Tribunal Adjusts Disallowance for Bogus Purchases by Deducting Assessee's Declared Gross Profit Rate

The tribunal partly allowed the appeals, upholding the assessment's reopening and adjusting the disallowance for bogus purchases by deducting the gross profit rate already declared by the assessee.

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Issues Involved:
1. Reopening of assessment under Section 148.
2. Disallowance on account of bogus purchases.
3. Percentage of disallowance to be applied to bogus purchases.

Issue-wise Detailed Analysis:

1. Reopening of Assessment under Section 148:
The assessee challenged the reopening of the assessment, which was affirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) observed that the Assessing Officer (AO) received credible and actionable information from the Sales Tax Department through DGIT (Inv.), Mumbai, indicating that the assessee was a beneficiary of accommodation entries in the form of bogus sales/purchases from M/s Navratan Impex amounting to Rs. 3,04,980/-. The AO issued a notice under Section 148 based on this information. The CIT(A) referenced the Supreme Court decisions in Raymond Woollen Mills and Rajesh Jhaveri Stock Brokers, which support the sufficiency of reason for reopening assessments. The AO followed the procedural requirements for reopening as laid out in GKN Driveshafts. The tribunal upheld the reopening, finding that tangible and cogent incriminating material justified the AO's belief that income had escaped assessment.

2. Disallowance on Account of Bogus Purchases:
The AO made a 12.5% addition on account of bogus purchases for various assessment years, based on the inability to serve notices under Section 133(6) and the assessee's failure to produce the parties or provide vital transportation documents. The AO concluded that the assessee made purchases from the grey market and added 12.5% of the total hawala purchases. The CIT(A) reduced this disallowance to 9%, considering the lower sales tax rate in Maharashtra compared to Gujarat, as referenced in the Simit P Sheth case. The tribunal noted that the assessee reconciled the bogus purchases with corresponding sales, supporting the conclusion that purchases were made from the grey market.

3. Percentage of Disallowance to be Applied to Bogus Purchases:
The tribunal considered the assessee's argument that the 12.5% disallowance rate was on the higher side due to the lower sales tax rate in Maharashtra. The tribunal found that while 100% disallowance for bogus purchases is not justified when sales are not doubted (as supported by the Nikunj Eximp Enterprises case), a 12.5% disallowance is appropriate for grey market purchases. However, the tribunal agreed with the assessee's counsel that the gross profit already declared should be deducted from the 12.5% disallowance to avoid double jeopardy. Consequently, the tribunal modified the CIT(A)'s order to restrict the disallowance to 12.5% of the bogus purchases, reduced by the gross profit rate already declared by the assessee.

Conclusion:
The appeals filed by the assessee were partly allowed, with the tribunal upholding the reopening of the assessment and modifying the disallowance to account for the gross profit rate already declared by the assessee. The order was pronounced in open court on 02.11.2018.

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