turnover of the assessee was accepted by the Trade Tax Department and it is not the case of the AO that proper books of accounts were not maintained by the assessee in regular course of business or the same method of accounting was not followed consistently. The ld. CIT(A) examined the bank accounts as well as books of accounts of the assessee and categorically stated that the purchases as well as the sales were through banking channel and there was no cash deposit in the bank account of the assessee. In the present case, the AO has not pointed out any defects in the books of accounts, therefore, the ld. CIT(A) was fully justified in deleting the addition made by the AO on account of alleged bogus purchases particularly when the GP rate declared by the assessee was progressive and was accepted by the AO. As regards to the additions sustained by the ld. CIT(A) by applying the net profit rate of 5% of the alleged unverifiable purchase. We are of the view that when the ld. CIT(A) himself accepted the trading results of the assessee and also held that the payment for purchases of material had been made through banking channel, GP rate declared by the assessee was progressive then there was no occasion to make the addition by applying the net profit rate of 5% by considering the purchases of ₹ 1,39,70,618/- as unverifiable. We, therefore, by considering the totality of the facts as discussed herein above delete the addition sustained by the ld. CIT(A). - Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition of Rs. 1,39,70,618/- on account of alleged bogus purchases.
2. Sustenance of addition of Rs. 6,98,530/- by applying a net profit rate of 5% on unverifiable purchases.

Issue-Wise Detailed Analysis:

1. Deletion of Addition of Rs. 1,39,70,618/- on Account of Alleged Bogus Purchases:

The department contended that the CIT(A) erred in deleting the addition of Rs. 1,39,70,618/- despite the purchases being made from a dealer whose purchases were proven bogus by the Commercial Tax Officer. The AO argued that the existence of the party was doubtful, and payments were rotated through various accounts of fictitious firms. The AO further noted that the trading results and sales were not disturbed, and the material in possession of the AO was not supplied to the assessee, nor was the assessee confronted with the information. The AO relied on several case laws to substantiate the addition.

In response, the assessee argued that the purchases were genuine, supported by purchase bills, payments made through banking channels, and no defects were pointed out in the books of accounts. The assessee also highlighted that the statement of the proprietor of M/s Riddhi Siddhi Enterprises was retracted, and no opportunity was given to cross-examine the said proprietor. The CIT(A) observed that no independent enquiry was made by the AO to form an opinion that M/s Riddhi Siddhi Enterprises provided accommodation bills. The CIT(A) pointed out that the AO had not commented on the total sales shown by the assessee, and there were no defects in the sales records or books of accounts. The CIT(A) concluded that the AO was not justified in making the addition of the entire cost of material to the income of the assessee, especially when the sales were accepted, and the purchases were made through banking channels.

The Tribunal upheld the CIT(A)'s decision, noting that the AO made the addition merely on the basis of a statement that was later retracted. The Tribunal emphasized that the AO did not provide any opportunity for cross-examination and that the turnover was accepted by the Trade Tax Department. The Tribunal also highlighted that the GP rate declared by the assessee was progressive and accepted by the AO. Therefore, the deletion of the addition was justified.

2. Sustenance of Addition of Rs. 6,98,530/- by Applying a Net Profit Rate of 5% on Unverifiable Purchases:

The assessee filed a cross-objection against the sustenance of the addition of Rs. 6,98,530/-, arguing that the purchases were genuine and included in the total purchases, which formed the basis for the sales. The assessee contended that the GP rate declared was progressive, and there was no occasion to make the impugned addition.

The CIT(A) had sustained the addition by applying a net profit rate of 5% on the unverifiable purchases, considering the possibility that the material might have been purchased from parties other than M/s Riddhi Siddhi Enterprises to save local taxes. However, the Tribunal noted that the CIT(A) had accepted the trading results and found that the purchases and sales were through banking channels. Given that the GP rate was progressive and no defects were pointed out in the books of accounts, the Tribunal concluded that there was no occasion to make the addition by applying a net profit rate of 5%.

Conclusion:

The Tribunal dismissed the department's appeal and allowed the assessee's cross-objection, thereby deleting the addition of Rs. 1,39,70,618/- and the sustained addition of Rs. 6,98,530/-. The Tribunal emphasized the importance of providing opportunities for cross-examination and the necessity of independent enquiries to substantiate claims of bogus purchases.