2019 (3) TMI 1544 - AT - Income Tax

Appellate tribunal limits disallowance to 2% of bogus purchases, adds only profit element to income

ACIT-19 (1), Mumbai Versus M/s. Chhaya Gems

ACIT-19 (1), Mumbai Versus M/s. Chhaya Gems - TMI Issues Involved:1. Justification of restricting the disallowance of purchases at 2% by the CIT(A) on account of bogus purchases.2. Non-appreciation of the fact that during the search and seizure operation, the directors of the alleged bogus parties admitted to providing only accommodation entries.Issue-wise Detailed Analysis:1. Justification of Restricting the Disallowance of Purchases at 2%:The revenue challenged the CIT(A)'s decision to restrict the disallowance of purchases to 2% of the total bogus purchases amounting to Rs. 4,34,15,667/- from M/s Moulimani Impex Pvt. Ltd. The AO had initially added the entire amount of the alleged bogus purchases to the assessee's income. The CIT(A) found that the AO did not conduct independent verifications or issue notices under sections 133(6)/131 of the I.T. Act. However, there was substantial evidence from sworn statements that the suppliers were only providing accommodation entries and not engaging in real business. The CIT(A) opined that the onus was on the assessee to prove the genuineness of the transactions, which the assessee failed to do. The CIT(A) referred to several Supreme Court judgments emphasizing the importance of considering the reality of transactions and the surrounding circumstances.The CIT(A) also noted that without actual purchases, it would be impossible to sell goods, indicating that the purchases were made from the grey market and not from the alleged bogus parties. The CIT(A) relied on the judgment of the Hon'ble Gujarat High Court in the case of CIT vs. Simit Sheth, where it was held that only the profit element embedded in such purchases should be added to the assessee's income. The CIT(A) considered the profit margins in the diamond trading industry and concluded that a 2% profit element embedded in the bogus purchases should be added to the assessee's income.2. Non-appreciation of the Fact During the Search and Seizure Operation:The revenue argued that the CIT(A) did not appreciate that during the search and seizure operation, the directors of the alleged bogus parties admitted on oath that they were providing only accommodation entries and not engaging in real business. The CIT(A) acknowledged this fact but emphasized that the AO did not conduct independent verifications. The CIT(A) considered the overwhelming evidence from the investigation wing of the Income Tax Department, which indicated that the alleged suppliers were only providing accommodation entries and not engaging in real business.The CIT(A) concluded that the transactions were not genuine and that the purchases were made from unknown entities in the grey market. The CIT(A) referred to various Supreme Court judgments that highlighted the importance of considering the reality of transactions and the surrounding circumstances. The CIT(A) also noted that the AO accepted the sales made by the assessee and did not question the quantitative details maintained by the assessee. Therefore, the CIT(A) concluded that instead of adding the entire amount of purchases, only the profit element embedded in such purchases should be added to the assessee's income.Conclusion:The appellate tribunal upheld the CIT(A)'s decision to restrict the disallowance of purchases to 2% of the total bogus purchases. The tribunal agreed with the CIT(A) that the AO did not conduct independent verifications and that there was substantial evidence indicating that the alleged suppliers were only providing accommodation entries. The tribunal also agreed that the profit element embedded in the bogus purchases should be added to the assessee's income, as per the judgment in the case of CIT vs. Simit Sheth. The tribunal concluded that the CIT(A) had decided the matter judiciously and correctly, and therefore, the revenue's appeal was dismissed.