2021 (6) TMI 389 - AT - Income Tax

Bogus purchases - CIT-A sustained 12.5% disallowance out of the bogus purchases - HELD THAT - We find that in this case the sales or any other aspect of working have not been doubted. It is settled law that when sales are not doubted, hundred percent disallowance for bogus purchases cannot be done. The rationale being no sales is possible without actual purchases. This proposition is supported from Hon'ble jurisdictional High Court decision in the case of Nickunj Eximp Enterprises 2014 (7) TMI 559 - BOMBAY HIGH COURT . In this case, the Hon'ble High Court has upheld hundred percent allowance for the purchases said to be bogus when sales are not doubted. However, the facts of the present case indicate that assessee has made purchase from 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. In such situation, in our considered opinion, on the facts and circumstances of the case, the 12.5% disallowance out of bogus purchases done by the learned CIT(A) meets the end of justice. Accordingly, we uphold the order of learned CIT(A).

Summary

Issues:
1. Reduction of addition for bogus purchases by the CIT(A).
2. Validity of the decision made by the CIT(A) in reducing the addition.
3. Applicability of the principle when sales are not doubted.
4. Consideration of purchases from the grey market.
5. Reference to legal precedents - Nickunj Eximp Enterprises, N.K. Proteins, and Adam H. Kazi.
6. Dismissal of the appeal filed by the Revenue.

Analysis:
The case involved an appeal by the Revenue challenging the decision of the Commissioner of Income Tax (Appeals) to reduce the addition for bogus purchases. The assessee, engaged in repairing and maintaining refrigeration units, had purchases questioned by the Assessing Officer based on information from the Sales Tax Department. The CIT(A) sustained only a 12.5% disallowance out of the bogus purchases, citing that sales were not doubted. The Revenue contended that a 100% disallowance should have been made, but the ITAT disagreed, emphasizing that without actual purchases, sales could not occur. The ITAT referred to the Nickunj Eximp Enterprises case where a similar principle was upheld by the jurisdictional High Court.

Furthermore, the ITAT noted that the purchases were made from the grey market, allowing the assessee to avoid taxes, which was detrimental to the exchequer. Despite the Revenue's reliance on the N.K. Proteins case, which was dismissed by the Supreme Court, the ITAT clarified that it had been explained and distinguished by the Bombay High Court in the Adam H. Kazi case. Ultimately, the ITAT upheld the CIT(A)'s decision of a 12.5% disallowance, stating that it served the interests of justice in the present circumstances.

In conclusion, the Revenue's appeal was dismissed, and the ITAT provided an opportunity for either party to apply for a recall of the order if a cross-appeal or cross-objection had not been heard, to enable a joint hearing of the appeals. The order was pronounced in accordance with Rule 34(4) of the ITAT Rules on 11th March 2021.