Appeal challenges addition of bogus purchases; CIT(A) upholds 25% disallowance but lacks basis. AO directed to restrict addition.

The appeal was filed against the CIT(A)-Mumbai's order on the addition of bogus purchases for the assessment year 2011-2012. The CIT(A) upheld a 25% disallowance of the inflated purchases, noting the AO's acceptance of the trading results. However, the CIT(A) did not provide a basis for this decision. Despite this, the assessee's trading results were not disturbed, and the books of accounts were not rejected. The AO was directed to restrict the addition by applying a GP rate of 3.50% instead of the 3.44% shown by the assessee, resulting in a partial allowance of the assessee's appeal.

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Issues: Appeal against CIT(A) order on addition of bogus purchases.

The judgment concerns an appeal filed by the assessee against the order of CIT(A)-Mumbai for the assessment year 2011-2012. The primary issue in this appeal revolves around the addition sustained by CIT(A) concerning bogus purchases. The AO had made an addition of Rs. 31,36,444 on account of these purchases based on information from the sales tax department. The CIT(A) upheld the addition of inflated purchases to the extent of 25%, noting that the AO had accepted the trading results as disclosed in the audited profit and loss account. The CIT(A) observed that once the sales are accepted, the purchases cannot be doubted. The assessee appealed against the order upholding the 25% disallowance, while the revenue did not appeal against the order deleting 75% of such purchases.

Upon review, it was found that the CIT(A) had not provided a basis for upholding the addition of 25% of the purchase amount treated as bogus by the AO. Despite this, the trading results of the assessee were not disturbed, and the books of accounts were not rejected. The Gross Profit (GP) rate disclosed by the assessee in the assessment year 2009-2010 was 4.73%, decreasing to 3.72% in the assessment year 2010-11. However, there was a 33% increase in sales amount during the year under consideration, leading to a slight reduction in net profit margins. Considering the GP rate of 3.72% in the previous year and the increase in turnover, the AO was directed to restrict the addition by applying a GP rate of 3.50% instead of the 3.44% shown by the assessee. As a result, the appeal of the assessee was allowed in part. The order was pronounced in the open court on 14/07/2016.

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