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2020 (4) TMI 853 - AT - Income TaxEstimation of income - Bogus purchases - disallowance u/s 69C - assessee categorically contended that the assessee has shown that they have declared gross profit at 10.37% and if the addition at 100% of the alleged bogus purchases is sustained, gross profit would raise to 24.44% and ultimate net profit would raise to 20.61% which is impossible - HELD THAT - In case the transaction is not verifiable or the parties were failed to prove the entire transaction, only profit embedded in such transaction is liable to be taxed and not the entire transaction. Thus, considering the nature and activities of the assessee and the fact that the lower authorities have recorded that assessee failed to produce sufficient evidence to prove the genuineness, we are of the view that in order to check the possibility of revenue leakage, a reasonable disallowance of purchases / amount / disputed purchases would be sufficient to meet the ends of justice. Therefore, considering the nature of business, the disallowances are restricted to 12.5% of the amount / disputed purchases. The AO is directed accordingly.
Issues Involved:
1. Validity of reopening of assessment proceedings under Section 147. 2. Addition under Section 69C on account of non-genuine purchases. Issue-wise Detailed Analysis: 1. Validity of Reopening of Assessment Proceedings Under Section 147: The assessee challenged the reopening of the assessment proceedings under Section 147 of the Income Tax Act, 1961, asserting that the reopening was "bad in law" and should be quashed. However, during the arguments, the assessee did not press this ground. Consequently, the appellate tribunal treated the issue as not pressed and dismissed it. 2. Addition Under Section 69C on Account of Non-Genuine Purchases: The core issue in the appeals was the addition made by the Assessing Officer (AO) under Section 69C, treating certain purchases as non-genuine. The AO had reopened the assessment based on information from the sales-tax department, which indicated that certain dealers were providing accommodation entries without actual delivery of goods. The assessee's name appeared in the list of beneficiaries. The AO issued notices to the parties involved, but the notices were returned unanswered. The assessee was given opportunities to substantiate the purchases but failed to provide sufficient documentary evidence. Consequently, the AO disallowed the entire purchases. On appeal, the CIT(A) upheld the AO's decision, noting that the assessee did not comply with the notices and only provided ledger accounts without supporting documents. The assessee then appealed to the tribunal. The tribunal considered the submissions from both parties. The assessee argued that the AO made the disallowance based on third-party information without considering the documentary evidence provided. The assessee also contended that the sales were not possible without purchases and that the AO did not reject the books of account. The assessee suggested that only the profit element of the bogus purchases should be added back to the income. The revenue argued that the assessee failed to substantiate the genuineness of the purchases and that the sales-tax department and the income-tax department's investigation revealed that the assessee was a beneficiary of hawala traders providing accommodation entries. The tribunal noted that the AO made the addition without conducting an independent inquiry and solely relied on the sales-tax department's report. The AO did not dispute the sales or consumption of the assessee and did not reject the books of account. The tribunal emphasized that no sale is possible without purchases. The CIT(A) confirmed the AO's action in an ex-parte order without considering the part details submitted by the assessee. The tribunal referred to various case laws, including the decision of the Hon'ble jurisdictional High Court in PCIT vs Rishabdev Technocable Ltd, which upheld the addition on an estimate basis, and the Hon'ble Gujarat High Court in CIT vs Bholanath Poly Fab (P) Ltd, which held that only the profit element embedded in such purchases should be taxed, not the entire amount. The tribunal concluded that only the profit element embedded in the non-genuine purchases should be taxed. Considering the nature of the assessee's business and the failure to produce sufficient evidence, the tribunal deemed a reasonable disallowance of 12.5% of the disputed purchases to be sufficient. The AO was directed to make the necessary adjustments accordingly. Conclusion: The appeals were partly allowed. The tribunal dismissed the ground related to the validity of reopening the assessment proceedings and directed a disallowance of 12.5% of the disputed purchases, instead of the entire amount, to meet the ends of justice. The decision for the assessment year 2009-10 was applied mutatis mutandis to the appeals for the assessment years 2010-11 and 2011-12.
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