2019 (1) TMI 585 - AT - Income Tax

12.5% disallowance on account of bogus purchase - purchase from grey market - 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 nonpayment 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, 12.5 % disallowance out of the bogus purchases for the profit made thereupon meets the end of justice. Hence, 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. This is to exclude double jeopardy to the assessee - Decided partly in favour of assessee.

Summary

Issues: Appeal against sustaining 12.5% disallowance on account of bogus purchase.

Analysis:
1. Background: The assessee, a trading firm in timber, filed a return declaring total income of ?28,760. The case was reopened based on information from the Investigation Wing regarding accommodation bills for purchases from hawala operators. The AO made a 12.5% addition on account of bogus purchases amounting to ?1,37,557.

2. AO's Findings: The AO found that purchases totaling ?11,00,457 were made from parties listed as suspicious dealers by the Sales Tax Department, involved in providing accommodation entries without actual goods delivery. The parties did not maintain stock, conduct genuine business, or transact goods, providing entries for commission.

3. Assessment Proceedings: The AO conducted inquiries, but notices to suppliers were unserved, and local inquiries reported non-existence of parties. The assessee failed to provide complete documentary evidence for purchases, like transportation bills. The AO disallowed ?1,37,557 as 12.5% of the total purchase amount.

4. Judgment: The ITAT found the evidence for purchases unproved. While sales were not doubted, 100% disallowance for bogus purchases was deemed inappropriate. Referring to a High Court decision, a 12.5% disallowance was considered just for profit made on bogus purchases from the grey market. The gross profit offered by the assessee was to be reduced by the standard 12.5% disallowance to avoid double jeopardy.

5. Conclusion: The ITAT partly allowed the appeal, modifying the order to exclude double jeopardy for the assessee. The judgment highlighted the importance of verifying purchases and ensuring fair taxation practices.