2020 (12) TMI 212 - AT - Income Tax

Estimation of income - Bogus purchases - CIT-A sustaining addition to the tune of 3% of alleged disputed purchase by applying average Gross Profit Ratio in the appellant s case - HELD THAT - Unverifiable element involved in the purchases in question called for addition and the same can be to the extent of percentage of purchases which can be estimated by a reference to the gross profit rates. The resultant net profit, in our opinion, is not relevant in this context. In so far as the gross profit rate is concerned, it is observed that the assessee for the immediately succeeding three years that is A.Y. 2015-16, 2016-17 and 2017-18 wherein the turnover shown by the assessee was comparable to the four years under consideration was 6.14% as against the average GP rate of 3.17% declared by the assessee for all the four years under consideration. The average GP rate declared by the assessee for all the four years under consideration thus was less by about 3% than the average GP rate declared by the assessee for the immediately succeeding three years - additional GP rate of 3% adopted by the Ld. CIT(A) as the profit element embedded in the disputed purchases for all the four years under consideration was quite fair and reasonable - Decided against assessee. Addition u/s 40A(3) - HELD THAT - It is observed that even though a possibility was expressed by the Ld. CIT(A) about the purchases in question having been made by the assessee from the grey market, there is no evidence whatsoever available on record to show that the said purchases were actually made by the assessee from the grey market and payments against the same were made in cash as alleged by the Ld. DR. In our opinion, this case is therefore not a fit case where the provision of section 40A(3) can be invoked and that too for the first time at this stage before the Tribunal. We, therefore, find no merit in the appeals of the Revenue

Summary

Issues Involved:
1. Validity of assessments under section 143(3) read with section 147.
2. Treatment of purchases as bogus and the resultant additions to income.
3. Estimation of profit element embedded in disputed purchases.
4. Applicability of section 40A(3) regarding cash payments.

Issue-wise Detailed Analysis:

1. Validity of Assessments under Section 143(3) read with Section 147:
The assessee challenged the validity of the assessments made by the Assessing Officer (AO) under section 143(3) read with section 147 of the Income Tax Act for the assessment years (A.Y.) 2011-12, 2012-13, 2013-14, and 2014-15. The Ld. CIT(A) upheld the validity of these assessments, rejecting the preliminary issue raised by the assessee. The Tribunal did not find any merit in the assessee's contention challenging the validity of the assessments.

2. Treatment of Purchases as Bogus and Resultant Additions:
The AO treated the entire purchases made by the assessee from the entities of Shri Sanjiw Kumar Singh as bogus, based on the survey and search findings, and added the amounts to the total income of the assessee for the four years under consideration. The assessee's attempt to establish the genuineness of the purchases was unsuccessful as they could not furnish transportation details or produce relevant documents like bilties and challans.

3. Estimation of Profit Element Embedded in Disputed Purchases:
The Ld. CIT(A) found that while the entire amount of alleged bogus purchases could not be added as income, only the profit element embedded in the disputed transactions should be considered for addition. The CIT(A) estimated this profit element at 3% of the disputed purchases, based on judicial precedents like CIT vs Simit P Sheth and CIT vs M/s. Mohommad Haji Adam & Co. The Tribunal upheld this estimation, finding it fair and reasonable, given the average gross profit (GP) rates declared by the assessee in subsequent years.

4. Applicability of Section 40A(3) Regarding Cash Payments:
The Revenue argued that since the purchases were made from the grey market, payments must have been made in cash, attracting the provisions of section 40A(3). However, the Tribunal accepted the assessee's contention that there was no evidence to show that the purchases were made in cash. The payments were made by cheques, as established by the bank statements. Therefore, the Tribunal found no merit in invoking section 40A(3) and dismissed the appeals of the Revenue.

Conclusion:
The Tribunal dismissed all four appeals of the assessee and both appeals of the Revenue. The assessments under section 143(3) read with section 147 were upheld. The treatment of the entire purchases as bogus was not accepted, and only the profit element at 3% of the disputed purchases was added to the income. The applicability of section 40A(3) was rejected due to lack of evidence of cash payments. The order was pronounced in the open court on 22nd October 2020.