2019 (11) TMI 1030 - AT - Income Tax

Addition of bogus purchase - CIT(A) restricted addition only to the extent of profit element therein - HELD THAT - For Revenue s pleadings, we find that the department itself has been fair enough in not disputing the assessee s corresponding sales in electrical equipments supplied to M/s Coal India Ltd. and its subsidiaries. It thus appears to be an instance of assessee s purchases made from unregistered dealers. Hon ble Bombay high court s recent decision in PCIT vs. Mohammad Haji Adam 2019 (2) TMI 1632 - BOMBAY HIGH COURT ; after taking into consideration hon ble apex court s decision in N. K. Proteins Ltd. vs. DCIT 2017 (1) TMI 1090 - SC ORDER holds that the right approach in such an instance of bogus/unverifiable purchases is that of assessment of profit element than the entire amount. We therefore decline the Revenue s argument by adopting the very reasoning herein as well. Assessee s grievance also deserves to be rejected as their lordships held therein that it is the gross profit and not the net profit including all operative costs available to be disallowed in case of bogus purchases. We accordingly affirm the CIT(A) findings for making subject-matter of challenge in all these four crossappeals filed at Revenue s and assessee s behest.

Issues Involved:
1. Correctness of disallowance of assessee’s entire purchases.
2. Application of gross profit rate on alleged bogus purchases.
3. Verification of suppliers and their VAT registrations.
4. Treatment of purchases as bogus based on Central Excise Department's findings.
5. Determination of profit element in the disallowed purchases.

Detailed Analysis:

1. Correctness of Disallowance of Assessee’s Entire Purchases:
The central issue revolves around the correctness of disallowing the entire purchases made by the assessee, amounting to ?4,90,30,444/- and ?2,28,86,352/- for the assessment years 2013-14 and 2014-15 respectively. The Assessing Officer (AO) disallowed these purchases on the grounds that the suppliers did not exist, as evidenced by the Central Excise Department’s enquiries. The CIT(A) restricted the disallowance to the profit element, calculating figures of ?69,72,348/- and ?37,22,278/- respectively.

2. Application of Gross Profit Rate on Alleged Bogus Purchases:
The assessee argued that the AO should have applied the gross profit rate on the alleged bogus purchases instead of disallowing the entire amount. The CIT(A) accepted this contention, noting that the sales were not disputed and were made to Coal India Ltd. and its subsidiaries. The CIT(A) concluded that the goods were physically available for sale, and thus, the entire purchases could not be disallowed. Instead, the gross profit rate was applied to determine the concealed income.

3. Verification of Suppliers and Their VAT Registrations:
The AO noted that the VAT registrations of most suppliers were either canceled or about to be canceled. However, the assessee provided evidence showing that the VAT registrations were valid at the time of the transactions. The CIT(A) found that the AO erred in treating the purchases as bogus solely based on the suppliers' VAT registration status and non-production of suppliers physically.

4. Treatment of Purchases as Bogus Based on Central Excise Department's Findings:
The Central Excise Department’s report indicated that the suppliers did not exist, and the purchases were either manufactured or unaccounted. This led to the AO’s conclusion that the purchases were bogus. However, the CIT(A) observed that the sales to Coal India Ltd. were genuine and supported by documentary evidence. The CIT(A) thus held that the purchases, though possibly not from the claimed suppliers, were genuine and should be assessed based on the profit element.

5. Determination of Profit Element in the Disallowed Purchases:
The CIT(A) applied a gross profit rate of 12.45% on the unverifiable purchases, resulting in an addition of ?69,72,348/- for the assessment year 2013-14. The balance amount of ?4,90,30,444/- was deleted. The same approach was applied for the assessment year 2014-15. The Tribunal upheld this method, citing the Bombay High Court’s decision in PCIT vs. Mohammad Haji Adam, which supports assessing the profit element in cases of bogus/unverifiable purchases.

Conclusion:
The Tribunal dismissed both the Revenue’s and assessee’s appeals. It affirmed the CIT(A)’s decision to restrict the disallowance to the profit element and not the entire purchase amount. The Tribunal also rejected the assessee’s plea to adopt net profits instead of gross profits, aligning with the precedent that only the gross profit embedded in the sales can be taxed. The order was pronounced on 15.11.2019.

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