2019 (4) TMI 1173 - HC - Income Tax

Appeals dismissed; 25% disallowance upheld as estimate for bogus purchases where corresponding sales were established

HC dismissed appeals and upheld the Tribunal and CIT(A) findings that purchases were bogus but that corresponding sales existed; therefore disallowance ... Disallowance of bogus purchases - Corresponding sales adjustment - Concurrent finding of fact - Estimate of disallowance (25% rule) - Application of sections 68 and 69C - Precedential value of jurisdictional High Court decisionsDisallowance of bogus purchases - Corresponding sales adjustment - Concurrent finding of fact - Estimate of disallowance (25% rule) - Precedential value of jurisdictional High Court decisions - Validity of restricting disallowance in respect of purchases found to be bogus to 25% where corresponding sales are recorded - HELD THAT: - The Tribunal and the Commissioner (Appeals) recorded concurrent findings of fact that, although purchases shown from the supplier-group were not genuine, the assessee had produced goods and there were corresponding sales arising from the use of bulk drugs. The appellant did not challenge these concurrent factual findings nor pleaded perversity. The Tribunal followed this court's earlier decisions (including Vijay Proteins and N.K. Industries) which uphold that where corresponding sales exist and on the material before appellate authorities an estimate is made, confining disallowance to a proportionate estimate (here 25%) is permissible. The court observed that the 25% figure is an estimate and not a fixed legal standard; an estimate based on facts and accepted by concurrent findings of fact does not raise a substantial question of law. The Bombay High Court decision relied upon by revenue (Shoreline Hotel) was held inapplicable on facts since it concerned exercise of a different power and involved no corresponding sales. Given the concurrent findings and reliance on consistent jurisdictional precedents, no error of law justifying interference was shown. [Paras 15, 16, 17, 18, 19]The restriction of disallowance to 25% of the purchases found to be bogus is sustained; the Tribunal's order is not a substantial question of law and the appeals are dismissed.Final Conclusion: The Tribunal rightly upheld the Commissioner (Appeals)'s restriction of disallowance to 25% having regard to concurrent findings that corresponding sales existed and in view of binding jurisdictional precedents; no substantial question of law is made out and the appeals are dismissed. Issues Involved:1. Whether the ITAT erred in law and on facts in upholding the CIT(A)'s order in restricting the addition/disallowances on account of bogus purchases to 25% instead of the entire amount.2. Whether the ITAT erred in relying on the decision of the Gujarat High Court in the case of N.K. Industries Ltd. vs. DCIT, in restricting the addition of bogus purchases.Issue-wise Detailed Analysis:1. Restriction of Addition/Disallowances on Account of Bogus Purchases:The appellant revenue questioned the Tribunal's order that upheld the CIT(A)'s decision to restrict the addition/disallowances on account of bogus purchases to 25% instead of the entire amount. The assessee, engaged in manufacturing and marketing bulk drugs and pharmaceutical preparations, was found to have made purchases from concerns operated by Shri F.H. Rizvi, which were deemed bogus. Despite the assessee providing various documents to support the genuineness of the purchases, the Assessing Officer (AO) deemed the evidence as not genuine, citing Shri Rizvi's admission that the transactions were merely on paper with no physical movement of goods.The AO further analyzed the yield ratio and found significant variations, which were deemed abnormal and unexplained. Consequently, the AO disallowed the entire amount of Rs. 41,73,000/- as bogus purchases and added Rs. 21,02,500/- to the total income, resulting in a total addition of Rs. 62,75,500/- for the assessment year.The CIT(A), however, observed that while the purchases were not genuine, the assessee had produced goods using the bulk drugs. Therefore, following the decision in Themis Medicare, the CIT(A) restricted the disallowance to 25% of the total purchases made from Shri Rizvi's concerns.The Tribunal, concurring with the CIT(A), noted that the AO had accepted the corresponding sales made out of the bogus purchases. It followed the jurisdictional High Court's decision in N.K. Industries Ltd. v. DCIT, which supported restricting the disallowance to 25% of the bogus purchases.2. Reliance on the Decision in N.K. Industries Ltd. vs. DCIT:The appellant argued that the Tribunal erred in relying on the decision in N.K. Industries Ltd. v. DCIT, where the court had observed that taxing only 25% of bogus claims goes against sections 68 and 69C of the Income Tax Act. The appellant contended that the entire amount of bogus purchases should have been disallowed, as the concerns of Shri Rizvi were only paper concerns with no physical movement of goods.The respondent, however, argued that the Tribunal rightly restricted the disallowance to 25% of the bogus purchases, as there were corresponding sales. The respondent cited the decision in Vijay Proteins Ltd. v. Commissioner of Income Tax, which supported restricting disallowance to 25% in cases of bogus purchases.The High Court, considering the rival submissions, noted that the CIT(A) had recorded a finding of fact that the assessee had produced goods using the bulk drugs. The Tribunal had not disturbed this finding. The court observed that the appellant had not challenged the concurrent finding of fact nor pleaded that the findings were perverse. The Tribunal had followed the jurisdictional High Court's decision in N.K. Industries Ltd. v. DCIT and Vijay Proteins Ltd. v. Commissioner of Income Tax, which justified restricting the disallowance to 25%.The court also referred to Sanjay Oilcake Industries v. CIT, where it was held that an estimate of 25% disallowance was fair and reasonable. The court emphasized that the quantum of deduction, namely 25%, is not a fixed standard but an estimate based on the facts and circumstances of each case.Conclusion:The High Court concluded that the Tribunal was justified in confirming the CIT(A)'s order restricting the disallowance to 25% of the bogus purchases, as there were corresponding sales. The court found no infirmity in the Tribunal's order and dismissed the appeals, holding that the impugned order did not give rise to any substantial question of law warranting interference. The decision of the Bombay High Court in Shoreline Hotel (P.) Ltd. v. Commissioner of Income Tax was found inapplicable to the present case, as it involved different facts and circumstances.