2021 (4) TMI 333 - AT - Income Tax

Estimation of income - bogus purchases - CIT (A) confirming the action of the AO in making addition on adhoc basis @ 12.50% - HELD THAT - In this case the sales have not been doubted. It is settled law that when sales are not doubted, hundred percent disallowance for bogus purchase cannot be done. The rationale being no sales is possible without actual purchases. This proposition is supported in the case of Nikunj eximp enterprises 2014 (7) TMI 559 - BOMBAY HIGH COURT as upheld hundred percent allowance for the purchases said to be bogus when sales are not doubted. However in that case all the supplies were to government agency. In the present case the facts of the case indicate that assessee has made purchase from the grey market. Making purchases through the grey market gives the assessee savings on account of non-payment of tax and others at the expense of the exchequer. As regards the quantification of the profit element embedded in making of such bogus/unsubstantiated purchases by the assessee, learned counsel pleaded that as held in M/S MOHOMMAD HAJI ADAM CO. 2019 (2) TMI 1632 - BOMBAY HIGH COURT the addition in respect of bogus purchases is to be limited to the extent of bringing the gross profit rate on such purchases at the same rate as of other genuine purchases. We set aside the matter to the file of the assessing officer with the direction to restrict the addition as regards the bogus purchases by bringing the gross profit rate on such bogus purchases at the same rate as that of the other genuine purchases - Assessee's appeal is partly allowed.

Issues:
1. Delay in filing the appeal
2. Disallowance on account of bogus purchases
3. Lack of supporting documentary evidence for purchases
4. Adhoc addition of 12.5% on alleged bogus purchases
5. Confirmation of the action by the Commissioner of Income Tax (Appeals)
6. Judicial precedent on treatment of bogus purchases when sales are not doubted
7. Distinction between purchases from grey market and genuine purchases
8. Application of gross profit rate on bogus purchases as per High Court judgment
9. Direction to the assessing officer to restrict the addition on bogus purchases

Delay in filing the appeal:
The appeal involved a delay of 390 days, which was condoned after considering the reasons provided in the condonation petition. The delay was attributed to the ex-parte order of the Commissioner of Income Tax (Appeals) being sent to the old address of the assessee, leading to awareness only after recovery proceedings commenced.

Disallowance on account of bogus purchases:
The Assessing Officer made an adhoc addition of 12.5% on alleged bogus purchases amounting to ?29,95,668, resulting in an addition of ?3,74,459 to the total income. The appellant contested this disallowance, seeking its deletion.

Lack of supporting documentary evidence for purchases:
The Assessing Officer observed that the appellant failed to provide supporting documentary evidence to establish the actual delivery and consumption of materials purchased. Additionally, the appellant did not furnish confirmation from the supplier regarding the sale and delivery of the materials.

Adhoc addition of 12.5% on alleged bogus purchases:
The Assessing Officer treated the sum spent on alleged bogus purchases as an adhoc addition of 12.5% of the expenses due to the lack of evidence supporting the legitimacy of the purchases.

Confirmation of the action by the Commissioner of Income Tax (Appeals):
The learned Commissioner of Income Tax (Appeals) confirmed the decision of the Assessing Officer regarding the adhoc addition on account of alleged bogus purchases.

Judicial precedent on treatment of bogus purchases when sales are not doubted:
The Tribunal referred to a High Court decision where it was established that when sales are not doubted, a hundred percent disallowance for bogus purchases cannot be justified, as sales are not possible without actual purchases.

Distinction between purchases from grey market and genuine purchases:
The Tribunal noted that the appellant made purchases from the grey market, which resulted in savings due to non-payment of taxes, indicating a potential profit element embedded in such transactions at the expense of the exchequer.

Application of gross profit rate on bogus purchases as per High Court judgment:
Following a High Court judgment, the Tribunal directed the assessing officer to restrict the addition on bogus purchases by aligning the gross profit rate on such purchases with that of genuine purchases, providing the appellant with an opportunity to be heard.

Direction to the assessing officer to restrict the addition on bogus purchases:
The Tribunal partly allowed the appeal, setting aside the matter to the assessing officer with instructions to limit the addition on bogus purchases by adjusting the gross profit rate in line with genuine purchases, emphasizing the appellant's right to a fair hearing.

The judgment addressed various issues, including the delay in filing the appeal, the treatment of alleged bogus purchases, the importance of supporting documentary evidence, and the application of gross profit rates on such transactions based on judicial precedents. The Tribunal's decision provided clarity on the assessment of bogus purchases, distinguishing between purchases from the grey market and genuine transactions, while ensuring a fair opportunity for the appellant to present their case.

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