2024 (9) TMI 1117 - AT - Income Tax

Estimation of income - bogus purchases - CIT(A) restricted the addition to the extent of profit element embedded in the transaction to 12.5% - HELD THAT - When the transaction was not verifiable only income component could be taxed and not the entire transaction amount. It is also discussed that the corresponding sale proceeds of the goods was not disputed in the case of the assessee. CIT(A) has restricted the addition to the extent of profit element embedded in the alleged purchases to the extent of 12.5% as discussed above in this order. CIT(A) has also referred the decision of S.V. Jiwani 2022 (10) TMI 173 - BOMBAY HIGH COURT wherein the addition to the extent of 12.5% of the bogus purchases is held as fair and reasonable. No Reason to interfere in the decision of ld. CIT(A) therefore, the appeal of the revenue is dismissed.

Issues Involved:
1. Reopening of assessment under Section 147 of the Income Tax Act.
2. Treatment of accommodation entries and bogus purchases.
3. Rejection of books of accounts under Section 145(3) of the Income Tax Act.
4. Determination of the profit element in bogus purchases.

Issue-wise Detailed Analysis:

1. Reopening of Assessment under Section 147 of the Income Tax Act:
The assessee filed a return of income for the assessment year 2009-10, declaring a total income of Rs. 3,65,690/-. The case was reopened under Section 147 based on information from the Sales Tax Department indicating that the assessee had availed accommodation entries in the form of purchase bills from various dealers. A notice under Section 148 was issued to the assessee.

2. Treatment of Accommodation Entries and Bogus Purchases:
During the assessment proceedings, the Assessing Officer (AO) issued a notice under Section 142(1) to the assessee to prove the genuineness of the transactions. The assessee failed to satisfactorily explain the transactions, leading the AO to treat the entire amount of Rs. 88,98,967/- as unexplained expenditure and added it to the total income. The CIT(A) restricted the addition to 12.5% of the bogus purchases, amounting to Rs. 11,12,371/-, relying on various judicial precedents.

3. Rejection of Books of Accounts under Section 145(3) of the Income Tax Act:
The AO rejected the books of accounts under Section 145(3) on the grounds that the assessee failed to produce non-genuine dealers for examination and did not provide vital documents such as delivery challans, transport receipts, and other relevant documents. The assessee's purchases from certain parties remained unverifiable, leading to the conclusion that the purchases were inflated and bogus.

4. Determination of the Profit Element in Bogus Purchases:
The CIT(A) and various judicial precedents emphasized that only the profit element embedded in the bogus purchases should be taxed, not the entire transaction amount. The CIT(A) referred to several cases, including the Hon'ble Gujarat High Court in M/s. Sanjay Oil Cake Industries Vs. CIT and the Hon'ble Ahmedabad Tribunal in M/s. Vijay Proteins Ltd. Vs. ACIT, which supported disallowances ranging from 10% to 100% based on the facts of each case. The CIT(A) ultimately upheld a 12.5% disallowance based on the decision of the Hon'ble Bombay High Court in PCIT vs. S.V. Jiwani, which was deemed fair and reasonable.

Conclusion:
The appeal by the revenue was dismissed, and the decision of the CIT(A) to restrict the addition to 12.5% of the bogus purchases was upheld. The Tribunal found no reason to interfere with the CIT(A)'s decision, which was well-reasoned and supported by various judicial pronouncements. The appeal of the revenue was dismissed, and the order was pronounced in the open court on 29.08.2024.

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