2017 (6) TMI 1145 - AT - Income Tax

Addition u/s 69C - bogus purchases - estimation of profit - Held that - The suppliers stated in their affidavits before the Sales Tax authorities that they were merely engaged in supply of bills for commission and therefore, they never supplied or delivered the material to the buyers. The reason being that, the revenue never doubted the sales and AO never disturbed the sales account of the assessee in the year under consideration, addition of entire purchases is not valid. Therefore, the addition of entire such purchases as done by the AO is not correct and thus, the decision of the CIT(A) in deleting the same is upheld. Resultantly, the appeals filed by the revenue are decided protanto. The profit portion of the suspected purchases is required to be taxed. We proceed to apply the same the facts of the present case. Genuity of purchases - Held that - In the present case, considering the affidavits failed by the suppliers before the Sales Tax authorities and the enquiry results u/s 133A, the onus is on the assessee to demonstrate the facts with the evidences. Merely stating that the purchases are genuine and quality of the contract is undisputed by the government is not enough and therefore, the same are unacceptable. To that extent, the arguments of the assessee s AR are dismissed. Correctness of adopting 8% of suspected purchases for addition by FAA - Held that - It is the claim the assessee without prejudice that the profit rate, if any, should be restricted to the said profit internal rates. But the same cannot be accepted considering the said Gujarat High Court s judgement in the case of Simit P Sheth (2013 (10) TMI 1028 - GUJARAT HIGH COURT) wherein 12.5% is confirmed. We also cannot confirm the ill conceived profit rate of 8% as the same is not in tune with the reasoning given by the Hon ble HC/Tribunal in the case of Simit P Sheth (supra). As such, AO never applied his mind to this aspect of the profit rate on the suspected purchases. CIT (A) did not remand this aspect to the file of the AO before adopting the profit rate of 8%. AO shall note that the 12.5% was confirmed in the case of Simit P Sheth (2013 (10) TMI 1028 - GUJARAT HIGH COURT ) when its internal profit is only 3.56%. It is a case of Steel Trader and the said profit rate may not apply to the facts of the present who is in the business of Civil Contractor / real estate. In the remand proceedings, AO shall grant reasonable hearing opportunity to the assessee before arriving at the reasonable profits on the suspected purchases as applicable to the facts of this case. Assessee is also allowed to supply the AO appropriate documents and data to arrive at appropriate profit rate. With the said directions, we allow the grounds of both the assessees for statistical purposes.

Issues Involved:
1. Addition under Section 69C for alleged bogus purchases.
2. Estimation of Gross Profit (GP) on alleged bogus purchases.
3. Onus of proof regarding the genuineness of purchases.
4. Determination of appropriate profit rate for suspected purchases.
5. Double taxation concerns.

Issue-wise Detailed Analysis:

1. Addition under Section 69C for alleged bogus purchases:
The primary issue involves the addition made under Section 69C of the Income Tax Act for alleged bogus purchases. The Assessing Officer (AO) received information from the DGIT (Inv.) regarding bogus purchases from hawala dealers. The AO noticed that the assessee made purchases from 13 parties, amounting to ?2,29,55,434/-. The AO added the entire amount as bogus purchases based on affidavits from suppliers and the assessee's statement during a survey. However, the CIT (A) reduced this addition to 8% of the total purchases, amounting to ?18,36,435/-, based on the GP estimation method.

2. Estimation of Gross Profit (GP) on alleged bogus purchases:
The CIT (A) relied on the judgment of the Hon’ble Bombay High Court in the case of CIT vs. Nikunj Eximp Enterprises Pvt Ltd, which stated that purchases cannot be added if sales are undisturbed. The CIT (A) concluded that there was no direct evidence of bogus purchases and estimated the GP at 8% of the alleged suspicious purchases. The assessee argued that the GP estimation was incorrect and that the books of accounts were valid and audited. The Tribunal referred to various decisions, including CIT vs. Simit P Sheth, where only the profit element embedded in such purchases was added to the income, not the entire purchase amount.

3. Onus of proof regarding the genuineness of purchases:
The assessee contended that the purchases were genuine, supported by banking transactions and proper accounting. The AO, however, relied on the suppliers' affidavits and the failure of the assessee to produce delivery challans. The Tribunal noted that the AO must demonstrate that the raw materials were not purchased or that the contracts were of inferior quality. The Tribunal emphasized that the onus was on the AO to prove the purchases were bogus, which was not conclusively done.

4. Determination of appropriate profit rate for suspected purchases:
The Tribunal discussed the appropriate profit rate for suspected purchases. It referred to the case of Simit P Sheth, where the Gujarat High Court confirmed a profit rate of 12.5% for similar cases. The Tribunal found that the CIT (A) did not remand the aspect of profit rate determination to the AO and adopted an 8% rate without sufficient basis. The Tribunal directed the AO to re-examine the appropriate profit rate, considering the nature of the business and comparable cases.

5. Double taxation concerns:
The assessee argued that taxing the profit on suspected purchases amounted to double taxation, as the profits were already recorded and taxed. The Tribunal referred to the Gujarat High Court's decision in Simit P Sheth, which held that only the profit element embedded in the purchases should be added to the income. The Tribunal concluded that the profit portion of the suspected purchases should be taxed, not the entire purchase amount.

Separate Judgments Delivered:
The Tribunal delivered a consolidated order for all the appeals, addressing the issues for different assessment years and parties involved. The appeals were partly allowed for statistical purposes, directing the AO to re-examine the appropriate profit rate and provide a fair hearing to the assessee.

Conclusion:
The Tribunal upheld the CIT (A)'s decision to restrict the addition to the profit element of the alleged bogus purchases but directed a re-examination of the appropriate profit rate. The appeals were partly allowed for statistical purposes, emphasizing the need for a fair and thorough examination of the facts and evidence.

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