2017 (8) TMI 712 - AT - Income Tax

Bogus purchases - estimation of income - CIT(A) reduced the addition to 12.5% - Held that - Where all the purchases are bogus and since the assessee failed to prove the genuineness it cannot be allowed, but could not adduce any evidence or cogent material which may prove that the purchases and sales made by the assessee were not reconciled. This fact proves that the assessee would have made purchases as the assessee could make the sales only if purchases are made. Without making purchases it would not be possible that the assessee could have made the sales. The Revenue has duly accepted the sales made by the assessee. The natural inference will be that the assessee might not have made the purchases from these parties, but to save tax might have made the purchases from some other parties and procured the bills these parties. This does not prove that there had not been actual purchases made by the assessee. By making purchases from some other parties the assessee might have saves tax. To that extent the assessee may have earned income. Therefore, we do not find any illegality or infirmity in the order of the CIT(A) in reducing the addition to 12.5%. Appeal filed by the Revenue is dismissed

Summary

Issues involved:
- Relief given by CIT(A) on account of bogus purchases

Analysis:
1. Issue of bogus purchases: The appeal was filed by the Revenue against the CIT(A)'s order for A.Y. 2010-11 regarding relief given on account of bogus purchases amounting to ?4,60,92,954. The AO noted that the assessee made purchases from two parties, which were deemed bogus based on information from the Sales Tax Department. After issuing show cause notices and recording statements, the AO disallowed the purchases. The CIT(A) reduced the addition to 12.5% of the disputed amount after considering submissions and remand reports. The CIT(A) relied on judicial pronouncements stating that only the profit element embedded in such purchases can be added to the income of the assessee, not the entire purchase amount, if purchases were not completely bogus but made from parties other than those mentioned in the books of accounts. The Tribunal confirmed the CIT(A)'s decision, emphasizing that the Revenue accepted the sales made by the assessee, indicating that purchases were likely made from other parties to save tax. Therefore, the addition was reduced to 12.5% of the disputed amount.

2. Judicial pronouncements: The CIT(A) referred to various judicial pronouncements to support the decision. In the case of CIT-1 Vs Simit P. Sheth, the High Court held that only the profit element embedded in disputed purchases should be taxed if purchases were not completely bogus. Similarly, in the case of CIT Vs. Bhalanath Poly Fab (P) Ltd., the High Court stated that the profit element embedded in purchases subject to tax, not the entire amount. The CIT(A) applied these principles to the present case, concluding that additional gross profit of 12.5% should be added to the income of the assessee on account of alleged bogus purchases. The Tribunal upheld this decision, emphasizing the importance of considering the profit element in such transactions.

3. Evidence and reasoning: The Revenue contended that since all purchases were bogus and not proven genuine, they should not be allowed. However, the Tribunal noted that the assessee's sales were accepted by the Revenue, indicating that purchases were likely made from other parties. Without evidence to prove otherwise, the Tribunal found no illegality in the CIT(A)'s decision to reduce the addition to 12.5% of the disputed purchases. The Tribunal confirmed the CIT(A)'s order, dismissing the appeal filed by the Revenue. The judgment highlights the importance of considering the profit element in disputed purchases and the need for concrete evidence to support allegations of bogus transactions.