ITAT reduces disallowance on bogus purchases, citing lack of inquiry & impact of grey market

The ITAT partially allowed the appeal, directing a 2% disallowance on bogus purchases instead of the initial 12.5% sustained by the CIT-A. The court considered that when sales are not doubted, a hundred percent disallowance may not be justified. Emphasizing the lack of inquiry into alleged bogus supplies and the impact of grey market purchases, the ITAT concluded that justice required a lower disallowance percentage.

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Issues:
1. Disallowance on account of bogus purchases - 12.5% disallowance sustained by CIT-A.
2. Reopening of assessment based on information from sales tax department.
3. Addition made by AO without issuing notice u/s 133(6) of the Act.
4. Applicability of hundred percent disallowance for bogus purchases when sales are not doubted.
5. Consideration of grey market purchases and tax implications.
6. Final decision on the disallowance percentage.

Analysis:
1. The appeal involved a dispute regarding the disallowance on account of bogus purchases, with the revenue contesting the CIT-A's decision to sustain only a 12.5% disallowance. The assessee, engaged in the business of ferrous & non-ferrous metals, faced a 12.5% addition by the AO for bogus purchases based on information from the sales tax department.

2. The assessment was reopened due to information from the sales tax department indicating purchases from bogus dealers. The AO made the addition without issuing a notice u/s 133(6) of the Act or conducting any inquiry from the alleged bogus supplies.

3. The CIT-A, upon the assessee's appeal, noted that the sales were not doubted and relied on various case laws to sustain the 12.5% disallowance. However, the revenue appealed to the ITAT against this decision.

4. The ITAT, after hearing both parties, considered the aspect that when sales are not doubted, a hundred percent disallowance for bogus purchases may not be warranted. Citing a jurisdictional High Court decision, the ITAT highlighted the possibility of sales not being possible without actual purchases.

5. The judgment discussed the implications of making purchases from the grey market, which could result in savings for the assessee at the expense of the exchequer. Despite this, due to the absence of any inquiry by the AO from the alleged bogus supplies, the ITAT decided to restrict the disallowance to 2% of the bogus purchases, considering the facts and circumstances of the case.

6. Consequently, the appeal filed by the assessee was partly allowed, and the ITAT directed a 2% disallowance on the bogus purchases, emphasizing the importance of justice in the decision-making process.

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