2019 (2) TMI 1632 - HC - Income Tax

HC upholds ITAT ruling limiting income addition by adjusting gross profit rate under income tax rules

The HC upheld the ITAT's decision deleting the addition of the entire purchase amount as the assessee's additional income. Since the department did not ... Bogus purchases - accommodation entries - addition to income on account of fictitious purchases - treatment when sales are accepted - adjustment by reference to gross profit rateBogus purchases - treatment when sales are accepted - adjustment by reference to gross profit rate - Whether the entire purchase amount shown to have been made through bogus accommodation bills must be added to the assessee's income where the department has accepted the assessee's sales. - HELD THAT: - The Assessing Officer found, on survey material, that purchases from three identified parties were bogus and added the full purchase amount to the assessee's income. The Commissioner (Appeals) accepted that the purchases were bogus but noted that the department accepted the sales recorded by the assessee and therefore could not, without more, treat the entire purchase value as the assessee's undisclosed income; he made an ad hoc 10% addition and directed computation of additions to the extent of the difference between the gross profit rate on undisputed purchases and the gross profit on sales attributable to the purchases from the suspicious parties. The Tribunal deleted the unexplained ad hoc 10% addition but sustained the direction permitting the Assessing Officer to tax the assessee by adjusting the gross profit rate. The High Court proceeded on the factual finding that the purchases were bogus but agreed with the appellate authorities that where sales recorded in the books are not disputed by the department, purchases cannot be rejected in a manner that leaves sales undisturbed; accordingly, the proper course is to restrict the addition by bringing the gross profit rate on such purchases into parity with genuine purchases rather than automatically adding the entire purchase value. The Court distinguished the cited Gujarat High Court decision as fact-specific and not applicable without regard to the acceptance of sales in the present case.The addition of the entire purchase amount was not warranted; restriction of additions by adjustment to the gross profit rate, as directed by the lower authorities, is justified.Final Conclusion: The High Court found no substantial question of law and dismissed the Revenue appeals, upholding the approach of restricting additions by reference to gross profit where the assessee's sales stood accepted; no order as to costs. Issues:- Whether the ITAT was justified in not confirming the addition made by the Assessing Officer on account of bogus purchasesRs.- Whether the ITAT was justified in presuming purchases and giving relief to the assessee where no purchases were made from certain partiesRs.- Whether the order of the ITAT is perverse as no reasonable person could arrive at such a findingRs.Analysis:Issue 1:The appeals arose from a common judgment of the Income Tax Appellate Tribunal (ITAT) regarding the addition made by the Assessing Officer (AO) on account of bogus purchases. The AO concluded that the purchases were bogus based on survey operations and added the entire sum to the assessee's income. The Commissioner of Appeals accepted the purchases as bogus but reduced the addition to 10% of the purchase amount. The Tribunal partly allowed the appeal of the assessee and dismissed that of the Revenue, deleting the additions made by the Commissioner of Appeals.Issue 2:The ITAT's decision to not confirm the addition made by the AO was based on the fact that the department had accepted the sales, and there was no reason to reject the purchases. The Tribunal deleted the ad hoc additions made by the Commissioner of Appeals but permitted the AO to tax the assessee based on the difference in the Gross Profit (GP) rates. The Revenue contended that the entire amount should have been added to the income of the assessee since the purchases were proven to be bogus. However, the Tribunal's decision was based on the principle that purchases cannot be rejected without affecting the sales of a trader.Issue 3:The Tribunal's decision was supported by the fact that there was no discrepancy between the purchases shown by the assessee and the declared sales. The Tribunal correctly restricted the additions to bring the GP rate on purchases at the same rate of other genuine purchases. The Gujarat High Court's judgment cited by the Revenue was deemed inapplicable to the case at hand. The Court held that no question of law arose in this scenario, and therefore, all Income Tax Appeals were dismissed.In conclusion, the judgment highlighted the importance of considering the relationship between purchases and sales in determining the taxation implications of alleged bogus transactions, ultimately leading to the dismissal of the appeals with no order as to costs.