2017 (1) TMI 1251 - AT - Income Tax

Bogus purchases - parties were not found at their address - accommodation entries by giving purchase invoices - Held that - Assessing Officer has not issued any notice for the presence of the parties i.e M/s Nirma Trading Company and Shri Omkar Enterprises. Therefore, we are of the view that the Assessing Officer has not doubted the bank transaction and the Assessing Officer has not made any inquiry whether the bank transaction was genuine or not. We find that in this case the cotton bales are sold by identifying the same lot numbers to various manufacturers by identifying press numbers, the goods have been purchased and ultimately sold, quantity details are maintained and they are reflected in tax audit report u/s 44AB of the Act, hence, if at all the purchases are not found to have been made from these two parties and treated as bogus purchases, the entire addition cannot be made unless there is some evidence in support of the claim that money reached back to the assessee. We find that in the instant case, the Assessing Officer has not doubted the bank transaction. Therefore, we are of the view that the entire addition cannot be made. The only addition which can be made is only NP addition. In the instant case, the assessee has shown NP rate of 1.62% of total turnover. Therefore, we direct to apply Net profit on above purchases at the rate of 6%. - Decided partly in favour of assessee

Summary

Issues Involved:
1. Bogus Purchases
2. Genuineness of Transactions
3. Application of Net Profit Rate

Detailed Analysis:

1. Bogus Purchases:
During the assessment proceedings, information was received from the Directorate General of Income Tax (DGIT), Bhopal, indicating that the assessee had made purchases from M/s Nirma Trading Company and Shri Omkar Enterprises without taking delivery of goods. The Assessing Officer (AO) issued a show cause notice to the assessee, who provided various documents to prove the genuineness of the transactions. However, the AO found discrepancies such as bills issued without lorry numbers and concluded that the purchases were bogus, adding the entire amount of ?2,46,08,762/- as unexplained sources under Section 69 of the Act.

2. Genuineness of Transactions:
The assessee appealed, arguing that the transactions were genuine and supported by various documents, including bank payment advices, purchase invoices, lorry receipts, and sales tax returns. The assessee contended that the non-availability of the suppliers at their addresses should not be the sole basis for treating the purchases as bogus. The assessee cited several judicial precedents to support the argument that when sales are genuine, the corresponding purchases should also be considered genuine.

The Tribunal noted that the AO did not issue summons to the suppliers or verify the bank transactions to determine the genuineness of the payments. The Tribunal referenced the decision in CIT vs. Hi Lux Automative Pvt. Ltd., which emphasized the need for the AO to verify transactions from the assessee's books and bank accounts. The Tribunal found that the AO failed to conduct a thorough inquiry and relied solely on the non-availability of the suppliers to conclude that the purchases were bogus.

3. Application of Net Profit Rate:
The Tribunal observed that the assessee maintained quantitative details of the goods, which were reflected in the tax audit report. The Tribunal held that even if the purchases were found to be bogus, the entire amount could not be added as income unless there was evidence that the money returned to the assessee. Instead, only the profit element embedded in the bogus purchases should be taxed. The Tribunal directed the application of a net profit rate of 6% on the disputed purchases, considering the assessee's declared net profit rate of 1.62%.

Conclusion:
The Tribunal partly allowed the appeal, directing that only the net profit rate of 6% be applied to the bogus purchases instead of adding the entire amount as income. The decision was based on the lack of thorough inquiry by the AO and the principle that only the profit element in bogus purchases should be subject to tax. The same reasoning was applied to a similar appeal (ITA No.132/Ind/2016), which was also partly allowed. The order was pronounced in open court on 17th October 2016.