2017 (2) TMI 796 - AT - Income Tax

Tax Dispute: Profit Disallowance on Bogus Purchases under Income Tax Act

The case involved disputes over the disallowance of addition for profit on bogus purchases under the Income Tax Act. The Revenue challenged the reduction ... Disallowance under as profit on bogus purchases - onus of proof on the assessee to establish genuineness of purchases - reliance on Sales Tax Department's list of bogus/hawala dealers - treatment of additional income declared before the Settlement Commission - use of declared additional income and gross profit margin as basis for partial disallowanceDisallowance under as profit on bogus purchases - reliance on Sales Tax Department's list of bogus/hawala dealers - onus of proof on the assessee to establish genuineness of purchases - Whether the addition of Rs. 2,38,32,673/- made by the AO on account of alleged bogus purchases could be sustained in full or required restriction. - HELD THAT: - AO disallowed the aggregate purchases from eleven suppliers after noting that those parties appeared on the Sales Tax Department's list of entities alleged to give bogus bills, and after service of notices under section 133(6) were returned unserved and field enquiries indicated accommodation entries. The CIT(A) examined the material and found that, while enquiries raised doubt about billing through those parties, the assessee's books, sales, and cheque payments were not disputed and there was no clinching proof that the goods were not received. The CIT(A) held that the primary onus to prove genuineness lay on the assessee and, in the absence of full discharge of that onus, restricted the disallowance to the amount the assessee had itself declared as additional income before the Settlement Commission, applying consideration of gross profit margins. The Tribunal found the CIT(A)'s order to be reasoned: AO lacked conclusive evidence to sustain the entire addition; CIT(A)'s approach of adopting the assessee's declared additional income and assessing by reference to gross profit was a permissible method of arriving at a fair disallowance. [Paras 5, 6]CIT(A)'s restriction of the AO's disallowance to the amount declared before the Settlement Commission and sustained on the basis of gross profit is upheld; Revenue's appeal is dismissed.Treatment of additional income declared before the Settlement Commission - use of declared additional income and gross profit margin as basis for partial disallowance - Whether the assessee's cross-objection to delete the disallowance entirely should be allowed. - HELD THAT: - The assessee contended that all disallowance should be deleted since payments were through bank and books were maintained. The CIT(A) nevertheless sustained disallowance to the extent of the amount declared before the Settlement Commission, having regard to the doubts raised by Sales Tax Department enquiries and the assessee's failure to fully discharge the onus of proving genuineness. The Tribunal agreed that the CIT(A)'s reasoned exercise in adopting the declared amount and applying gross profit margins did not warrant interference. [Paras 7]Cross-objection dismissed; entire disallowance is not deleted and the partial disallowance sustained by CIT(A) is maintained.Final Conclusion: The Tribunal upholds the CIT(A)'s reasoned order restricting the AO's disallowance under section 69C to the amount the assessee declared before the Settlement Commission (applied by reference to gross profit); Revenue's appeal and the assessee's cross-objection are dismissed. Issues:1. Disallowance of addition of Rs. 2,38,32,673 as profit on bogus purchases under section 69C of the Income Tax Act.2. Failure to produce parties before the Assessing Officer and lack of evidence to substantiate actual delivery of goods purchased.3. Disallowance made by the Assessing Officer based on investigation findings and statement of parties.4. Assessment of additional income by the Settlement Commission and subsequent disallowance by the Commissioner of Income Tax (Appeals).Issue 1: Disallowance of Addition on Bogus PurchasesThe case involved an appeal by the Revenue and a Cross Objection by the assessee against the order of the Commissioner of Income-Tax (Appeals) for the Assessment Year 2010-11. The Revenue contested the reduction of addition of Rs. 2,38,32,673 to Rs. 37,63,260 under section 69C of the Act. The assessee, a civil contractor, filed additional income before the Settlement Commission due to disputed bogus purchases. The Assessing Officer disallowed the sum on account of bogus purchases, which was later restricted by the Commissioner of Income-Tax (Appeals). The Revenue challenged this reduction, while the assessee sought the deletion of the entire disallowance.Issue 2: Failure to Produce Parties and Lack of Substantiating EvidenceDuring the assessment proceedings, the Assessing Officer requested details of parties from whom purchases were made. The assessee provided the details, but the parties were found to be listed as bogus/hawala dealers by the Sales Tax Department. Notices issued to these parties were returned unserved, and subsequent inquiries revealed they were involved in providing accommodation entries. The assessee argued that the purchases were genuine, supported by payments through bank challan and consumption in contracts with the Municipal Corporation. However, the Assessing Officer disallowed the purchases due to lack of delivery challans, transportation evidence, and stock register details. The Commissioner of Income-Tax (Appeals) considered the genuineness based on bank transactions but sustained the disallowance partially, citing the onus on the taxpayer to prove the transactions' authenticity.Issue 3: Disallowance Based on Investigation FindingsThe Revenue relied on investigation findings and statements of third parties to support the disallowance of purchases. The Sales Tax Department's website listed the parties as involved in bogus billing, and postal authorities confirmed their unavailability at provided addresses. The Assessing Officer disallowed purchases from all parties, leading to the appeal. The Commissioner of Income-Tax (Appeals) upheld the disallowance based on the taxpayer's responsibility to prove genuine transactions, despite the lack of concrete evidence to doubt the payments made by the assessee.Issue 4: Assessment by Settlement Commission and Subsequent DisallowanceThe assessee's initial approach to the Settlement Commission on the matter of bogus purchases resulted in additional income declaration. However, the Settlement Commission's application was deemed invalid, leading to the resumption of assessment proceedings. The Commissioner of Income-Tax (Appeals) sustained the disallowance based on the additional income offered before the Settlement Commission, granting partial relief to the assessee. The appeal by the Revenue and the Cross Objection by the assessee were both dismissed, upholding the Commissioner's decision.In conclusion, the judgment addressed the issues of disallowance of bogus purchases, lack of substantiating evidence, reliance on investigation findings, and assessment by the Settlement Commission. The decision upheld the partial disallowance based on the taxpayer's onus to prove genuine transactions and the Commissioner's reasoned consideration of the case.