2019 (4) TMI 1173 - HC - Income Tax

Disallowances of bogus purchases to 25% - concern person of seller makes statement in search that he issued bogus bills to various parties on nominal commission - in light of the statement AO held that the evidence for purchase produced by the assessee was not genuine and disallowed - AO worked out the yield ratio and found that during the period from assessment years 1992-93 to 1997-98, there was a big variation in actual yield achieved - assessee company had not provided the reason for decrease in gross profit ratio and details of yield as called for - assessee also submitted that if the purchases are held to be bogus, the corresponding sales be excluded - CIT(A) restricted the disallowance to 25% - Tribunal dismissed the appeals - HELD THAT - As can be seen from the order passed by the Commissioner (Appeals), he, after appreciating the material on record, has recorded a finding of fact to the effect that the assessee had produced goods by utilising such bulk drugs and it is in the light of such finding of fact recorded by him that he has restricted the disallowance on account of bogus purchases to 25%. The Tribunal has not disturbed such finding of fact recorded by the Commissioner (Appeals). A perusal of the proposed questions shows that the appellant has neither challenged the concurrent finding of fact recorded by the Commissioner (Appeals) and the Tribunal, nor has it been pleaded that the findings of fact recorded by the Tribunal are perverse. In the facts of the present case, the Tribunal, having concurrently found that there were corresponding sales in respect of the bogus purchases, was wholly justified in confirming the order passed by the Commissioner (Appeals) in restricting the bogus purchases to 25% of the bogus purchases. Since the Tribunal as well as the Commissioner (Appeals), have merely followed the decision of the jurisdictional High Court, no infirmity can be found in the impugned order passed by the Tribunal warranting interference. However, it may be clarified that the quantum of deduction, namely, 25% cannot be said to be a fixed standard, inasmuch as, in the case of Sanjay Oilcake Industries v. Commissioner of Income tax 2008 (3) TMI 323 - GUJARAT HIGH COURT what the court has held was that the extent of restriction was merely an estimate and that an estimate cannot give rise to a question of law. Nonetheless, having regard to the facts and circumstances of this case, this court does not find any warrant for interference. In the light of the above discussion, the conclusion arrived at by the Tribunal being based upon a finding of fact, namely, that there were corresponding sales in respect of the bogus purchases, the impugned order passed by the Tribunal cannot be said to give rise to any question of law, much less, a substantial question of law warranting interference - appeals dismissed.

Issues Involved:
1. Whether the ITAT erred in law and on facts in upholding the CIT(A)'s order in restricting the addition/disallowances on account of bogus purchases to 25% instead of the entire amount.
2. Whether the ITAT erred in relying on the decision of the Gujarat High Court in the case of N.K. Industries Ltd. vs. DCIT, in restricting the addition of bogus purchases.

Issue-wise Detailed Analysis:

1. Restriction of Addition/Disallowances on Account of Bogus Purchases:

The appellant revenue questioned the Tribunal's order that upheld the CIT(A)'s decision to restrict the addition/disallowances on account of bogus purchases to 25% instead of the entire amount. The assessee, engaged in manufacturing and marketing bulk drugs and pharmaceutical preparations, was found to have made purchases from concerns operated by Shri F.H. Rizvi, which were deemed bogus. Despite the assessee providing various documents to support the genuineness of the purchases, the Assessing Officer (AO) deemed the evidence as not genuine, citing Shri Rizvi's admission that the transactions were merely on paper with no physical movement of goods.

The AO further analyzed the yield ratio and found significant variations, which were deemed abnormal and unexplained. Consequently, the AO disallowed the entire amount of ?41,73,000/- as bogus purchases and added ?21,02,500/- to the total income, resulting in a total addition of ?62,75,500/- for the assessment year.

The CIT(A), however, observed that while the purchases were not genuine, the assessee had produced goods using the bulk drugs. Therefore, following the decision in Themis Medicare, the CIT(A) restricted the disallowance to 25% of the total purchases made from Shri Rizvi's concerns.

The Tribunal, concurring with the CIT(A), noted that the AO had accepted the corresponding sales made out of the bogus purchases. It followed the jurisdictional High Court's decision in N.K. Industries Ltd. v. DCIT, which supported restricting the disallowance to 25% of the bogus purchases.

2. Reliance on the Decision in N.K. Industries Ltd. vs. DCIT:

The appellant argued that the Tribunal erred in relying on the decision in N.K. Industries Ltd. v. DCIT, where the court had observed that taxing only 25% of bogus claims goes against sections 68 and 69C of the Income Tax Act. The appellant contended that the entire amount of bogus purchases should have been disallowed, as the concerns of Shri Rizvi were only paper concerns with no physical movement of goods.

The respondent, however, argued that the Tribunal rightly restricted the disallowance to 25% of the bogus purchases, as there were corresponding sales. The respondent cited the decision in Vijay Proteins Ltd. v. Commissioner of Income Tax, which supported restricting disallowance to 25% in cases of bogus purchases.

The High Court, considering the rival submissions, noted that the CIT(A) had recorded a finding of fact that the assessee had produced goods using the bulk drugs. The Tribunal had not disturbed this finding. The court observed that the appellant had not challenged the concurrent finding of fact nor pleaded that the findings were perverse. The Tribunal had followed the jurisdictional High Court's decision in N.K. Industries Ltd. v. DCIT and Vijay Proteins Ltd. v. Commissioner of Income Tax, which justified restricting the disallowance to 25%.

The court also referred to Sanjay Oilcake Industries v. CIT, where it was held that an estimate of 25% disallowance was fair and reasonable. The court emphasized that the quantum of deduction, namely 25%, is not a fixed standard but an estimate based on the facts and circumstances of each case.

Conclusion:

The High Court concluded that the Tribunal was justified in confirming the CIT(A)'s order restricting the disallowance to 25% of the bogus purchases, as there were corresponding sales. The court found no infirmity in the Tribunal's order and dismissed the appeals, holding that the impugned order did not give rise to any substantial question of law warranting interference. The decision of the Bombay High Court in Shoreline Hotel (P.) Ltd. v. Commissioner of Income Tax was found inapplicable to the present case, as it involved different facts and circumstances.

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