2023 (1) TMI 363 - AT - Income Tax

Estimation of income - bogus purchases @12% by CIT-A - HELD THAT - Addition in the hands of the assessee is liable to be restricted only to the extent of the profit which the assesse would have made by procuring the goods at a discounted value from the open/grey market, as against the inflated value at which the same had been booked on the basis of the bogus bills in its books of account. Quantification of profit which the assessee would have made by procuring the goods in question from the open/grey market, we find that in the case of M/s. Mohhomad Haji Adam Company 2019 (2) TMI 1632 - BOMBAY HIGH COURT while upholding the order of the Tribunal, had observed, that the addition in the hands of the assessee as regards the bogus/unproved purchases was to be made to the extent of bringing the G.P rate of such purchases at the same rate of other genuine purchases. We are of the considered view that on the same lines the profit made by the assessee in the case before us by procuring the goods at a discounted value from the open/grey market can safely be determined by bringing the G.P rate of such bogus purchases at the same rate as that of the other genuine purchases. We, thus, in terms of our aforesaid observations restore the matter to the file of the A.O, with a direction to restrict the addition in the hands of the assessee qua the impugned bogus/unverified purchased by bringing the GP rate of such bogus purchases at the same rate as that of the other genuine purchases. Accordingly, we set-aside the order of the CIT(Appeals) to the said extent and restore the matter to the file of the A.O to give effect to our aforesaid observations.Appeals of the assessee and revenue are allowed for statistical purposes

Summary

Issues Involved:
1. Validity of proceedings under Section 147/148.
2. Addition of Rs.35,73,000/- for alleged bogus purchases.
3. Opportunity to examine persons whose statements were relied upon by the AO.
4. Deletion of addition of Rs.2,62,02,000/- out of total bogus purchase addition of Rs.2,97,75,000/-.
5. Deletion of addition of Rs.22,39,080/- for unreported profit on bogus purchases.

Detailed Analysis:

1. Validity of Proceedings under Section 147/148:
The assessee initially challenged the validity of the proceedings under Section 147/148 of the Income-tax Act, 1961. However, during the hearing, the assessee's Authorized Representative sought liberty to withdraw these grounds of appeal. Consequently, the grounds challenging the validity of the jurisdiction assumed by the AO under Section 147 were dismissed as not pressed.

2. Addition of Rs.35,73,000/- for Alleged Bogus Purchases:
The assessee contested the addition of Rs.35,73,000/- made by the CIT(A) for alleged bogus purchases. The AO had initially made an addition of Rs.2,97,75,000/- for purchases from eight parties, which were deemed bogus. The CIT(A) scaled down the addition to Rs.35,73,000/- by applying an overall profit rate of 8% to the value of the impugned purchases. The Tribunal observed that the assessee failed to substantiate the authenticity of its claim of purchases from the eight tainted parties with supporting documents such as delivery challans and bilties. The Tribunal concurred with the lower authorities that the purchases were not genuine and upheld the view that the assessee had procured bogus bills.

3. Opportunity to Examine Persons Whose Statements were Relied Upon by the AO:
The assessee argued that the AO erred in passing the assessment order without allowing the opportunity to examine the persons whose statements were relied upon. However, this ground was withdrawn by the assessee's Authorized Representative during the hearing and was dismissed as not pressed.

4. Deletion of Addition of Rs.2,62,02,000/- out of Total Bogus Purchase Addition of Rs.2,97,75,000/-:
The revenue was aggrieved by the CIT(A)'s decision to delete Rs.2,62,02,000/- out of the total addition of Rs.2,97,75,000/- for bogus purchases. The Tribunal noted that the assessee had recorded the impugned purchases in its stock register and the corresponding sales. It was observed that the purchases were routed through bogus bills to facilitate their inclusion in the books of account. The Tribunal held that the addition should be restricted to the profit margin that the assessee would have made by purchasing the goods at a discounted value from the open market, rather than the inflated value recorded in the books. The matter was restored to the AO to determine the addition by bringing the GP rate of such bogus purchases to the same rate as that of genuine purchases.

5. Deletion of Addition of Rs.22,39,080/- for Unreported Profit on Bogus Purchases:
The revenue also contested the deletion of Rs.22,39,080/- for unreported profit on bogus purchases. The AO had disallowed the GP rate of 7.52% on the impugned purchases, leading to an addition of Rs.22,39,080/-. The CIT(A) vacated this addition, observing that the purchases and corresponding sales were duly recorded by the assessee. The Tribunal upheld this view, noting that the purchases had been accounted for in the sales/closing stock and that the addition should be limited to the profit margin derived from purchasing goods at a discounted value from the open market.

Conclusion:
The Tribunal allowed both the assessee's and the revenue's appeals for statistical purposes. The matter was restored to the AO to restrict the addition to the profit margin by bringing the GP rate of the bogus purchases to the same rate as that of genuine purchases. The Tribunal's decision emphasized the need for substantiating purchase transactions with supporting documentary evidence and the appropriate quantification of additions based on profit margins rather than the entire amount of impugned purchases.