2022 (2) TMI 864 - AT - Income Tax

Estimation of profit on the bogus purchases - CIT(A) restricted the addition to the extent of 25% of purchase - HELD THAT - We find that neither the Assessing Officer nor the CIT(A) tried to find out the profit element embedded in such transactions. Therefore, in absence of any material the conclusion to arrive that profit margin in the impugned transaction is 25%, the addition of 25% is not justified. The assessee has shown its profit @ 6.67%. It is settled law that even if the transaction of disputed purchases is not fully verified, the revenue authority are not entitled to tax the entire transaction, rather the profit element embedded in such transaction is to be tax. In our view, when the assessee himself has shown profit at 6.67%, the disallowance @ 8% of such disputed purchases would meet the possibility of revenue leakage. Therefore, we direct the Assessing Officer to restrict the purchase @ 8% on both the disallowances - Appeal of the assessee is partly allowed.

Summary

Issues:
1. Estimation of profit on bogus purchases
2. Assessment of cash purchases below a certain amount

Estimation of profit on bogus purchases:
The appeal by the assessee was against the order of the Commissioner of Income tax for assessment year 2014-15, challenging the estimation of profit at 25% on bogus purchases. The assessee argued that there was no rationale for any addition, especially since purchases were made in both cash and cheque. The Assessing Officer disallowed purchases totaling to ?1.83 crores, stating that parties were not found at given addresses. The CIT(A) restricted the addition to 25% of the total purchases, citing the decision in Vijay Trading Co. case. The Tribunal found that the Assessing Officer did not reject the books of account or dispute the purchases, and the profit margin was low due to market competition. Considering the turnover and lack of verification of profit element in the transactions, the Tribunal directed the Assessing Officer to restrict the purchase disallowance to 8% on both disputed purchases.

Assessment of cash purchases below a certain amount:
The Assessing Officer disallowed all purchases below ?20,000 paid in cash, totaling to ?1.83 crores, as bogus purchases. The CIT(A) restricted the addition to 25% following the Vijay Trading Co. case. The Tribunal noted that the Assessing Officer did not reject the books of account or dispute the purchases. The Tribunal emphasized that only the profit element embedded in such transactions should be taxed, not the entire amount. As the assessee had shown a profit of 6.67%, the Tribunal directed the Assessing Officer to restrict the purchase disallowance to 8% on both disputed purchases.

In conclusion, the Tribunal partly allowed the appeal by the assessee, directing the Assessing Officer to restrict the purchase disallowance to 8% on both disputed purchases.