ITAT Mumbai reduces profit estimation on bogus purchases, cites business nature & precedents

The ITAT Mumbai partially allowed the assessee's appeals for Assessment Years 2009-10 and 2010-11, reducing profit estimation on alleged bogus purchases from 8.80% to 2%. The Assessing Officer's addition towards bogus purchases was decreased based on the nature of the assessee's business and varying profit rates in similar cases. The ITAT highlighted shortcomings in evidence presented by both parties and directed a lower profit estimation, citing precedents. The revenue's appeal for one year was dismissed. Judgment was pronounced on October 18, 2019.

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Issues:
1. Addition towards alleged bogus purchases for Assessment Years 2009-10 and 2010-11.

Detailed Analysis:
1. The appeals were directed against identical orders of the Commissioner of Income Tax (Appeals) -18, Mumbai, pertaining to Assessment Years 2009-10 and 2010-11. The main issue was the addition towards alleged bogus purchases made by the Assessing Officer. Both the assessee and the revenue challenged the orders, which were heard together due to common facts and issues.

2. The assessee, a private limited company engaged in manufacturing and trading, had filed returns for the relevant assessment years. The cases were reopened under section 147 based on information from the Directorate General of Income Tax Investigation, Mumbai, regarding Hawala dealers issuing bogus purchase bills. The Assessing Officer added 12.50% profit on alleged bogus purchases, leading to significant income additions for both assessment years.

3. The assessee contended before the Commissioner of Income Tax (Appeals) that the purchases were genuine, supported by evidence such as purchase bills, bank statements, and VAT audit reports. The CIT(A) reduced the profit estimation from 12.50% to 8.80% based on relevant submissions and legal precedents, including a decision of the Gujarat High Court.

4. Upon hearing both parties and reviewing the material and case laws, the ITAT found shortcomings on both sides in proving their cases conclusively. The Assessing Officer relied on information from the investigation wing and the Sales Tax Department without conducting thorough inquiries. The ITAT noted that profit estimation on alleged bogus purchases should be based on facts of each case, citing precedents where profit rates varied from 2% to 12.50%.

5. Considering the nature of the assessee's business and consistent with previous decisions, the ITAT directed the Assessing Officer to estimate profit at 2% on alleged bogus purchases, reducing the additions accordingly. The appeals by the assessee for both assessment years were partly allowed, while the revenue's appeal for one of the years was dismissed.

6. The judgment was pronounced on October 18, 2019, by the ITAT Mumbai.

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