2024 (9) TMI 1056 - HC - Income Tax

Estimation of income - bogus purchases - CIT(A) deducted the Value Added Tax ( VAT ) amount and other expenses and restricted the disallowance to 12.5% of the balance amount of bogus purchases as confirmed by ITAT - HELD THAT - AO did not accept the evidence but instead, made independent inquiries and added the amount in assessee s income. AO, however, has not disputed the sales made by assessee out of such purchases. CIT(A) has given detailed findings for justifying addition to the extent of 12.5% only. The Courts have time and again held that only the profit element in the alleged bogus purchases amount can be treated as income, particularly, when the sales has not been disputed. CIT(A) restricted the addition by estimating the gross profit at 12.5%. Whether that is a right estimate is a question of fact. The ITAT has accepted it. Therefore, we see no reason to interfere. Decided against revenue.

Summary

Issues:
1. Impugning an order of the Income Tax Appellate Tribunal dismissing two appeals for AY 2009-10 and 2011-12.
2. Reopening of assessment under Section 147 of the Income Tax Act based on alleged bogus purchases.
3. Disallowance of entire purchase amount as bogus purchases by the Assessing Officer.
4. Appeal before the Commissioner of Income Tax (Appeals) and subsequent relief granted.
5. Appeal by Revenue before the ITAT questioning disallowance of expenditure and profit element taxation.
6. Justification of ITAT's decision and confirmation of CIT(A)'s order.
7. Determination of profit element in alleged bogus purchases and restriction of addition to 12.5%.

Analysis:
The High Court of Bombay heard an appeal challenging the order of the Income Tax Appellate Tribunal (ITAT) dismissing two appeals for the assessment years 2009-10 and 2011-12. The case involved the reopening of the assessment under Section 147 of the Income Tax Act based on alleged bogus purchases made by the assessee. The Assessing Officer disallowed the entire purchase amount as bogus purchases after receiving information that suppliers had issued fake bills without actual sales. The Commissioner of Income Tax (Appeals) upheld the reopening of assessment but restricted the disallowance to the profit element embedded in the bogus purchases, estimated at 12.5%. The ITAT affirmed the CIT(A)'s decision, leading to the appeal by Revenue before the High Court.

The High Court considered the arguments presented and found no fault in the ITAT's decision. It emphasized that the determination of whether the purchases were bogus or the parties involved were fake was a factual question. The assessee had provided various documents to support the purchases, including tax audit reports, financial statements, and payment records. Despite the Assessing Officer's rejection of this evidence, the sales made by the assessee were not disputed. The CIT(A) justified the addition of only 12.5% as profit income from the bogus purchases, a decision accepted by the ITAT. The Court reiterated that only the profit element from alleged bogus purchases could be treated as income when sales were not in question, as established in previous judgments. Therefore, the High Court upheld the ITAT's decision and dismissed the appeal by Revenue.

In conclusion, the High Court affirmed the ITAT's decision regarding the treatment of alleged bogus purchases, emphasizing the factual nature of the case and the importance of considering the profit element in such transactions. The Court found no grounds to interfere with the CIT(A)'s restriction of the disallowance to 12.5% of the total amount of bogus purchases, as it was based on a factual assessment of the situation and consistent with established legal principles.