ITAT restricts bogus purchase addition to gross profit difference under section 68 following Bombay HC precedent

ITAT Mumbai allowed the assessee's appeal regarding bogus purchases. Following Bombay HC precedent in Mohommad Haji Adam and Company, the tribunal restricted the addition to the difference between gross profit rates on genuine versus non-genuine purchases. The assessee declared 7.89% gross profit on regular trading and 7.64% on non-genuine transactions. The tribunal directed the Assessing Officer to disallow only 0.25% (the difference) of disputed purchases under section 68, rather than the entire amount of bogus purchases.

---

---

Issues:
The issues involved in this case are reopening of assessment u/s 147 of the Income-tax Act, treatment of purchases as non-genuine u/s 69C of the Act, addition of income based on non-genuine purchases, appeal against the order of the Learned Commissioner of Income Tax (Appeals), and determination of the profit element embedded in non-genuine purchases.

Reopening of Assessment:
The appeal was filed by the assessee against the order of the Learned Commissioner of Income Tax (Appeals) for the A.Y. 2012-13. The case was reopened u/s 147 of the Act based on information received about accommodation entries provided by various dealers, including the assessee. The Assessing Officer treated the purchases as non-genuine u/s 69C of the Act, leading to the determination of the assessee's income at a higher amount.

Treatment of Purchases as Non-genuine:
The Assessing Officer concluded that the purchases made by the assessee were non-genuine, obtained as accommodation entries without actual transportation of materials. Despite the assessee's submissions, the Assessing Officer treated the purchases as bogus under section 69C of the Act, resulting in a higher income determination for the assessee.

Appeal Against CIT(A) Order:
The assessee appealed before the Ld. CIT(A) and subsequently to the Appellate Tribunal, challenging the addition made by the Assessing Officer. The Ld. CIT(A) directed the Assessing Officer to restrict the addition to the Gross Profit Rate of 7.89% while working out the profit element embedded in the non-genuine purchases.

Determination of Profit Element:
The Appellate Tribunal considered the submissions and material on record, emphasizing that only the profit element embedded in non-genuine purchases should be added to the income. The Tribunal referred to previous judgments and directed the Assessing Officer to disallow only 0.25% of the disputed purchases under section 68 of the Act, in line with the difference in gross profit declared in regular trading and non-genuine transactions.

Conclusion:
Following the decision of the Hon'ble Bombay High Court and the previous case of the assessee, the Appellate Tribunal allowed the appeal filed by the assessee. The Tribunal directed the Assessing Officer to restrict the addition to the profit element embedded in the non-genuine purchases, highlighting the importance of estimating the profit reasonably in such cases.

---