2021 (2) TMI 351 - AT - Income Tax

Estimation ofincome - Bogus purchases - CIT-A sustained the addition @ 12.5% made by AO - HELD THAT - Assessee has already declared GP ratio @ 2.11% from the purchases made from Prakash Steel Allies and others respectively during this year - CIT(A) has sustained the addition made by the AO by estimating @ 12.5% of the alleged bogus purchases, in our view, which is too high considering the fact that assessee is dealing in trading activities. Assessee has declared margin this assessment year @ 2.11% and in previous assessment year @ 1.42%. On an average, assessee has declared margin of 2% (approx). In the trading activities, it is expected to earn around 3-5%. Taking the higher margin that assessee might have earned in the alleged transaction and as per the decision of HEERAMANECK SON GF case 2018 (12) TMI 1830 - ITAT MUMBAI and SIMIT P SHETH 2013 (10) TMI 1028 - GUJARAT HIGH COURT we are inclined to direct the AO to estimate the income @ 3% (5% - 2%) of the alleged purchases. Accordingly, the grounds raised by the assessee are partly allowed.

Summary

Issues:
1. Ex-parte hearing due to non-appearance of assessees.
2. Reopening of assessment based on information from sales tax department.
3. Addition made on account of non-genuine purchases.
4. Appeal before Ld. CIT(A) and subsequent appeal before ITAT.
5. Comparison of declared GP ratio with estimation made by AO and Ld. CIT(A).

Analysis:
1. The Appellate Tribunal, ITAT Mumbai, dealt with two appeals filed by related parties against the order of Ld. Commissioner of Income Tax (Appeals) for AY 2010-11 and 2011-12. Despite no appearance by the assessees, the hearing proceeded ex-parte with the assistance of the Ld. DR.

2. The assessment was reopened under section 147 of the Act based on information received from the sales tax department regarding bogus purchases. The total income was determined after making an addition of 12.5% on account of non-genuine purchases.

3. The Ld. CIT(A) sustained the addition made by the AO, leading to the assessees filing appeals before the ITAT. The Tribunal referred to a previous case where additions were restricted to 3% of alleged bogus purchases, considering various factors such as turnover, payment methods, and lack of confirmation from suppliers.

4. The ITAT noted that the assessees had declared a GP ratio of around 2% on their purchases, while the addition made by the AO and upheld by Ld. CIT(A) was at 12.5%. Relying on precedents and industry standards, the ITAT directed the AO to estimate income at 3% of the alleged purchases, leading to the partial allowance of the appeals.

5. Given the similarity in facts, another appeal for AY 2010-11 was also partly allowed by the ITAT, emphasizing the need for a reasonable estimation of income based on trading activities and declared margins. The appeals were partly allowed, and the orders were pronounced on 25.01.2021.