2021 (4) TMI 663 - AT - Income Tax

Estimation of income - bogus purchases - CIT(A) restricting the addition to 12.5% as against the 30% bogus purchases disallowed by the Assessing Officer - HELD THAT - No infirmity in the order passed by the Ld.CIT(A) in restricting the addition to 12.5% as against the 30% bogus purchases disallowed by the Assessing Officer. Grounds raised by the revenue are dismissed.

Issues Involved:
1. Legitimacy of bogus purchases disallowed by the Assessing Officer.
2. Justification for restricting the addition to 12.5% by the Commissioner of Income Tax (Appeals).

Detailed Analysis:

1. Legitimacy of Bogus Purchases Disallowed by the Assessing Officer:

The assessee, engaged in the printing business, filed a return of income declaring ?71,601 for the A.Y. 2009-10. The return was processed under section 143(1) of the Income Tax Act. The Assessing Officer (AO) received information from the DGIT (Inv.), Mumbai, indicating that the assessee had availed accommodation entries from various dealers without actual transportation of goods. Consequently, the assessment was reopened under section 147 of the Act.

During reassessment, the assessee was asked to prove the genuineness of the purchases. The assessee provided invoices, bank statements, and purchase details, asserting that payments were made through account payee cheques. However, the parties involved were not produced before the AO. The AO concluded that the purchases were non-genuine, suspecting that the assessee might have made purchases in the gray market. Notices issued under section 133(6) to the parties were returned unserved, leading the AO to treat ?3,25,697 (30% of ?10,85,656) as non-genuine purchases.

2. Justification for Restricting the Addition to 12.5% by the Commissioner of Income Tax (Appeals):

The Commissioner of Income Tax (Appeals) [CIT(A)] considered the evidence and submissions, restricting the addition to 12.5% of the alleged bogus purchases. The CIT(A) noted that payment by cheque does not suffice to establish the genuineness of purchases, referencing the case of M/s. Kanchwala Gems vs. JCIT, affirmed by the Supreme Court.

The CIT(A) observed that the AO's conclusion was based on statements from Sales Tax Authorities and independent inquiries. The assessee failed to maintain a proper stock register or establish a direct nexus between purchases and sales. Additionally, the assessee could not produce corroborative evidence like transportation bills.

The CIT(A) emphasized that while the purchases from the alleged parties were unverifiable, it was not possible to conclude that no purchases were made. The CIT(A) cited the Bombay High Court's decision in CIT v. Nikunj Eximp Enterprises (P.) Ltd., which held that merely because suppliers did not appear before the AO, it cannot be concluded that purchases were not made.

Given the circumstances, the CIT(A) found it appropriate to estimate the additional profit earned from such purchases rather than disallowing the entire amount. The CIT(A) referenced multiple judicial pronouncements where courts have consistently held that only a part of such purchases can be disallowed, especially when corresponding sales are not doubted.

The CIT(A) cited the Gujarat High Court's decision in CIT-1 Vs Simit P. Sheth, which supported the view that only the profit element embedded in such purchases should be added to the income. The CIT(A) also referenced several Mumbai Tribunal cases where a 12.5% estimation of profit on bogus purchases was upheld.

Based on these precedents, the CIT(A) directed the AO to estimate profit at 12.5% of the alleged bogus purchases, amounting to ?1,35,707, and restrict the addition accordingly. The balance amount of ?1,89,990 was allowed as relief to the assessee.

Conclusion:

The ITAT upheld the CIT(A)'s decision, finding no infirmity in restricting the addition to 12.5% of the alleged bogus purchases. The appeal of the revenue was dismissed, and the order was pronounced on 03.02.2021.

Order:

The appeal of the revenue is dismissed.

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