2019 (3) TMI 1025 - AT - Income Tax

Bogus purchases - CIT-A sustaining 12.5% disallowance - purchases through the grey market - reduction of gross profit already shown and offered to tax from profits earned by the assessee on these bogus purchase transaction - 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 this regard 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. We find considerable cogency in the submission of the learned counsel 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. - Decided partly in favour of assessee.

Summary

Issues:
1. Disallowance on account of bogus purchases amounting to ?6,20,220 for the assessment year 2009-10.

Analysis:
The case involved an appeal by the assessee against the Commissioner of Income Tax (Appeals) sustaining a 12.5% disallowance on alleged bogus purchases. The assessee, engaged in trading ferrous and non-ferrous metals, faced scrutiny due to purchases from hawala dealers providing accommodation entries without actual goods delivery. The AO reopened assessment based on information from Sales Tax authorities, leading to a disallowance of ?6,20,220 (12.5% of total alleged bogus purchases of ?49,61,764).

2. Genuineness of purchases and legal precedents:
The AO requested evidence to establish the genuineness of purchases, but the assessee failed to produce parties or key documents like delivery challans. However, the assessee matched bogus purchases with sales. The ITAT considered legal precedents, including a Gujarat High Court decision and a Supreme Court dismissal of a Special Leave Petition, emphasizing the necessity of documentary evidence for purchases. The ITAT noted that sales were not doubted, preventing a 100% disallowance for bogus purchases.

3. Determination of disallowance percentage:
The ITAT referenced a jurisdictional High Court decision regarding bogus purchases when sales are not doubted. It highlighted the impact of grey market purchases on tax evasion and concluded a 12.5% disallowance was appropriate in this case. The assessee argued for taxing only profits from bogus transactions and deducting declared gross profits from the disallowance. The ITAT accepted this argument to avoid double jeopardy for the assessee.

4. Modification of the order:
After careful consideration, the ITAT modified the CIT(A) order, restricting the disallowance to 12.5% of bogus purchases minus the declared gross profit rate. The assessee's counsel agreed with this modification. Consequently, the appeal was partly allowed, balancing the need for disallowance with fairness to the assessee.

In conclusion, the ITAT judgment addressed the issue of disallowance on alleged bogus purchases, emphasizing the importance of documentary evidence, legal precedents, and fair treatment of the assessee in determining the appropriate disallowance percentage.