2017 (8) TMI 641 - AT - Income Tax

Tribunal orders de novo assessment, requires evidence of material consumption. Assessee gets opportunity to present case.

The Tribunal set aside the matter and restored it to the AO for a de novo determination, directing the assessee to provide evidence of the material's ... Bogus purchases - AO observed that, transaction of purchase of material four parties are nothing but a colorable devices using forged and fabricated bills for the purposes of evasion of income-tax. - Notice u/s 133(6) returned as unserved - Held that:- In the absence of utilization/consumption of the material so purchased from these alleged entry providers being proved for manufacturing of finished goods, there is always possibility of manipulations to suppress profits and evade taxes and hence it is critical for the assessee to prove utilization/consumption of these material so purchased for manufacturing of finished goods dealt with by the assessee. In our considered view keeping in view factual matrix of the case and in the interest of justice to both the parties, the matter needs to be set aside and restored to file of A.O. for denovo determination of this issue by the AO on merits in accordance with law and the assessee is hereby directed to prove the consumption/utilization of the material so purchased from these alleged entry providers for manufacture of the engineering goods so dealt with by the assessee with cogent evidences before the A.O. including production of excise records concerning stocks and also to prove that these purchases to the tune of ₹ 82,54,793/- from these alleged entry operators were genuine. The AO shall admit all relevant evidences /material filed by the assessee in de-novo proceedings before adjudicating this issue on merits in accordance with law. Issues Involved:1. Verification and examination of alleged bogus purchases.2. Granting relief based on average Gross Profit (G.P.) rate.3. Application of the judgment in CIT Vs Simit P Sheth.4. Ignoring the decision of the Hon'ble Gujarat High Court regarding wholly bogus purchases.Issue-wise Detailed Analysis:1. Verification and Examination of Alleged Bogus Purchases:The Revenue contended that the CIT(A) erred by not verifying whether the quantity of alleged bogus purchases and their corresponding sales were accounted for in the books of accounts. During the assessment, the assessee failed to establish the genuineness of the purchases from four parties, who were untraceable. The AO received information from the Sales Tax Department indicating that the assessee was involved in bogus transactions amounting to Rs. 82,54,793/-. Notices issued to these parties returned unserved, and the assessee could not provide adequate evidence to prove the genuineness of these purchases. Consequently, the AO added the entire amount of alleged bogus purchases to the assessee's income under Section 69C of the Income-tax Act, 1961.2. Granting Relief Based on Average Gross Profit (G.P.) Rate:The CIT(A) granted relief by relying on the assessee's submission regarding the average G.P. rate of 17.6% for the preceding five years (A.Y. 2006-07 to 2010-11). The CIT(A) directed the AO to add only the G.P. arising from the alleged bogus purchases, determining the G.P. rate at 17.6%. The CIT(A) reasoned that since the AO had not disturbed the sales emanating from these purchases, only the profit element should be added back.3. Application of the Judgment in CIT Vs Simit P Sheth:The Revenue argued that the CIT(A) incorrectly applied the judgment in CIT Vs Simit P Sheth, where the business, evidence, and quantitative details differed. The CIT(A) had relied on this case to support the addition of only the profit element rather than the entire bogus purchase amount. The CIT(A) observed that when sales are accepted, the basis of purchases cannot be questioned, and only the profit element should be added.4. Ignoring the Decision of the Hon'ble Gujarat High Court:The Revenue contended that the CIT(A) ignored the decision of the Hon'ble Gujarat High Court, which stated that if the entire purchases were wholly bogus, the entire amount should be added back to the income. The CIT(A) did not consider this aspect and instead focused on the G.P. rate for granting relief.Tribunal's Decision:The Tribunal noted that the assessee, a manufacturer of engineering goods, failed to prove the consumption/utilization of the material allegedly purchased from four hawala entry providers. The Tribunal observed that the assessee could not provide evidence to prove the genuineness of the purchase transactions. The Tribunal emphasized the need for the assessee to prove the utilization/consumption of the material for manufacturing finished goods to avoid manipulation and tax evasion.In the interest of justice, the Tribunal set aside the matter and restored it to the AO for a de novo determination. The Tribunal directed the assessee to provide cogent evidence of the consumption/utilization of the material and to prove the genuineness of the purchases. The AO was instructed to admit all relevant evidence and provide the assessee with an opportunity to be heard.The appeal of the Revenue was allowed for statistical purposes, and the order was pronounced in the open court on 16th August 2017.