2020 (4) TMI 126 - AT - Income Tax

Tribunal allows appeals, directs 12.5% profit estimate on alleged bogus purchases.

Mr. Chirag J Mehta (Proprietor of Navpad Chemicals) Versus ACIT, Circle-19 (2), Mumbai

The Tribunal partly allowed the appeals for both AY 2009-10 and AY 2011-12, directing the AO to estimate a 12.5% profit on the alleged bogus purchases. ... Bogus purchases - Transaction with hawala/suspicious dealers - HELD THAT:- On perusal of records, the assessee is into the business of whole seller and reseller in dyes and chemicals and pharma items. The assessee has declared gross profit of 5.61% to 5.91% for AY 2009-10 to AY 2011-12. Although, the rate of gross profit declared by the assessee in his books of accounts is not a correct yardstick to determine the profit element in alleged bogus purchases, but if you go through the nature of business of the assessee and industry practice, at any point of time 100% additions cannot be sustained. Further, although the assessee has cited the decision in the case of Mohammad Hazi Adam and Company vs PCIT [2019 (2) TMI 1632 - BOMBAY HIGH COURT] and requested to scale down additions made by the Ld. AO towards gross profit rate of other purchases, but the claim of the assessee cannot be accepted, because the gross profit declared by the assessee in its regular books of accounts cannot be considered as correct in view of the fact that there is some sort of doubt is still there, in respect of purchases claim to have made from certain parties. After considering facts and circumstances of this case and consistent with view taken by the co-ordinate bench in number of cases a reasonable amount of profit needs to be estimated of alleged bogus purchase to meet the ends of the justice. Hence, by taking into account over all facts and circumstances of this case and also, consistent with view taken by the co-ordinate bench in similar cases, we direct the Ld. AO to estimate 12.5% profit on alleged bogus purchases. Issues Involved:1. Validity of reopening of assessment under Section 147 of the Income Tax Act.2. Disallowance of Rs. 87,61,453/- as bogus purchases.Issue-wise Detailed Analysis:1. Validity of Reopening of Assessment under Section 147:The assessee initially challenged the reopening of assessment under Section 147, claiming it was based on a change of opinion. However, during the hearing, the assessee's representative chose not to press this ground. Consequently, this ground of appeal was dismissed as not pressed.2. Disallowance of Rs. 87,61,453/- as Bogus Purchases:The core issue revolves around the disallowance of Rs. 87,61,453/- which was claimed as purchases from alleged bogus parties. The assessee, a trader in dyes, chemicals, and pharma items, had initially declared an income of Rs. 6,95,124/- for AY 2009-10. Following a survey operation under Section 133A, it was found that the assessee was involved in obtaining bogus purchase bills to reduce taxable profits. The assessee admitted to this during the survey and filed a revised return declaring Rs. 94,56,577/-, including the bogus purchases.The Ld. Commissioner of Income Tax (Appeals) [CIT(A)] upheld the reopening of the assessment, citing fresh tangible material from the survey and information from the Directorate General of Income Tax (Investigation) [DGIT(Inv.)] indicating income escapement. The CIT(A) also noted that the assessee did not request the reasons for reopening or file objections during the assessment proceedings.Regarding the disallowance of bogus purchases, the CIT(A) observed that the assessee had admitted to booking bogus purchases to reduce taxable profits and had filed a revised return incorporating this admission. The CIT(A) thus upheld the findings of the Assessing Officer (AO).Before the Tribunal, the assessee argued that the admission of additional income was under coercion and undue influence, and that no additions should be made solely based on the statement recorded during the survey. The assessee cited judicial precedents, including the Supreme Court's decision in CIT vs. S. Khaderkhan Sons, which held that statements recorded during surveys have no evidentiary value unless corroborated by other evidence.The Tribunal acknowledged that the assessee is entitled to raise additional grounds and claims during appellate proceedings, as supported by the Supreme Court's decisions in Jute Corporation of India Ltd. vs. CIT and Goetz India Ltd. vs. CIT. The Tribunal admitted the additional claim and examined the issue on merits.The Tribunal found that the AO had not conducted any independent enquiry to substantiate the claim of bogus purchases and had solely relied on the statement made during the survey and information from the MVAT department. The assessee had provided purchase bills, payment details, and other relevant documents to support the genuineness of the purchases. The AO did not dispute the sales declared by the assessee.The Tribunal referred to judicial precedents, including the Gujarat High Court's decision in Simit P. Sheth vs. CIT, which held that in cases of bogus purchases, only the profit element embedded in such purchases should be taxed, not the entire purchase amount. The Tribunal also cited the Bombay High Court's decision in PCIT vs. Mohammad Haji Adam & Co., which supported taxing only the profit element in such cases.Considering the nature of the assessee's business and industry practices, the Tribunal concluded that a reasonable profit percentage should be estimated for the alleged bogus purchases. The Tribunal directed the AO to estimate a 12.5% profit on the alleged bogus purchases.Conclusion:The Tribunal partly allowed the appeals for both AY 2009-10 and AY 2011-12, directing the AO to estimate a 12.5% profit on the alleged bogus purchases. This decision was based on the principle that only the profit element in the bogus purchases should be taxed, not the entire purchase amount.