2017 (11) TMI 502 - AT - Income Tax

Bogus purchases - G.P. determination - CIT-A concluded that the profit element in all fairness was liable to be reduced from the aforesaid estimated profit rate of 17.5% as estimated earlier - Held that - CIT(A) in the backdrop of the facts of the case should have in all fairness restricted the initial estimation of profit at 12.5% (supra), as against the profit rate of 17.5% (supra) so adopted by him. We thus substitute the estimation of the initial profit rate of 17.5% adopted by the CIT(A), by a rate of 12.5%. We are further of the considered view that in the backdrop of the order of the coordinate bench of the Tribunal in the case of Madhukant B. Gandhi (2010 (2) TMI 1211 - ITAT MUMBAI)the CIT(A) should have directed reduction of the gross profit rate declared by the assessee during the year under consideration, from the aforesaid initial profit rate so estimated by him, and not the average gross profit rate for the last three years. We have been informed by the ld. A.R that the G.P. rate for the year under consideration stood reflected at 6.32%. We thus in the backdrop of our aforesaid observations direct the A.O to reduce the estimated profit rate of 12.5% (supra) by the profit percentage of 6.32% (supra) pertaining to the year under consideration. We thus in the backdrop of our aforesaid observations sustain the consequential addition at 6.18% i.e. 12.5% (-) 6.32% of the aggregate value of purchases made by the assessee from the aforesaid parties, viz. (i). M/s Rajendra Impex India; and (ii). M/s Newzone Multitrade Private Limited. That before parting we direct the A.O to verify the claim of the ld. A.R that the G.P rate declared by the assessee during the year under consideration worked out at 6.32%(supra)

Issues Involved:
1. Validity of reopening of assessment under Section 147 of the Income Tax Act.
2. Addition of ?32,68,914/- as bogus purchases and estimation of profit percentage.
3. Levy of interest under Sections 234B and 234C of the Income Tax Act.

Detailed Analysis:

1. Validity of Reopening of Assessment under Section 147 of the Income Tax Act:
The assessee initially challenged the reopening of the assessment under Section 147 of the Income Tax Act. However, during the appeal, the assessee's representative conceded and did not press this ground. Consequently, the Tribunal dismissed this ground as not pressed.

2. Addition of ?32,68,914/- as Bogus Purchases and Estimation of Profit Percentage:
The main issue was the addition of ?32,68,914/- as bogus purchases from two entities: M/s Rajendra Impex India and M/s Newzone Multitrade Private Limited. The Assessing Officer (A.O) reopened the case based on information from the Sales Tax Department that these parties were providing bogus purchase bills. Notices sent to these parties were returned undelivered, and the assessee failed to produce these parties for examination. Despite providing some documentary evidence, the A.O concluded that the purchases were not genuine but were made from unknown parties in the grey market. Consequently, the A.O added the peak investment of ?32,68,914/- to the assessee's income under Section 69C.

The assessee appealed to the CIT(A), arguing that the purchases were genuine and supported by payments made via account payee cheques. However, the CIT(A) upheld the A.O's decision, noting that the assessee failed to substantiate the genuineness of the purchases. The CIT(A) concluded that while the purchases were not made from the bogus parties, they were made from unknown parties in the grey market. Thus, only the profit margin embedded in such purchases could be taxed. The CIT(A) estimated a profit rate of 17.5% on the bogus purchases, reduced by the average gross profit (G.P) rate of 5.4% for the last three years, resulting in an addition of 12.1%.

Upon further appeal, the Tribunal agreed with the CIT(A) that only the profit element embedded in the bogus purchases should be taxed. However, the Tribunal found the initial profit rate of 17.5% to be excessive and reduced it to 12.5%. The Tribunal also directed that the G.P rate for the year under consideration (6.32%) should be deducted from the estimated profit rate of 12.5%, resulting in a net addition of 6.18% of the aggregate value of the bogus purchases. The A.O was directed to verify the G.P rate claimed by the assessee.

3. Levy of Interest under Sections 234B and 234C of the Income Tax Act:
The issue of levying interest under Sections 234B and 234C was not specifically addressed in detail in the judgment. However, since the primary contention regarding the bogus purchases was partly allowed, any consequential interest levied under these sections would be subject to recomputation based on the revised taxable income.

Conclusion:
The Tribunal partly allowed the appeal, reducing the addition related to bogus purchases to 6.18% of ?32,68,914/-, and directed the A.O to verify the G.P rate for the relevant year. The appeal regarding the reopening of the assessment was dismissed as not pressed. The order was pronounced in the open court on 01.09.2017.

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