2019 (1) TMI 885 - AT - Income Tax

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, 12.5 % disallowance out of the bogus purchases meets the end of justice. 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. We find considerable cogency in the submission of the learned counsel of the assessee, as otherwise it will be double jeopardy to the assessee. 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.Assessee fairly accepted this proposition. Appeal filed by the assessee stands partly allowed.

Summary

Issues:
1. Disallowance of expenses claimed by the assessee based on alleged un-genuine purchases.
2. Burden of proof on the assessee to substantiate the genuineness of transactions.
3. Disallowance and addition of the alleged purchases to the total income of the assessee.
4. Appeal against the order of the Commissioner of Income Tax (Appeals) restricting the disallowance to 8%.
5. Consideration of documentary evidence provided by the assessee for the purchases.
6. Rationale behind disallowance percentage for alleged bogus purchases.
7. Modification of the order to restrict the disallowance to 12.5% of the bogus purchases.

Analysis:

1. The case involved a dispute regarding the disallowance of expenses claimed by the assessee based on alleged un-genuine purchases. The Assessing Officer disallowed the expenses as the assessee failed to prove the genuineness of the transactions, especially after the notice issued under section 133(6) was not complied with.

2. The burden of proof was on the assessee to substantiate the genuineness of the transactions. Despite furnishing copies of purchase invoices, ledger accounts, and bank statements, the VAT/TIN numbers of the parties matched with those identified as hawala dealers by the Sales-tax Department, raising doubts on the genuineness of the purchases.

3. Consequently, the alleged purchases were disallowed and added back to the total income of the assessee by the Assessing Officer, leading to the dispute and subsequent appeal before the Commissioner of Income Tax (Appeals).

4. The Commissioner of Income Tax (Appeals) restricted the disallowance to 8%, considering the arguments presented by the appellant regarding the VAT payments made twice and the motive behind obtaining bogus bills. The appellant's contention led to a partial allowance of the appeal.

5. The appellate tribunal considered the documentary evidence provided by the assessee for the purchases and noted that while adverse inferences were drawn due to the inability to produce suppliers, the sales were not doubted, which influenced the decision on the disallowance percentage.

6. The tribunal deliberated on the rationale behind the disallowance percentage for alleged bogus purchases, citing a jurisdictional High Court decision and the distinction between purchases from the grey market and government agencies, leading to the decision to restrict the disallowance to 12.5% of the bogus purchases.

7. Ultimately, the tribunal modified the order to limit the disallowance to 12.5% of the bogus purchases, taking into account the gross profit rate already declared by the assessee on these transactions, thus partly allowing the appeal filed by the assessee.