2019 (12) TMI 1636 - AT - Income Tax

ITAT directs quantifying addition for bogus purchases aligning profit rates

Shri Narpat H. Mehta Versus ITO 19 (2) (4), Mumbai.

Shri Narpat H. Mehta Versus ITO 19 (2) (4), Mumbai. - TMI Issues:- Disallowance on account of bogus purchases- Reopening of assessment based on information from sales tax Department- Inability to produce suppliers for purchases- Adverse inference drawn by the assessing officer- Application of settled law when sales are not doubted- Purchase from the grey market- Quantification of profit element in bogus purchases- Application of High Court judgment in restricting addition for bogus purchases- Direction to assessing officer for quantification and opportunity for the assesseeAnalysis:The judgment pertains to an appeal by the assessee against a disallowance of 12.5% on account of bogus purchases sustained by the CIT-A for the assessment year 2010-11. The assessee, engaged in trading ferrous and non-ferrous metals, had its assessment reopened based on information from the sales tax Department regarding bogus purchases. Despite submitting purchase vouchers with payments made through banking channels, the suppliers were not produced before the assessing officer, leading to the disallowance of Rs. 7,19,770.The CIT-A confirmed the disallowance, prompting the assessee to appeal before the ITAT. The ITAT, after hearing both parties and reviewing the records, noted that the assessee had provided documentary evidence for the purchases. It highlighted that while adverse inference was drawn due to the absence of supplier verification, the sales were not doubted. The ITAT referenced a High Court decision stating that when sales are not in question, a complete disallowance for bogus purchases is unwarranted since genuine sales necessitate actual purchases.The judgment further discussed the distinction between purchases from the grey market, which can lead to tax evasion, and upheld a recent High Court ruling limiting additions for bogus purchases to align with the gross profit rate of genuine purchases. Consequently, the ITAT set aside the matter for the assessing officer to restrict the addition by adjusting the gross profit rate on bogus purchases to match that of legitimate ones. The assessee was directed to be given a fair opportunity to present their case.Ultimately, the ITAT partially allowed the assessee's appeal, emphasizing compliance with the High Court's directive in quantifying the addition for bogus purchases. The judgment was pronounced on 3.12.2019, providing a comprehensive resolution to the issues raised in the appeal.