2017 (10) TMI 1558 - AT - Income Tax

Tribunal Limits Purchase Additions for Assessee, Emphasizes Proof of Transactions

The Tribunal partly allowed the assessee's appeals for A.Y. 2009-10, 2010-11, and 2011-12, dismissing the revenue's appeals. The A.O was directed to limit ... Onus of proof as to genuineness of purchases - accommodation entries / bogus purchases - addition under Section 69C for peak investment from unidentified sources - use of postal returns to Sec. 133(6) notices as evidence of non existence of parties - restriction of addition to profit element where sales are accepted - estimation of profit element for purchases from open/grey marketOnus of proof as to genuineness of purchases - accommodation entries / bogus purchases - use of postal returns to Sec. 133(6) notices as evidence of non existence of parties - Whether purchases claimed from specified parties could be treated as bogus and whether the assessee had discharged the onus to prove their genuineness for A.Y. 2010-11. - HELD THAT: - The Tribunal accepted the information from the Sales Tax authorities and the fact that notices under Sec. 133(6) were returned with remarks such as 'not known', 'left' and 'unclaimed' as fortifying the conclusion that the supplier parties were non existent or hawala dealers. Given those inputs and the assessee's failure to produce the parties for examination or to furnish irrefutable documentary evidence of movement and delivery of goods (transportation details, delivery/consignment documents, transporter particulars), the Tribunal agreed with the lower authorities that the assessee did not discharge the heavy onus cast upon him to prove the genuineness and veracity of the purchases. The material placed on record (ledgers, purchase bills, bank statements) was held to be insufficient to dispel the doubts raised by the Sales Tax information and postal returns. [Paras 9]Purchases claimed from the specified parties were held to be ingenuine for A.Y. 2010-11 as the assessee failed to discharge the onus to prove genuineness.Restriction of addition to profit element where sales are accepted - addition under Section 69C for peak investment from unidentified sources - estimation of profit element for purchases from open/grey market - Whether, having accepted the assessee's sales, the addition should be peak investment under Section 69C or should be restricted to the profit element, and if restricted, what rate should be applied for A.Y. 2010-11. - HELD THAT: - The Tribunal agreed with the CIT(A)'s approach that where sales are accepted, the Assessing Officer should not make an addition of the entire peak investment; instead the addition should be limited to the profit element representing the benefit the assessee would have obtained by purchasing from unidentified sources in the open/grey market. The Tribunal considered factors such as the VAT rate applicable to ferrous and non ferrous items (4%) and other monetary benefits (cash discounts, savings) likely available in the grey market, and concluded that an aggregated figure of 8% reasonably represented the profit element. Accordingly the Tribunal modified the CIT(A)'s quantification (which had applied 17.5%) and directed the Assessing Officer to restrict the addition to 8% of the aggregate value of the purchases. [Paras 9]Addition under Section 69C was restricted to the profit element and quantified at 8% of the aggregate purchases for A.Y. 2010-11; the AO was directed to compute the addition accordingly.Onus of proof as to genuineness of purchases - accommodation entries / bogus purchases - restriction of addition to profit element where sales are accepted - estimation of profit element for purchases from open/grey market - Whether the same legal conclusions on characterization and quantification of additions apply to A.Y. 2009-10. - HELD THAT: - The Tribunal found the facts and issues for A.Y. 2009-10 to be the same as those decided for A.Y. 2010-11. The Tribunal therefore applied the same reasoning: the Sales Tax information and returned Sec. 133(6) notices established a heavy onus on the assessee which was not discharged; sales having been accepted, the addition could not be the full peak investment but only the profit element arising from purchases in the open/grey market. The Tribunal directed the Assessing Officer to restrict the addition to 8% of the aggregate value of the purchases recorded for A.Y. 2009-10. [Paras 15]For A.Y. 2009-10 the addition under Section 69C was restricted to 8% of the aggregate purchases; the CIT(A)'s order was modified accordingly.Onus of proof as to genuineness of purchases - accommodation entries / bogus purchases - restriction of addition to profit element where sales are accepted - estimation of profit element for purchases from open/grey market - Whether the same legal conclusions on characterization and quantification of additions apply to A.Y. 2011-12. - HELD THAT: - The Tribunal held that the facts and issues for A.Y. 2011-12 were identical to those in the earlier years: Sales Tax inputs and returned Sec. 133(6) notices placed a heavy burden on the assessee which was not met, and the assessee's sales were not disputed. Applying the same principle, the Tribunal concluded that the addition should be limited to the profit element the assessee would have realized by procuring goods from the open/grey market, and fixed that element at 8% of the aggregate purchases claimed for A.Y. 2011-12. The CIT(A)'s estimation at 17.5% was accordingly modified. [Paras 21]For A.Y. 2011-12 the addition under Section 69C was restricted to 8% of the aggregate purchases; the CIT(A)'s order was modified accordingly.Final Conclusion: All three appeals of the assessee (A.Y. 2009-10, 2010-11, 2011-12) are partly allowed and the corresponding revenue appeals are dismissed. In each year the Tribunal upheld that the assessee failed to prove genuineness of purchases in view of Sales Tax inputs and returned Sec. 133(6) notices, but directed that the addition under Section 69C be restricted to the profit element, quantified at 8% of the aggregate purchases for each assessment year, with the Assessing Officer to compute the quantum accordingly. Issues Involved:1. Addition under Section 69C for alleged bogus purchases.2. Justification of CIT(A)'s confirmation of addition at 17.5% of total purchases as bogus.3. Rejection of books of accounts under Section 145(3).4. Onus on the assessee to prove the genuineness of purchase transactions.Issue-wise Detailed Analysis:1. Addition under Section 69C for alleged bogus purchases:The assessee was engaged in the business of dealing in ferrous and non-ferrous metals and had declared total income for A.Y. 2010-11. During the assessment proceedings, it was observed that the assessee had made purchases from 12 parties blacklisted by the Sales Tax Authorities for providing accommodation entries. The Assessing Officer (A.O) issued notices under Section 133(6) to verify the genuineness of these purchases, which either were returned undelivered or not complied with. The A.O directed the assessee to produce these parties and provide documentary evidence, which the assessee failed to do. Consequently, the A.O concluded that the purchases were not genuine and made an addition of Rs. 3,66,65,814/- under Section 69C, considering the peak amount of alleged bogus purchases.2. Justification of CIT(A)'s confirmation of addition at 17.5% of total purchases as bogus:The CIT(A) upheld the A.O's finding that the purchases were not genuine but concluded that the addition should be restricted to the profit element involved in such purchases. The CIT(A) estimated the profit element at 17.5% of the total purchases and directed the A.O to reduce the profit already declared by the assessee from this percentage. This decision was based on the premise that the assessee did make purchases, albeit not from the alleged bogus parties but from unidentified sources. The CIT(A) relied on judicial pronouncements, including the Hon’ble Gujarat High Court's judgment in Bholanath Polyfab Pvt. Ltd., to support this stance.3. Rejection of books of accounts under Section 145(3):The CIT(A) observed that the rejection of books of accounts under Section 145(3) would typically arise when the profitability ratio is not accepted or major discrepancies are noticed in the books. However, in this case, the A.O did not reject the books of accounts but questioned the genuineness of the purchases. The CIT(A) maintained that the onus was on the assessee to prove the genuineness of the transactions, which was not satisfactorily discharged.4. Onus on the assessee to prove the genuineness of purchase transactions:The Tribunal observed that the assessee failed to substantiate the genuineness of the purchase transactions. The information from the Sales Tax Authorities indicated that the parties were providing accommodation entries without actual sale of goods. The assessee did not produce the parties for examination nor provided irrefutable documentary evidence such as transportation details or delivery challans. The Tribunal agreed with the CIT(A) that the sales were genuine, indicating that the goods were purchased from unidentified sources. However, the Tribunal modified the CIT(A)'s order, directing the A.O to restrict the addition to 8% of the total purchases, considering the benefits the assessee might have gained from purchasing in the open/grey market.Separate Judgments Delivered:The Tribunal's decision applied mutatis mutandis to the cross-appeals for A.Y. 2009-10 and A.Y. 2011-12, with similar findings and directions for restricting the addition to 8% of the total purchases for these years as well.Conclusion:The appeals of the assessee for A.Y. 2009-10, 2010-11, and 2011-12 were partly allowed, while the appeals of the revenue for the same years were dismissed. The Tribunal directed the A.O to restrict the addition to 8% of the total purchases for each assessment year.