2017 (8) TMI 747 - AT - Income Tax

Bogus purchases from two parties - based on list of hawala operators published by Maharashtra Sales-tax Department relied upon - addition u/s 69C - reasonable profit computation in case of these transactions - Held that - Assessee has produced certain details to prove the purchases from the said parties in view of the fact that the assessee could not prove the existence of the parties and also could not rebut the finding of Maharashtra State Sales-tax department that the parties were hawala operators involved in providing accommodation entries the purchases from the said parties cannot be accepted as genuine. But keeping in view the fact that the AO had not doubted sales declared by the assessee a reasonable inference can be drawn that the assessee has purchased goods from the grey market and obtained bills from these parties to cover up the purchases. Therefore under these facts and circumstances what needs to be taxed is only the profit element embedded in such purchases but not the entire purchases from these parties. In this case the assessee is involved in specialized business of providing lifting solutions of heavy equipment from the ground level to the critical point of its final placement which requires specialized skills and knowledge. The assessee also declared a gross profit of 37% on its gross receipts. Keeping in view overall facts and circumstances of the case we are of the considered view that a reasonable net profit of 12.5% on total bogus purchases would be sufficient to meet the ends of justice. Hence we direct the AO to estimate net profit of 12.5% on total purchases made from the above two parties. - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Validity of reopening the assessment.
2. Genuineness of purchases from alleged hawala operators.
3. Appropriate percentage of net profit estimation on alleged bogus purchases.

Detailed Analysis:

1. Validity of Reopening the Assessment:
The assessee objected to the reopening of the assessment on the basis that it was initiated based on information received from an external source, which they argued was not tenable in law. However, the CIT(A) dismissed this ground, supporting the validity of the reopening of the assessment.

2. Genuineness of Purchases from Alleged Hawala Operators:
The assessee was engaged in providing lifting solutions and had declared purchases from M/s Rushabh Enterprises and M/s Swastik Enterprises, both listed as hawala operators by the Maharashtra Sales-tax Department. The AO treated these purchases as bogus due to the lack of documentary evidence to establish their genuineness and added the total amount to the income under Section 69C of the Income-tax Act, 1961. The assessee provided purchase orders, invoices, delivery challans, consignment notes, and bank statements to support the purchases but failed to produce the parties in person. The CIT(A) noted that the assessee had declared a gross profit of 37.13%, which was above the industry average, and found no evidence of cash being received back from suppliers. Consequently, the CIT(A) deleted the additions made by the AO.

3. Appropriate Percentage of Net Profit Estimation on Alleged Bogus Purchases:
The Tribunal agreed with the CIT(A) that the entire purchases should not be added back but only the profit element embedded in such purchases. Referring to various judicial precedents, including the Hon'ble Gujarat High Court's decision in Vijay Proteins Ltd vs ACIT, the Tribunal found a reasonable net profit estimation of 12.5% on the total bogus purchases to be appropriate. The Tribunal directed the AO to estimate a net profit of 12.5% on the purchases from M/s Rushabh Enterprises and M/s Swastik Enterprises for both assessment years 2009-10 and 2010-11.

Conclusion:
The appeals filed by the revenue for both assessment years 2009-10 and 2010-11 were partly allowed. The Tribunal upheld the reopening of the assessment but directed the AO to estimate a net profit of 12.5% on the total purchases from the alleged hawala operators instead of adding the entire purchase amount to the income. The order was pronounced in the open court on 28th July 2017.