2018 (4) TMI 277 - AT - Income Tax

Addition made on account of bogus purchases - Held that - As relying on M/s. Chhabi Electricals Pvt. Ltd. Vs. DCIT 2017 (6) TMI 514 - ITAT PUNE Addition is to be restricted by applying GP rate of 10% on the said purchases over and above the GP rate shown by the assessee. Accordingly, appeal filed by the assessee is partly allowed

Summary

Issues Involved:
1. Disallowance of bogus purchases.
2. Confirmation of disallowance to the extent of 25% by CIT(A).

Issue-wise Detailed Analysis:

1. Disallowance of Bogus Purchases:
The primary issue in the appeal concerns the addition made on account of bogus purchases. The assessee, engaged in the manufacturing of steel products, was alleged to have made bogus purchases based on information from the Sales Tax Department, Maharashtra. The Assessing Officer (AO) reopened the case under section 148 of the Income-tax Act, 1961, and issued notices under section 133(6) to verify the transactions. The AO concluded that the purchases amounting to ?20,00,492 (including original and new hawala purchases) were bogus as no replies were received from the alleged sellers, and the notices were returned unserved. Consequently, the AO added the entire amount to the assessee's income.

2. Confirmation of Disallowance to the Extent of 25% by CIT(A):
The Commissioner of Income Tax (Appeals) [CIT(A)] applied a Gross Profit (GP) rate of 25% on the alleged bogus purchases, reducing the addition to ?5,00,123. The CIT(A) reasoned that in the absence of production of parties and lack of proof of expenses, the purchases could not be verified, and thus, restricted the disallowance to 25% of the total purchases.

Detailed Analysis:

The assessee argued that no addition was warranted as the statements relied upon by the authorities were not confronted to the assessee. The assessee provided various documents to establish the genuineness of the purchases, including ledger accounts, purchase bills, movement of goods, bank statements, and production flow charts. The assessee also requested an opportunity to cross-examine the alleged hawala dealers, which was not granted.

The Tribunal noted that the AO failed to provide the statements or evidence in respect of the purchases. Citing the Pune Bench of Tribunal decisions in ACIT Vs. M/s. Chetan Enterprises and M/s. Chhabi Electricals Pvt. Ltd. Vs. DCIT, it was held that in the absence of such evidence being confronted to the assessee, no addition was warranted. The Tribunal emphasized the principle of natural justice, which demands that any document used against the assessee must be confronted to them before reliance.

The Tribunal observed that the assessee had established the movement of goods and provided necessary evidences. It was noted that the CIT(A) had also acknowledged the consumption details filed by the assessee. Therefore, following the precedent set by similar cases, the Tribunal concluded that the addition made by the CIT(A) was not justified.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that no addition was warranted in the hands of the assessee concerning the alleged bogus purchases. The addition made by the CIT(A) was deleted, and the appeal was allowed, emphasizing the need for adherence to principles of natural justice and proper confrontation of evidence in such cases.