2017 (10) TMI 160 - AT - Income Tax

Bogus purchases - G.P. determination - Held that - Considering the primary statements given by Shri Dharmichand Jain and the failure on the part of the assessee to produce the said parties for examination to the AO and also the decision in the case of Nikunj Eximp Enterprises (2013 (1) TMI 88 - BOMBAY HIGH COURT) we find, the decision of the CIT (A) in restricting the addition to a portion of the bogus purchases is justified. Regarding 12.5% adopted by the CIT (A) relying on the judgment of the Hon‟ble Gujarat High Court in the case of Simit P Sheth (2013 (10) TMI 1028 - GUJARAT HIGH COURT) we find, the said judgment is the source material for the said 12.5%. The CIT (A) did not apply his mind to the nature of the business, VAT % and the relatable GP & NP rates of the different businesses. In our view, the GP / NP rate vary from business to business. Profit percentage in construction business is similar to that of the Gold Jewellery business. In our view, it is not proper to adopt some percentage of construction business to the business of Gold Jewellery. Further, it is a well established company and the GP rates are varying from 5.37% (AY 2010-2011) to 10.26% (AY 2012- 2013). In our view, this issue of percentage GP or NP need to revisit the file of the AO. AO is directed to study the relevant details of the company or that of the other good comparable ones and decide the issue afresh after granting a reasonable opportunity of being heard to the assessee. Addition of interest attributable to advances given for acquisition of property - adequacy of own funds - Held that - Considering the request of the Ld AR, we find, there is need for facts on if the assessee posses adequate own funds, if the interest bearing funds are found flowing in the advances given for purchase of the property etc. AO is directed to examine the issue afresh after granting a reasonable opportunity of being beard to the assessee

Summary

Issues:
1. Validity of addition on account of alleged bogus purchases
2. Disallowance of interest attributable to advances for property acquisition

Analysis:

Issue 1: Validity of addition on account of alleged bogus purchases
The appellant challenged the addition of a percentage of purchases alleged to be bogus, arguing that various evidence was produced to support the purchases' genuineness. The CIT (A) partially allowed the appeal, relying on High Court judgments and restricting the addition to 12.5% of the purchases. The appellant contended that the CIT (A)'s decision was not sustainable, as the business was different from the precedent cited. The Tribunal noted the primary statements by a key individual and the failure to produce suppliers for examination, supporting the CIT (A)'s decision to limit the addition. However, the Tribunal found the application of 12.5% without considering business specifics improper, directing the AO to reevaluate the GP rates and netting claims, while also addressing VAT issues.

Issue 2: Disallowance of interest attributable to advances for property acquisition
The appellant argued that the interest expenditure was not linked to advances for property purchase due to sufficient own funds. The Tribunal directed the AO to reexamine the facts regarding the availability of own funds and the flow of interest-bearing funds into property advances. The decision allowed the appeal for statistical purposes, emphasizing the need for a fresh assessment based on relevant legal principles and judgments.

In conclusion, the Tribunal partly allowed the appeal, directing the AO to reevaluate both issues after granting the appellant a reasonable opportunity to present their case. The judgment highlighted the importance of considering specific business factors and legal precedents in determining the validity of additions and disallowances in the assessment.