2017 (2) TMI 72 - AT - Income Tax

Estimation of profit of 15% on the total alleged bogus purchases - seller parties were found to be Hawala Operators/ bogus bill providers - Held that - Even it is presumed that the purchases are bogus and the assessee was not in a position to prove the existence of the suppliers admittedly, without purchases of the material, there cannot be any sale. Even otherwise, the Assessing Officer has not examined the aspect of sale. Even as per the provision of section 44AD of the Act, which is a special provision for computing profit & gains on business on presumptive basis, the profit is to be computed equal to 8% of the total turnover or gross receipt of the assessee. In the present appeal, the Ld. Commissioner of Income Tax (Appeal) has directed to adopt the profit at 15% of the alleged bogus purchases and no appeal has been filed by the assessee by accepting the order of the Ld. Commissioner of Income Tax (Appeal), therefore, in our view, the First Appellate Authority is quite justified to safeguard the interest of the Revenue, consequently, we find no infirmity in the conclusion of the Ld. Commissioner of Income Tax (Appeal), his stand is affirmed, resulting into dismissal of appeals of the Revenue.

Summary

Issues Involved:
1. Legitimacy of directing the Assessing Officer to estimate profit at 15% on total alleged bogus purchases.
2. Examination of the genuineness of transactions with alleged bogus bill providers.
3. Analysis of payment patterns and credit terms with suppliers.
4. Consideration of the circumstantial evidence and human probability in determining the nature of transactions.
5. Application of legal precedents in estimating profit from alleged bogus purchases.

Detailed Analysis:

1. Legitimacy of directing the Assessing Officer to estimate profit at 15% on total alleged bogus purchases:
The Revenue's appeals challenge the direction given by the Commissioner of Income Tax (Appeal) to estimate profit at 15% on the total alleged bogus purchases. The Revenue argued that the seller parties were found to be bogus bill providers, and thus, the entire purchase amount should be added to the income. However, the Tribunal upheld the CIT(A)'s decision, noting that without the purchase of materials, the sales and job work receipts declared by the assessee would not have been possible. The Tribunal found that taxing the profit element embedded in the purchases, rather than the entire amount, was justified.

2. Examination of the genuineness of transactions with alleged bogus bill providers:
The Assessing Officer (AO) issued notices under section 133(6) to verify the genuineness of transactions with the alleged bogus suppliers. The notices returned unserved, and the suppliers were found to be non-existent. The AO concluded that the purchases were bogus based on information from the Sales Tax Department and statements from hawala operators. The Tribunal noted that while the AO relied on external information, there was no independent investigation or enquiry conducted to ascertain the true nature of the transactions.

3. Analysis of payment patterns and credit terms with suppliers:
The Tribunal examined the payment patterns and credit terms with both alleged bogus suppliers and regular suppliers. It was observed that the appellant took abnormal credit periods extending up to one year with the bogus suppliers, whereas regular suppliers were paid within 30 to 90 days. This discrepancy in payment patterns was considered as circumstantial evidence indicating the bogus nature of the transactions.

4. Consideration of the circumstantial evidence and human probability in determining the nature of transactions:
The Tribunal applied the principle of human probability and circumstantial evidence to conclude that the transactions with the alleged bogus suppliers were not genuine. The Tribunal referred to market practices, noting that no prudent businessman would extend credit beyond six months to one year in tight market conditions. This led to the reasonable conclusion that the suppliers were bogus, and the appellant might have made cash purchases from other parties, subsequently obtaining bills from the bogus suppliers.

5. Application of legal precedents in estimating profit from alleged bogus purchases:
The Tribunal referred to several legal precedents, including the cases of Commissioner of Income-tax v. Bholanath Poly Fab. Pvt. Ltd., Sanjay Oilcake Industries v. Commissioner of Income-tax, and Commissioner of Income-tax v. Simit P. Sheth. These cases established that in situations involving bogus purchases, only the profit element embedded in such purchases should be taxed. The Tribunal found that estimating profit at 15% of the total alleged bogus purchases was in line with these precedents and upheld the CIT(A)'s decision.

Conclusion:
The Tribunal dismissed the Revenue's appeals, affirming the CIT(A)'s decision to estimate profit at 15% on the total alleged bogus purchases. The Tribunal found no infirmity in the CIT(A)'s conclusion, noting that the approach safeguarded the interest of the Revenue while acknowledging the circumstantial evidence and legal precedents. The appeals of the Revenue were dismissed, and the order was pronounced in the open court.