2015 (12) TMI 620 - AT - Income Tax

Unexplained purchases - estimation of income - Held that - It is not in dispute that the assessee made sales out of the purchases made from grey market and even if some benefit is accrued it has to be in tune with the normal profit earned in this line of business. We are concerned with A.Ys. 2009-10 and 2011-12 wherein the assessee has declared gross profit of 19.49% and 18.85%. For A.Y. 2008-09 she declared 22.34% GP and for 2013-14 it was 22.46%. Thus by taking into consideration the additional benefit, if any, availed by the assessee by making purchases in the grey market, I am of the view that an estimate of income at 22.5% of the gross purchases would meet the ends of justice and I direct the AO accordingly. In other words, addition reference to 22.5% of purchases made in grey market is hereby directed to be added to the total income. As regards interest charged under section 234A, 234B and 234C of the Act, as rightly observed by the learned CIT(A), the AO has no discretion in this regard. However, the assessee would get substantial relief, if any, in the light of the fact that the disallowance is scaled down further. - Decided partly in favour of assessee.

Summary

Issues involved:
Reopening of assessment based on information from Sales Tax Department, addition of non-genuine purchases under section 69C, justification of purchases, disallowance percentage, interest charged under sections 234A, 234B, and 234C.

Reopening of Assessment and Addition of Non-Genuine Purchases:
The appeals were against orders by CIT(A)-1, Thane for assessment years 2009-10 and 2011-12 regarding non-genuine purchases. The AO reopened the assessment due to information from the Sales Tax Department about entries/bogus purchase bills. The AO observed that the assessee failed to produce parties or provide evidence to prove the genuineness of purchases. Consequently, the purchases were treated as non-genuine, leading to additions of Rs. 3,20,965 for 2009-10 and Rs. 4,83,563 for 2011-12. The assessee argued that the addition was not justified under section 69C of the Act as proving the source of purchase after a gap of two years was challenging.

Justification of Purchases and Disallowance Percentage:
The CIT(A) noted that the assessee did not adequately justify the purchases made from third parties by providing confirmations and relevant details. The onus was on the assessee to prove the expenditure, which was not done satisfactorily. The CIT(A) considered various case laws and concluded that a 25% disallowance of unproved purchases was reasonable. The CIT(A) highlighted that the assessee's books lacked complete details, making it difficult to compute the correct profit. The CIT(A) confirmed the 25% disallowance and directed the AO to charge interest based on the confirmed addition.

Interest Charged under Sections 234A, 234B, and 234C:
The CIT(A) upheld the interest charged under sections 234A, 234B, and 234C, citing the decision of the Supreme Court. The assessee appealed to the Tribunal, arguing that even a 25% addition was not lawful. The counsel contended that the profit earned in the business was around 18%, suggesting that a 25% addition was higher than normal. However, the Tribunal considered the GP rates from previous years and directed an addition of 22.5% of purchases made in the grey market. The Tribunal also acknowledged the mandatory nature of interest charges but noted that the scaled-down disallowance would provide some relief to the assessee.

In conclusion, the Tribunal partly allowed the appeals, directing the AO to make additions based on 22.5% of purchases from the grey market and adjust the interest charges accordingly. The judgment emphasized the importance of proving the genuineness of purchases and the onus on the assessee to provide complete details for accurate computation of profits.