2019 (9) TMI 488 - AT - Income Tax

Bogus purchases - estimation of GP - CIT-A restricted the addition by estimating the income of the assessee on the basis of the average GP rate of past three years including the current year at 8.66% - HELD THAT - We note that in case of M/s. Kanchwala Gems vs. JCIT 2006 (12) TMI 83 - SUPREME COURT the income was estimated by taking the GP on the entire sales and not an addition was made to the returned income by making the disallowance of unverifiable purchases. In case of M/s. N.K. Proteins Ltd. vs. DCIT 2017 (1) TMI 1090 - SC ORDER it was a case of addition based on inflated purchases and not the estimation of income by rejecting the books of account. Therefore, those decisions relied upon by the Revenue would not help in the present case when the AO has rejected the books of account of the assessee. Accordingly, following the earlier order of this Tribunal, we do not find any error or illegality in the impugned order of the ld. CIT (A). Appeal of the revenue is dismissed.

Issues Involved:
1. Justification of applying an average GP rate of 8.70% by the CIT (A) and restricting the addition to ?4,26,171/- against the AO's addition of ?75,62,336/- for unverifiable purchases.
2. Ignoring the decisions/findings of the Hon’ble Supreme Court in M/s. Kachwala Gems vs. JCIT and N.K. Proteins Ltd. vs. DCIT regarding the addition of entire bogus purchases as undisclosed income.

Detailed Analysis:

1. Justification of Applying Average GP Rate:

The Revenue challenged the CIT (A)'s decision to apply an average GP rate of 8.70%, restricting the addition to ?4,26,171/- against the AO's addition of ?75,62,336/- for unverifiable purchases. The AO had treated purchases of ?3,02,49,345/- from 13 parties as unverifiable and disallowed 25% of these purchases. The assessee firm, engaged in trading, manufacturing, and exporting Gem Stones and Jewellery, provided details like PAN, TIN, CST, and RST numbers for these suppliers.

The CIT (A) found that the AO's findings were contrary to the facts, as the suppliers were registered under CST and RST. The CIT (A) held that once the books of account were rejected under section 145(3), the income should be estimated on a reasonable basis, typically using the past GP rate. The CIT (A) applied a GP rate of 8.70%, resulting in an addition of ?4,26,171/-, considering the past three years' GP rate and the current year's increased turnover.

2. Ignoring Decisions/Findings of the Supreme Court:

The Revenue argued that the CIT (A) ignored the Supreme Court's decisions in M/s. Kachwala Gems vs. JCIT and N.K. Proteins Ltd. vs. DCIT, which held that entire bogus purchases should be added as undisclosed income. The AO relied on these decisions to justify the 25% disallowance of unverifiable purchases.

However, the Tribunal noted that in the case of M/s. Kachwala Gems vs. JCIT, the income was estimated by taking the GP on the entire sales, not by disallowing unverifiable purchases. Similarly, in N.K. Proteins Ltd. vs. DCIT, the case involved inflated purchases, not the estimation of income after rejecting books of account. The Tribunal emphasized that once books are rejected, the AO should estimate income based on the GP rate, as established in the assessee's own case and other similar cases.

Conclusion:

The Tribunal upheld the CIT (A)'s decision to apply the average GP rate, rejecting the Revenue's appeal. The Tribunal found no error or illegality in the CIT (A)'s order, emphasizing that the estimation of income based on the GP rate is appropriate once the books of account are rejected. The Tribunal dismissed the Revenue's appeal, affirming the CIT (A)'s approach and the reduced addition.

← Previous Next →