2021 (1) TMI 1017 - AT - Income Tax

Bogus purchases - CIT-A restricted disallowance by the CIT(A) to 4% of the aggregate value of the impugned purchases HELD THAT - CIT(A) while relying on the order passed by his predecessor for A.Y 2010-11 had lost sight of the aforesaid material fact - we are unable to persuade ourselves to subscribe to the scaling down of the disallowance of the entire value of the impugned purchases made by the A.O to 4% of the value of such purchases by the CIT(A). We also cannot remain oblivious of the fact that the assessee had failed to prove that the impugned purchases were either accounted for in its sales or formed part of its closing stock for the year under consideration for the reason that the relevant documentary evidence had been impounded by the Sales tax department in the course of an action conducted on the assessee and thus were not available with the assessee. Mater in all fairness requires to be revisited by the A.O with an opportunity to the assessee to demonstrate before him that the impugned purchases had either found its way as a part of the accounted sales or formed part of its closing stock for the year under consideration. In case the assessee is able to demonstrate before the A.O that the impugned purchases were either accounted for in its sales or formed part of its closing stock for the year under consideration then the scaling down of the disallowance by the CIT(A) to 4% of the aggregate value of the impugned purchases would be in order. Appeal filed by the revenue is allowed for statistical purposes.

Issues Involved:
1. Deletion of addition made in respect of bogus purchases.
2. Determination of profit percentage on bogus purchases.
3. Validity of CIT(A)'s order and its reliance on the previous year's order.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made in Respect of Bogus Purchases:
The assessee, engaged in the business of trading in iron and steel, filed its return for A.Y. 2009-10. The original assessment was completed with an income of ?16,12,270/-. Subsequently, based on information from the DGIT(Inv.) regarding bogus purchases aggregating to ?2,60,02,507/-, the case was reopened under Sec. 147 of the Income Tax Act, 1961. The A.O. observed that the assessee procured bogus purchase bills from 11 parties. For 5 of these parties, the purchases were already considered in the original assessment, and an addition @1% of the turnover was made. For the remaining 6 parties, the A.O. added the entire value of ?1,21,34,099/- as the assessee failed to produce supporting documents, claiming they were seized by the Sales Tax department.

2. Determination of Profit Percentage on Bogus Purchases:
The CIT(A) restricted the addition to 4% of the value of the impugned purchases, considering the benefit the assessee would have gained by procuring goods at a discounted value from the open/grey market, saving on VAT and other incidental charges. The revenue contested this, arguing that the CIT(A) erred in dislodging the A.O.'s disallowance and substituting it with 4% of the aggregate value. The revenue emphasized that unlike A.Y. 2010-11, the assessee failed to show that the sales correlating to the impugned purchases were duly accounted for in its books.

3. Validity of CIT(A)'s Order and Its Reliance on the Previous Year's Order:
The CIT(A) relied on the order passed by his predecessor for A.Y. 2010-11, which was upheld by the Tribunal. However, the Tribunal noted that the facts of the current year were distinguishable. The assessee failed to substantiate the genuineness of the purchases and did not produce necessary documents due to their seizure by the Sales Tax department. The Tribunal found that the CIT(A) had wrongly applied the previous year's order, as the assessee failed to prove that the impugned purchases were accounted for in its sales or closing stock.

Conclusion:
The Tribunal concluded that the matter requires a revisit by the A.O. with an opportunity for the assessee to demonstrate that the impugned purchases were accounted for in its sales or closing stock. If the assessee can prove this, the scaling down of the disallowance to 4% by the CIT(A) would be justified. Otherwise, the A.O.'s disallowance of the entire value of the impugned purchases would stand. The order of the CIT(A) was set aside, and the matter was restored to the A.O. for fresh adjudication. The appeal filed by the revenue was allowed for statistical purposes.

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