ITAT sets aside bogus purchases estimation, directs gross profit rate alignment with genuine purchases per Bombay HC precedent

ITAT Mumbai set aside the matter to the assessing officer regarding bogus purchases estimation. Following Bombay HC precedent in M Haji Adam Co, the tribunal directed that additions for bogus purchases should be restricted by bringing the gross profit rate on such purchases to the same rate as genuine purchases, rather than the CIT(A)'s 5% reduction approach.

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Issues involved:
The issues in this case involve the sustenance of a 5% disallowance on account of bogus purchases, reduction of the disallowance from 8% to 5% by CIT(A), and the subsequent appeal before ITAT.

Details of Judgment:
1. The assessing officer made an 8% addition on account of bogus purchases, which was later reduced to 5% by CIT(A).
2. The ITAT considered the documentary evidence provided by the assessee for the purchases and noted that while adverse inferences were drawn due to the inability to produce suppliers, the sales were not doubted. The ITAT referenced a High Court decision which upheld hundred percent allowances for purchases deemed bogus when sales are not doubted.
3. The ITAT observed that the assessee had made purchases from the grey market, resulting in savings at the expense of the exchequer. Following a recent High Court judgment, the ITAT limited the addition in respect of bogus purchases to bring the gross profit rate in line with genuine purchases.
4. The Tribunal allowed the appeal partly, deleting ad hoc additions but permitting the A.O. to tax the assessee based on the difference in GP rates.
5. The Tribunal's decision was supported by the fact that there was no discrepancy between the purchases and sales shown by the assessee, leading to the conclusion that purchases cannot be rejected without affecting sales in the case of a trader.
6. The matter was set aside to the assessing officer with directions to restrict the addition by aligning the gross profit rate on bogus purchases with genuine purchases, ensuring the assessee is given a fair hearing.
7. Ultimately, the assessee's appeal was partly allowed by the ITAT.

Separate Judgment:
No separate judgment was delivered by the judges in this case.

Conclusion:
The ITAT Mumbai partially allowed the assessee's appeal, emphasizing the need to align the gross profit rate on bogus purchases with genuine purchases and granting the assessee a fair opportunity to present their case.

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