Assessee's Appeal Partially Allowed: Direction on Gross Profit Rate Alignment

The ITAT partially allowed the assessee's appeal in a case concerning disallowance on account of bogus purchases. The ITAT set aside the matter to the assessing officer with directions to align the gross profit rate on bogus purchases with that of genuine purchases, following a High Court decision. This decision aimed to ensure a fair hearing opportunity for the assessee and limit the addition for bogus purchases, considering the nature of purchases made from the grey market.

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Issues:
- Disallowance on account of bogus purchases
- Application of gross profit rate on bogus purchases

Analysis:
1. The appeal was filed by the assessee against the CIT-A's decision to sustain a 12.5% disallowance on account of bogus purchases for the assessment year 2012-13.

2. The assessee, engaged in trading ferrous and non-ferrous metals, had its assessment reopened based on information from the sales tax department regarding alleged bogus purchases. While the assessee provided purchase vouchers and made payments through banking channels, the suppliers were not produced before the assessing officer. Notably, the sales made by the assessee were not under doubt.

3. The Income Tax Officer made a 12.5% addition on account of bogus purchases, resulting in a disallowance of Rs. 2,93,849. The CIT-A upheld this decision upon the assessee's appeal.

4. The ITAT heard both parties and reviewed the records before making a decision.

5. The ITAT observed that the assessee had provided documentary evidence for the purchases, but adverse inference was drawn due to the absence of supplier verification. Notably, in cases where sales are not doubted, a hundred percent disallowance for bogus purchases is not justified as sales cannot occur without actual purchases. This principle was supported by a jurisdictional High Court decision in the case of Nikunj Eximp Enterprises.

6. In the present case, it was noted that the assessee had made purchases from the grey market, potentially evading taxes. Referring to a recent judgment by the High Court of Bombay, it was established that the addition for bogus purchases should be limited to ensure the gross profit rate aligns with that of genuine purchases.

7. Following the High Court's judgment, the ITAT set aside the matter to the assessing officer with directions to restrict the addition by aligning the gross profit rate on bogus purchases with that of genuine purchases, granting the assessee a fair hearing opportunity.

8. Consequently, the assessee's appeal was partly allowed, and the order was pronounced on 3.9.2019.

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