2023 (2) TMI 268 - AT - Income Tax

Estimation of income - bogus purchases - quantification of profit - CIT(A) sustaining the addition by estimating profit of 2.9% on alleged bogus purchase - HELD THAT - As decided in 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. Addition in respect of the purchases which were found to be bogus in the case of the assessee before them, who was a trader, was to be worked out by bringing the G.P. rate of such bogus purchases at the same rate as that 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. Thus, in terms of our aforesaid observations restore the matter to the file of the A.O, with a direction to him to restrict the addition in the hands of the assessee qua the impugned bogus/unverified purchases by bringing the GP rate of such bogus purchases at the same rate as that of the other genuine purchases. Needless to say, the A.O shall in the course of set-aside proceedings afford a reasonable opportunity of being heard to the assessee. Appeals of the assessee and revenue are allowed for statistical purposes.

Summary

Issues Involved:
Quantification of profit on alleged bogus purchases, Disallowance of expenses, Judicial pronouncements applicability, Addition of income based on purchase transactions.

Quantification of Profit on Alleged Bogus Purchases:
The appeal involved cross-appeals by the assessee and the revenue against the CIT(Appeals) order arising from the AO's order for assessment year 2014-15. The AO disallowed 25% of the value of alleged bogus purchases, resulting in an addition to the assessee's income. The CIT(Appeals) scaled down the disallowance to 2.90% of the value of the purchases, leading to an addition of Rs.23,09,619. The main issue was the quantification of the profit/income the assessee would have made from purchasing goods at a discounted value. The AO and CIT(Appeals) used different percentages for disallowance, leading to appeals from both parties.

Disallowance of Expenses:
The assessee contested the disallowance of expenses related to freight, hamali expenses, and custom milling charges. The grounds of appeal related to these expenses were not pressed during the hearing, resulting in their dismissal. The focus shifted to the primary issue of quantifying profit on alleged bogus purchases.

Applicability of Judicial Pronouncements:
The revenue questioned the CIT(Appeals)' decision to allow substantial relief to the assessee based on judicial pronouncements. The revenue argued that these pronouncements were not applicable to the present case, emphasizing the need for a specific analysis based on the facts at hand. The issue of judicial precedents and their relevance in the context of the case was a point of contention between the parties.

Addition of Income Based on Purchase Transactions:
The core of the dispute revolved around the authenticity of purchase transactions made by the assessee firm. The AO labeled the purchases as bogus due to lack of documentary evidence, leading to the addition of income. The CIT(Appeals) reduced the disallowance percentage, prompting appeals from both the assessee and the revenue. The judgment focused on determining the profit the assessee would have earned by procuring goods at a discounted value from the open market, aligning with the principles established in relevant judicial decisions.

This detailed analysis of the judgment highlights the key issues, arguments, and decisions made by the authorities involved in the case, providing a comprehensive overview of the legal proceedings and outcomes.