2017 (9) TMI 1215 - AT - Income Tax

Bogus purchases - estimating profit - Held that - We find that the assessee had purchased goods from five parties mentioned in paragraph two, that he had held that suppliers were indulged in issuing bogus bills without supplying the goods, that the AO had not doubted the sales made by the assessee, that he had held that goods were not supplied by the parties that were appearing in the books of accounts of the assessee. Thus, he had not doubted the genuineness of the purchase as such but he had doubt about the parties supplying the goods. In our opinion, in such cases the profit embedded in the transaction could be added to the income of the assessee and the entire purchases cannot be disallowed. We find that the AO had invoked the provisions of section 69C of the Act. But, he has not deliberated upon the issue as to how the provisions of said section were applicable. It is one of the deeming sections and has to be construed strictly. In our opinion, the order of the FAA, estimating the profit at the rate of 12.5% of the total purchases is a better estimate than the estimate made by the AO wherein he had disallowed the hundred percent of the purchases. - Decided against AO.

Summary

Issues:
1. Disallowance of alleged bogus purchases and addition to total income under unexplained expenditure.
2. Interpretation of provisions of section 69C of the Act.
3. Estimation of profit on total purchases for assessment purposes.

Issue 1: Disallowance of alleged bogus purchases and addition to total income under unexplained expenditure:
The Assessing Officer (AO) made an addition to the total income of the assessee under the head unexplained expenditure, amounting to &8377; 46.47 lakhs, due to alleged bogus purchases from five different parties. The AO found that the assessee failed to provide sufficient evidence to establish the genuineness of the transactions, including proof of goods being used in the business and lack of verifiable purchases in the books of accounts. The AO invoked the provisions of section 69C of the Act to make the addition. However, the First Appellate Authority (FAA) held that the purchases were genuine, and the AO's disallowance was not justified. The FAA estimated the profit at 12.5% of the total purchases, providing relief of &8377; 40.66 lakhs to the assessee.

Issue 2: Interpretation of provisions of section 69C of the Act:
The Appellate Tribunal found that the AO did not adequately deliberate on the application of section 69C, a deeming provision that must be strictly construed. The Tribunal noted that the AO's complete disallowance of the purchases was not justified, and the FAA's estimation of profit at 12.5% of the total purchases was a more reasonable approach. The Tribunal decided in favor of the FAA's order, emphasizing the need for a detailed analysis before invoking deeming provisions like section 69C.

Issue 3: Estimation of profit on total purchases for assessment purposes:
The Tribunal agreed with the FAA's decision to estimate the profit at 12.5% of the total purchases, considering the peculiar facts and circumstances of the case. The Tribunal concluded that the profit embedded in the transactions could be added to the income of the assessee, rather than completely disallowing the purchases. The Tribunal dismissed the appeal filed by the AO, upholding the FAA's estimation of profit and providing relief to the assessee.

In conclusion, the Appellate Tribunal upheld the FAA's decision, emphasizing the importance of a detailed analysis before disallowing purchases and adding to total income under unexplained expenditure. The Tribunal highlighted the need for a strict interpretation of deeming provisions like section 69C and supported the estimation of profit at 12.5% of total purchases for assessment purposes in this case.