2021 (9) TMI 177 - AT - Income Tax

Estimation of income - GP estimation on bogus purchases - AO estimated GP on bogus purchases @ 12.5% - HELD THAT - Assessee has declared GP of 9.42% on regular transactions. This GP has not been disturbed by the AO. In bogus purchase transactions, the modus operandi is that the purchases are made from grey market to save VAT and marginal purchase cost and matching bogus bills are obtained from accommodation entry providers. Taking into consideration entirety of facts, we are of considered view that the ends of justice would be met, if suppressed profit margin on bogus purchases as estimated at 5%. We hold and direct accordingly.

Summary

Issues:
Cross appeals by the assessee and the Revenue against the order of Commissioner of Income Tax (Appeals)-26 Mumbai for the Assessment Year 2009-10.

Analysis:
The assessee, engaged in manufacturing and trading of dyes and chemicals, had its assessment re-opened due to allegedly obtaining bogus purchase bills. The Assessing Officer estimated Gross Profit (GP) at 12.5% on the alleged hawala purchases, adding ?19,03,878 to the income. The assessee submitted documentary evidence to prove the genuineness of purchases, including ledger accounts and bank statements. The CIT(A) modified the assessment based on a VAT Audit Report, reducing the bogus purchases to ?76,78,960 but retained the ad hoc GP addition at 12.5%.

The assessee argued that its declared GP was higher than the industry average, and based on the evidence provided, requested the deletion of the entire addition. Alternatively, the assessee proposed the addition be limited to the difference between the GP estimated by the AO and the GP declared by the assessee, citing a Tribunal decision in a similar case.

The Department, represented by Sh. Sanjay J. Sethi, contended that the VAT Audit Report was not presented to the AO and emphasized that the parties from whom the unapproved purchases were made were declared hawala operators. The Department argued that the assessee failed to prove the genuineness of the dealers and purchases, urging for the restoration of the original addition made by the AO.

The ITAT Mumbai observed that the assessee did not discharge its onus in proving the genuineness of the suspicious dealers and purchases. While upholding the AO's GP estimation on bogus purchases, the ITAT reduced the quantum of bogus purchases to ?76,78,960 based on the VAT Audit Report. Considering the facts and the modus operandi of the bogus purchase transactions, the ITAT estimated a suppressed profit margin of 5% on the reduced amount. Consequently, the appeal of the assessee was partly allowed, and the Revenue's appeal was dismissed.

In conclusion, the ITAT Mumbai delivered the judgment, partly allowing the assessee's appeal and dismissing the Revenue's appeal on August 24, 2021.