2018 (1) TMI 506 - AT - Income Tax

Bogus purchases - purchases from grey market - profit estimation - Held that - The assessee had not carried out any genuine purchase transactions from the aforementioned parties, but then the fact that the corresponding sales of the goods under consideration stood duly accounted for in the books of accounts of the assessee, had not been doubted by the lower authorities. We are of the considered view that now when the sales of the goods under consideration have duly been routed through the books of the accounts of the assessee, therefore, it could safely be concluded that the assessee had purchased the goods from the open/grey market. CIT(A) had rightly observed that the addition was liable to be restricted only up to the amount of profit margin involved in making of purchases of the goods from the open/grey market. We have given a thoughtful consideration to the observations of the CIT(A) and find that he had by way of a very well reasoned order restricted the addition in the hands of the assessee to the extent of the profit margin relatable to aggregate value of the purchases under consideration. We further find that no infirmity emerges on the part of the CIT(A) by adopting the profit margin at the rate of 12.5% by relying on the judgment of CIT Vs. Simit P. Sheth (2013 (10) TMI 1028 - GUJARAT HIGH COURT) - Decided against revenue

Summary

Issues:
1. Justification of sustaining 12.5% profit rate on total purchases made from parties providing accommodation entries.
2. Failure to substantiate purchases before the Assessing Officer.
3. Consideration of profit margin in the addition of bogus purchases.
4. Applicability of the judgment in restricting the addition to the profit margin.

Analysis:

1. The appeal by the revenue challenged the CIT(A)'s order sustaining a 12.5% profit rate on total purchases from parties providing accommodation entries. The A.O reopened the case based on information about bogus purchases. The assessee failed to substantiate purchases during assessment, leading to rejection of account books. Despite turnover, no evidence supported purchases. The A.O concluded the purchases were not genuine, adding the entire amount of bogus purchases to the assessee's income.

2. The CIT(A) upheld the A.O's decision, noting the failure to prove the genuineness of purchases. However, as corresponding sales were not doubted, the CIT(A) restricted the addition to the profit margin generated from open/grey market purchases. Relying on a Gujarat High Court judgment, the CIT(A) estimated the profit margin at 12.5% of the bogus purchase value.

3. The revenue appealed the CIT(A)'s decision, arguing for the restoration of the A.O's full addition. Despite the assessee's absence, the Tribunal proceeded with the appeal. The Tribunal considered the facts and observed that although genuine purchases were not made, the sales were accounted for. Consequently, the addition was limited to the profit margin from open/grey market purchases, in line with the CIT(A)'s reasoned order.

4. The Tribunal found no fault in the CIT(A)'s approach, affirming the profit margin restriction and the reliance on the Gujarat High Court judgment. Consequently, the Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s order.