2019 (1) TMI 738 - AT - Income Tax

Bogus purchases - Revenue received information from Sales-tax Department, Government of Maharashtra, that certain dealers were only providing accommodation bills without actually supplying materials Held that - Since the assessee has failed to reconcile the purchases with the sales, we are of the view that the profit element embedded in such purchases is justified. The learned AR submitted that the VAT applicable on the product is around 5%. In these kind of purchases, the assessee could have made savings on account of VAT and also would have got materials at discounted rate. Considering these position of the issue, we are of the view that the estimate of profit at 25% is on the higher side. Hence on the conspectus of the matter, we are of the view that this issue may be put to rest, if the addition is sustained to 12.50% of the value of bogus purchases. Accordingly, we modify the order passed by the learned CIT(A) and direct the A.O. to sustain the addition to the extent of 12.50% of the value of bogus purchases. - Appeal filed by the assessee is partly allowed.

Summary

Issues:
Assessment of alleged bogus purchases and rejection of books of account leading to estimation of income.

Analysis:
The appeal pertains to the assessment year 2010-2011 where the assessee, a trader in iron, steel, and hardware, faced scrutiny due to alleged bogus purchases totaling ?1,48,79,887. The Assessing Officer (A.O.) reopened the assessment as per information from the Sales-tax Department regarding accommodation bills provided by certain dealers without actual supply of goods. The A.O. found discrepancies in the assessee's documentation, such as missing delivery challans, transportation details, and failure to produce stock registers. Consequently, the A.O. rejected the books of account and estimated the income at 25% of the sales value, leading to the dispute.

In the appellate proceedings, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the rejection of books but modified the estimation method. The CIT(A) directed to add 25% value of bogus purchases to the declared income instead of estimating profit on the entire sales turnover. The assessee challenged this decision, arguing that invoices and payment proofs were provided, and sales tax was paid subsequently. The assessee also cited a related case where a lower GP rate was accepted. The Revenue contended that the assessee failed to reconcile purchases with sales and did not produce essential documents like stock register.

Upon review, the ITAT found the assessee's failure to reconcile purchases with sales significant. Considering potential savings on VAT and discounted rates, the ITAT deemed the 25% profit estimate excessive. Referring to a related case, the ITAT clarified that the absence of a Revenue challenge limited its scope for altering the CIT(A)'s decision. Ultimately, the ITAT modified the CIT(A)'s order, reducing the addition to 12.50% of the value of bogus purchases, finding it a more reasonable estimation of profit.

In conclusion, the ITAT partially allowed the assessee's appeal, directing the A.O. to sustain the addition at 12.50% of the value of bogus purchases, providing a balanced resolution to the disputed assessment.