2019 (3) TMI 800 - AT - Income Tax

Tribunal Upholds CIT(A) Decision on Profit Element Calculation, Rejects AO's Peak Credit Theory

Dy. Commissioner of Income Tax, Central Circle-5 (2) MUMBAI Versus Milan H. Sanghavi (HUF), (Prop. P.M. Enterprises), Milan H. Sanghavi, (Prop. Dipen Trading Company)

Dy. Commissioner of Income Tax, Central Circle-5 (2) MUMBAI Versus Milan H. Sanghavi (HUF), (Prop. P.M. Enterprises), Milan H. Sanghavi, (Prop. Dipen ... Issues Involved:1. Legitimacy of the alleged bogus purchases.2. Application of peak credit theory by the Assessing Officer (AO).3. Validity of the 12.5% addition rate directed by the Commissioner of Income Tax (Appeals) [CIT(A)].4. Reliance on self-serving statements of suppliers.5. Treatment of unaccounted cash and credit period for payments.Detailed Analysis:Issue 1: Legitimacy of the Alleged Bogus PurchasesThe Revenue conducted search and seizure operations on M/s. Satra Properties (I) Ltd. and the assessees, identifying the latter's concerns as bogus billers. The AO examined the purchases made by the assessees from several parties identified as Hawala operators, who provided accommodation bills without supplying materials. Despite issuing summons, these parties did not appear, except for one representative who claimed actual supply of materials. The AO concluded that the purchases were bogus, as supported by the suppliers' admissions before the Sales Tax authorities.Issue 2: Application of Peak Credit Theory by the AOThe AO presumed that the assessees used unaccounted cash for these purchases and proposed to assess the peak amount of bogus purchases. The peak amounts were calculated based on the highest outstanding balances during the relevant periods. For Milan H. Sanghavi (HUF), the peak amount was Rs. 386.83 Lakhs, and for Milan H. Sanghavi, it was Rs. 326.37 Lakhs. The AO assessed these amounts as income for the respective years but made no additions for other years.Issue 3: Validity of the 12.5% Addition Rate Directed by the CIT(A)The CIT(A) disagreed with the AO's peak credit theory, noting that the AO accepted the sales declared by the assessees, which implied actual purchases. The CIT(A) directed the AO to make additions at 12.5% of the value of the bogus purchases, citing the savings from VAT and the rotation of capital. This rate was supported by the Gujarat High Court's decision in CIT vs. Simit P. Sheth.Issue 4: Reliance on Self-Serving Statements of SuppliersThe assessees argued that the AO's reliance on self-serving statements made by suppliers before the Sales Tax authorities was unjustified. They pointed out that payments were made through account payee cheques, and one supplier confirmed actual supply. The CIT(A) considered these aspects and found the AO's presumption of unaccounted cash introduction unsupported by material evidence.Issue 5: Treatment of Unaccounted Cash and Credit Period for PaymentsThe AO's presumption that the assessees received cash back from suppliers was not substantiated with evidence. The assessees' claim of a 90-day credit period for payments, if considered, would significantly reduce the peak credit amount. The CIT(A) found the AO's rejection of this claim unjustified and directed a profit-based addition instead.Conclusion:The Tribunal upheld the CIT(A)'s decision to assess the profit element at 12.5% of the value of the alleged bogus purchases, rejecting the AO's peak credit theory due to lack of supporting evidence for unaccounted cash introduction. The Tribunal found no infirmity in the CIT(A)'s orders, which were consistent with judicial precedents, and dismissed the Revenue's appeals.