2018 (11) TMI 698 - AT - Income Tax

Disallowance on account of bogus purchases - addition to 12.5% of the bogus purchases - Held that - In the present case the facts of the case indicate that assessee has made purchase from the grey market. Making purchases through the grey market gives the assessee savings on account of non-payment of tax and others at the expense of the exchequer. In such situation in our considered opinion on the facts and circumstances of the case the 12.5 % disallowance out of the bogus purchases meets the end of justice. As the assessee has prayed that when only the profits earned by the assessee on these bogus purchase transaction is to be taxed the gross profit already shown by the assessee and offered to tax should be reduced from the standard 12.5% being directed to be disallowed on account of bogus purchase. Upon careful consideration we find considerable cogency in the submission of the assessee as otherwise it will be double jeopardy to the assessee. Accordingly we modify the order of learned CIT-A and direct that the disallowance in this case be restricted to 12.5 % of the bogus purchases as reduced by the gross profit rate already declared by the assessee on these transactions. Ld counsel of the assessee fairly accepted this proposition

Summary

Issues:
1. Disallowance on account of bogus purchases - Revenue's appeal
2. Reassessment and disallowance on part of bogus purchases - Assessee's appeal

Analysis:
1. The Revenue's appeal challenged the CIT(A)'s decision to restrict the disallowance on account of bogus purchases to 12.5% of the total amount. The AO had added back the entire amount of the alleged bogus purchases based on incriminating evidence from the Sales Tax department and the assessee's failure to produce requested parties for verification. The CIT(A) upheld the disallowance of 12.5% of the purchases, citing the motive of inflating purchase prices to suppress profits. The Tribunal considered the documentary evidence provided by the assessee, the absence of doubts on sales/consumption, and legal precedents. Ultimately, the Tribunal modified the CIT(A)'s order, limiting the disallowance to 12.5% of the bogus purchases after deducting the gross profit rate declared by the assessee on those transactions.

2. The assessee's appeal contested the reassessment and the sustained 12.5% disallowance on bogus purchases. The AO reopened the assessment based on information alleging accommodation entries from hawala dealers. The assessee submitted various documents to substantiate the transactions' genuineness, but failed to produce the parties for verification. The CIT(A) upheld the disallowance, considering the motive behind obtaining bogus bills. The Tribunal noted that no shortcomings were found in the documentary evidence provided by the assessee and highlighted the importance of not doubting sales when assessing bogus purchases. The Tribunal referred to a High Court decision supporting full allowance for purchases when sales are not doubted. Ultimately, the Tribunal modified the CIT(A)'s order, restricting the disallowance to 12.5% of the bogus purchases after adjusting for the gross profit rate declared by the assessee.

In conclusion, the Tribunal dismissed the Revenue's appeals and partly allowed the assessee's cross objections, emphasizing the need to consider the actual profit earned on the bogus purchase transactions to avoid double jeopardy for the assessee. The judgment highlighted the importance of providing documentary evidence, not doubting sales in the absence of proof, and considering the specific circumstances of each case when determining disallowances on bogus purchases.