2019 (2) TMI 784 - AT - Income Tax

Tribunal Limits Disallowance to 8% for Bogus Purchases, Focusing on Profit Element

The Tribunal upheld the First Appellate Authority's decision to restrict the disallowance of bogus purchases to 8%, considering the already declared gross ... Disallowance of bogus purchases - CIT-A restricted addition to 8% by granting the benefit of gross profit (4.5%) already declared by the assessee - whether the assessee has not proved the genuineness of the transaction? - Held that:- AO got information that the purchases made by the parties, mentioned in the assessment order are suspected parties and are mentioned at the website of Maharashtra VAT Department. The assessee claim to have made purchases of ₹ 34,92,40,689/-, therefore, the assessee was asked to furnish the details of purchases made from these parties. The notices issued/served under section 133(6) of the Act, however, there was no reply from the concerned parties. The facts are that neither the parties were produced nor the transaction was substantiated with positive material therefore, the Ld. Assessing Officer made the addition at the rate of 12.5% of such bogus purchases. On appeal, before the Ld. Commissioner of Income Tax (Appeal), the GP was adopted at the rate of 8% by granting the benefit of gross profit (4.5%) already declared by the assessee. The Revenue is aggrieved and is in appeal before this Tribunal. If the observation made in the assessment order, leading to addition made to the total income, conclusion drawn in the impugned order, material available on record, assertions made by the ld. respective counsel, if kept in juxtaposition and analyzed, admittedly, there cannot be any sale without purchases and only the profit element embedded in the bogus purchases can be added. Since, the assessee has already declared gross profit @ 4.5%, therefore, we find no infirmity in granting the benefit of the GP already declared by the assessee, because in the competitive world of trade, there may not be huge profit. - Decided against revenue Issues Involved:1. Disallowance of bogus purchases.2. Rate of disallowance (8% vs. 12.5%).3. Genuineness of transactions.4. Application of precedents from higher courts.Detailed Analysis:Issue 1: Disallowance of Bogus PurchasesThe Revenue challenged the order of the First Appellate Authority, which restricted the disallowance of bogus purchases to 8%. The Revenue argued that the assessee failed to prove the genuineness of the transactions, warranting a higher disallowance rate. The assessee contended that the First Appellate Authority had appropriately considered the gross profit already declared.Issue 2: Rate of Disallowance (8% vs. 12.5%)The Revenue's primary contention was that the First Appellate Authority erred in restricting the addition to 8% instead of the 12.5% determined by the Assessing Officer. The Tribunal noted that the First Appellate Authority had granted the benefit of the already declared gross profit of 4.5% by the assessee, which was deemed appropriate considering the facts and circumstances of the case.Issue 3: Genuineness of TransactionsThe Tribunal referred to multiple precedents to assess the genuineness of the transactions. In Sanjay Oilcakes Industries vs. CIT, it was established that the sellers were not traceable, and the purchases were likely inflated. The Tribunal highlighted that in such cases, only the profit element embedded in the bogus purchases should be subjected to tax, as supported by the Gujarat High Court in CIT vs Bholanath Poly Fab. Pvt. Ltd. and CIT vs Vijay M. Mistry Construction Ltd.Issue 4: Application of Precedents from Higher CourtsThe Tribunal extensively cited decisions from various High Courts and the Supreme Court to justify its stance. In Kachwala Gems vs JCIT, the Supreme Court acknowledged that some guesswork is inevitable in estimating income in such cases. The Gujarat High Court in CIT vs Ashish International Ltd. emphasized the necessity of cross-examination to validate statements used against the assessee. The Mumbai Tribunal in DCIT vs Rajeev G. Kalathil underscored that suspicion alone cannot replace concrete evidence. The Bombay High Court in CIT vs Nikunj Exim Enterprises Pvt. Ltd. affirmed that the absence of suppliers' appearance does not automatically render purchases bogus if other evidence supports the transactions.Conclusion:After considering the rival submissions, material on record, and relevant judicial precedents, the Tribunal concluded that only the profit element embedded in the bogus purchases should be added to the income. Since the assessee had already declared a gross profit of 4.5%, the Tribunal found no infirmity in the First Appellate Authority's decision to restrict the addition to 8%. Consequently, the appeals of the Revenue were dismissed.This Order was pronounced in the open court in the presence of ld. representatives from both sides at the conclusion of the hearing on 01/01/2019.