2017 (10) TMI 1255 - AT - Income Tax

Addition u/s 69C - addition at the rate of 15% of gross bogus purchases - purchases from hawala parties - Held that - Admittedly, in such type of cases, there is no option but to estimate the profit which depends upon the subjective approach of an individual and the material facts available on record. Commissioner of Income Tax (Appeal) considered the factual matrix and the order of Assessment Year 2009-10, wherein, disallowance was confirmed at the rate of 5.08% of the alleged purchases, restricted the disallowance at the rate of 15% of the bogus purchases amounting to ₹ 55,98,500/-. As per the assessee, the assessee has already made declaration the gross profit at the rate of 20.49%. Admittedly, in such type of cases, there is no option but to estimate the gross profit. Thus, considering the totality of facts, to further plug the leakage of Revenue, we direct the Ld. Assessing Officer to restrict the disallowance @ 16% (as agreed by the ld. counsel for the assessee) in place of 15% restricted by the Ld. Commissioner of Income Tax (Appeal). Thus, the appeal of the Revenue is partly allowed.

Issues Involved:
1. Legitimacy of the addition made under Section 69 of the Income Tax Act, 1961.
2. Justification for restricting the addition to 15% of gross bogus purchases.
3. Assessment of whether the purchases were genuine or inflated.
4. Evaluation of the evidence and material on record.
5. Estimation of profit in cases of alleged bogus purchases.

Issue-Wise Detailed Analysis:

1. Legitimacy of the Addition Made Under Section 69:
The Revenue challenged the order dated 31/10/2016 by the First Appellate Authority, which restricted the addition of ?55,98,500/- made under Section 69 of the Income Tax Act, 1961 to ?8,39,775/-, allowing relief of ?47,58,725/- to the assessee. The Revenue argued that the assessee, a manufacturer of engineering goods, failed to produce the stock register and utilization of goods. The assessee countered by stating that they had already declared a gross profit rate of 20.49%, which was enhanced to 15% by the Commissioner of Income Tax (Appeal).

2. Justification for Restricting the Addition to 15% of Gross Bogus Purchases:
The Tribunal considered various judicial precedents to reach a conclusion. The Hon'ble Gujarat High Court in Sanjay Oilcakes Industries vs CIT and CIT vs Bholanath Poly Fab. Pvt. Ltd. held that in cases where purchases are shown to be made by account payee cheques but the sellers are not traceable, the likelihood of inflated purchase prices cannot be ruled out. The Tribunal noted that the Commissioner of Income Tax (Appeal) had restricted the disallowance to 15% based on similar cases, where it was established that the purchases were not entirely bogus but involved inflated prices.

3. Assessment of Whether the Purchases Were Genuine or Inflated:
The Tribunal referred to multiple cases like CIT vs Vijay M. Mistry Construction Ltd., CIT vs Ashish International Ltd., and CIT vs Nikunj Exim Enterprises Pvt. Ltd., which highlighted that the purchases might be genuine even if the sellers were not traceable. The Tribunal emphasized that the purchases were made through banking channels and that the goods were actually received and utilized in the manufacturing process. The Tribunal also noted that the assessee had provided sufficient documentation, including purchase invoices and bank statements, to support the genuineness of the transactions.

4. Evaluation of the Evidence and Material on Record:
The Tribunal analyzed the evidence, including the remand report from the Assessing Officer, which indicated that notices to eight parties were returned unserved. The Commissioner of Income Tax (Appeal) had considered the factual matrix and previous assessments to restrict the disallowance to 15%. The Tribunal found that the assessee had produced copies of purchase invoices, payment proofs through banking channels, and evidence of material utilization, which supported the legitimacy of the purchases.

5. Estimation of Profit in Cases of Alleged Bogus Purchases:
The Tribunal acknowledged that in cases involving alleged bogus purchases, there is an element of guesswork in estimating the profit. The Tribunal referred to the Hon'ble Gujarat High Court's decision in N.K. Industries Ltd. vs DCIT, which upheld the addition of the entire income from bogus purchases. However, the Tribunal also noted that in similar cases, the disallowance was often restricted to a certain percentage of the alleged bogus purchases. Considering the totality of facts and to further plug the leakage of Revenue, the Tribunal directed the Assessing Officer to restrict the disallowance to 16% instead of 15%.

Conclusion:
The Tribunal partly allowed the Revenue's appeal, directing the Assessing Officer to restrict the disallowance to 16% of the gross bogus purchases. This decision was based on a thorough evaluation of the evidence, judicial precedents, and the specific circumstances of the case. The order was pronounced in the open court on 21/08/2017.

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