2021 (1) TMI 683 - AT - Income Tax

Estimation of income - Bogus purchases - assessee failed to establish the genuineness of the purchases - AO estimated the profit @ 12.5% on the disputed purchases - HELD THAT - The ratio laid down in Jakharia Fabric (P.) Ltd. 2020 (3) TMI 474 - BOMBAY HIGH COURT observing that profit element embedded in such transaction has to be added to the total income of the assessee is applicable to the present case. The nature of business in the instant case is manufacturing and selling of agricultural equipments and implements. Considering the nature of business of the assessee, we set aside the order of the Ld. CIT(A) and direct the AO to estimate profit @ 4% on the disputed purchases and make an addition accordingly.

Summary

Issues:
1. Justification of deleting the addition of ?1,88,768 made by the AO on account of bogus purchases.
2. Entertaining the appeal despite the tax effect being below the monetary limit prescribed by CBDT instruction.
3. Restoration of the AO's order by setting aside the CIT(A)'s order.

Issue 1: The appeal involved the justification of deleting the addition of ?1,88,768 made by the AO on account of bogus purchases. The AO had reopened the assessment based on information from the Sales Tax Department that the assessee obtained accommodation entries from a specific entity. Despite the assessee providing information and documents during reassessment proceedings, the AO estimated a profit on the disputed purchases and made the addition to the income shown by the assessee. The CIT(A) deleted this disallowance by emphasizing that the AO solely relied on external information without pointing out discrepancies in the assessee's records or noncompliance. The CIT(A) held that the AO was unjustified in disallowing the purchases and directed the AO to relieve the disallowance.

Issue 2: The issue of entertaining the appeal despite the tax effect being below the monetary limit prescribed by CBDT instruction was raised. The Revenue requested the ITAT to entertain the appeal citing an exception in the instruction due to information received from law enforcement agencies. However, the ITAT did not delve deeply into this issue in the judgment, focusing more on the substantive issue of the addition made by the AO.

Issue 3: The third issue revolved around the restoration of the AO's order by setting aside the CIT(A)'s order. The Revenue, relying on a judgment of the Bombay High Court, argued that the profit element embedded in the transactions should be added to the total income of the assessee. The ITAT agreed with this argument, emphasizing that the nature of the assessee's business warranted a profit estimation on the disputed purchases. Consequently, the ITAT directed the AO to estimate the profit at 4% on the disputed purchases and make an addition of ?60,400 only, partially allowing the appeal.

In conclusion, the ITAT Mumbai, in the cited judgment, addressed the issues of justifying the addition made by the AO, entertaining the appeal despite the tax effect, and restoring the AO's order by directing a profit estimation on the disputed purchases. The judgment highlighted the importance of substantiating transactions and considering the nature of the assessee's business in determining profit additions.