2020 (4) TMI 581 - AT - Income Tax

Estimation of income - bogus purchases - HELD THAT - AO has not disallowed the sales, but disputed only the purchases. Therefore, we cannot disallow 100% of the purchases and we have seen that various courts held that when the AO accepts the turnover without any dispute and in those situation, only the benefit enjoyed by the assessee are being considered for disallowance instead of 100% of purchases and considering the benefit enjoyed by the assessee for these type of transactions, the rate of disallowance were varying from 12.5% to 3%. We notice that during this current AY, the turnover of the assessee has grown to 20.68 crores against 8.05 crores, even though there is sharp increase in the turnover, the assessee declared only 3.07% as the GP. Since Ld. CIT(A) has adopted previous year gross profit as the base for this AY also. But the results achieved by the assessee for the period is not reasonable and cannot be relied on. Therefore, following the standard basis of the decision of the Coordinate Benches, we are inclined to direct the AO to disallow 12.5% of the purchases value which are under dispute. - Decided partly in favour of revenue.

Issues Involved:
1. Bogus Purchase Bills
2. Reopening of Assessment under Section 147
3. Disallowance of 100% of Bogus Purchases
4. Estimation of Gross Profit (GP) Rate
5. Validity of Comparative Analysis of GP Rates
6. Relief Granted by CIT(A)
7. Grounds of Appeal by Assessee and Revenue

Issue-wise Detailed Analysis:

1. Bogus Purchase Bills:
The assessee, engaged in the business of scrap material and iron & steel, was found to have received bogus purchase bills from entities like Sidhivinayak and Surat Tube Corporation. The AO, upon receiving information from the Sales Tax Department, treated these transactions as bogus due to the lack of supporting documents such as transport and octroi bills, despite ledger accounts and cheque payments being provided by the assessee.

2. Reopening of Assessment under Section 147:
The assessment was reopened under Section 147 of the Income Tax Act by issuing a notice under Section 148, based on the information received from the Sales Tax Department regarding bogus purchase bills.

3. Disallowance of 100% of Bogus Purchases:
The AO disallowed 100% of the bogus purchases. The CIT(A) agreed with the AO's findings but only sustained 5.73% of the bogus purchases as suppressed profit, relying on various judgments.

4. Estimation of Gross Profit (GP) Rate:
The CIT(A) analyzed the GP rates for the hawala years, preceding two years, and subsequent two years. The GP rate for AY 2011-12 was found to be 3.07%, significantly lower than the 4.66% in AY 2007-08 (non-hawala purchase year). The CIT(A) concluded that the appellant had suppressed its profits by booking alleged hawala purchases.

5. Validity of Comparative Analysis of GP Rates:
The CIT(A) compared the GP rates of the appellant with those of similar trades and found that the appellant's GP rates were lower. For instance, the GP rate for M/s Vinayak Trading Corporation was 9.20% and 9.22% in the same years, compared to the appellant's 5.20% and 3.07%.

6. Relief Granted by CIT(A):
The CIT(A) estimated the GP rate at 5.73% for the hawala years, leading to the disallowance of ?11,36,293 for AY 2010-11 and ?55,01,723 for AY 2011-12. The balance amounts were deleted, and the appeals were partly allowed.

7. Grounds of Appeal by Assessee and Revenue:
Both the assessee and revenue appealed against the CIT(A)'s order. The revenue argued that the CIT(A) erred in not following the ITAT Pune's decision to confirm 100% addition of bogus purchases. The assessee contended that the CIT(A) did not follow his own findings and that the GP ratio adopted for AY 2010-11 should not be the basis for AY 2011-12.

Final Judgment:
The Tribunal considered the rival submissions and the material on record. It noted that the AO did not dispute the sales but only the purchases. The Tribunal found that the CIT(A) had rightly evaluated the transactions from AY 2007-08 to 2013-14. However, it concluded that the results achieved by the assessee were not reasonable and directed the AO to disallow 12.5% of the purchase value under dispute. Consequently, the appeal filed by the assessee was dismissed, and the appeal filed by the revenue was partly allowed. The order was pronounced in the open court on 10th Feb 2020.

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