2020 (4) TMI 325 - AT - Income Tax

Revenue's Appeal Dismissed by Tribunal Upholding 12.5% Profit Estimation

DCIT, Central Circle-3 (2), Mumbai Versus Doshi Medical Service

The revenue's appeal challenging the restriction of addition to 12.5% of bogus purchases was dismissed by the Tribunal. The Tribunal upheld the Ld. ... Bogus purchases - CIT(A) restricting the addition to the extent of 12.5% - HELD THAT:- Although, both authorities have taken different rate of profit for estimation of income from alleged bogus purchase, but no one could support said rate of gross profit with necessary evidences or any comparable cases. Admittedly, the assessee is in the business of trading in drugs and medicins and the retail profit margin in this kind of business is ranging between 10% to 20%. Therefore, we are of the considered view that the ld. CIT(A) has taken one of the possible method to settle dispute between the parties and estimated 12.50% gross profit on alleged bogus purchases. Hence, we are inclined to uphold order of the ld. CIT(A) and dismiss appeal filed by the Revenue.. Issues Involved:1. Restriction of addition to 12.5% of bogus purchases.2. Failure to consider the decision of the Hon’ble Apex Court in the case of N K Proteins Ltd Vs DCIT.3. Validity of the evidence provided by the assessee to support the genuineness of purchases.4. Reliance on information from the Sales Tax Department and investigation wing.5. Estimation of profit from alleged bogus purchases.Issue-wise Detailed Analysis:1. Restriction of Addition to 12.5% of Bogus Purchases:The revenue's appeal contested the Ld. CIT(A)'s decision to restrict the addition to 12.5% of the bogus purchases amounting to Rs. 77,18,604/-. The Ld. CIT(A) relied on the decision of the Hon’ble Gujarat High Court in the case of Simith P. Sheth vs CIT, which held that only the profit element embedded in such purchases should be added to the assessee's income. The Tribunal upheld this approach, noting that the Ld. CIT(A) had appropriately applied a 12.5% rate for computing unaccounted profits from the alleged bogus purchases, considering industry standards and past judgments.2. Failure to Consider the Decision of the Hon’ble Apex Court in the Case of N K Proteins Ltd Vs DCIT:The revenue argued that the Ld. CIT(A) failed to consider the decision of the Hon’ble Apex Court in the case of N K Proteins Ltd Vs DCIT, which dealt with similar facts. The Tribunal noted that while the revenue cited this case, the Ld. CIT(A) had relied on the Gujarat High Court's decision in Simith P. Sheth, which was more relevant to the facts of the present case. The Tribunal found no error in the Ld. CIT(A)'s reliance on the Gujarat High Court's judgment.3. Validity of the Evidence Provided by the Assessee to Support the Genuineness of Purchases:The assessee claimed that the purchases were genuine and supported by necessary evidence such as books of accounts, stock details, and bank statements. However, the Ld. AO found these insufficient, noting that notices issued to the parties were returned unserved. The Tribunal observed that both sides failed to conclusively prove their case with necessary evidence. The assessee's failure to provide further evidence and the Ld. AO's reliance on third-party information without thorough investigation were both noted as shortcomings.4. Reliance on Information from the Sales Tax Department and Investigation Wing:The Ld. AO relied heavily on information from the Sales Tax Department and investigation wing, which indicated that the parties involved were providing accommodation entries without actual delivery of goods. The Tribunal acknowledged this reliance but criticized the Ld. AO for not taking the investigation to its logical conclusion. The Tribunal emphasized that mere reliance on third-party information without concrete evidence was insufficient to justify a 100% addition.5. Estimation of Profit from Alleged Bogus Purchases:The Tribunal discussed various precedents where only the profit element embedded in bogus purchases was taxed. The Hon’ble Gujarat High Court in Simith P. Sheth and the ITAT, Mumbai in several cases had directed the estimation of gross profit on alleged bogus purchases. The Tribunal noted that the retail profit margin in the assessee's business ranged between 10% to 20%. In this case, the Ld. CIT(A)'s estimation of a 12.5% gross profit was deemed reasonable and consistent with industry norms and past judgments. The Tribunal upheld the Ld. CIT(A)'s order, dismissing the revenue's appeal.Conclusion:The appeal filed by the revenue was dismissed, and the Ld. CIT(A)'s order to restrict the addition to 12.5% of the bogus purchases was upheld. The Tribunal found that both sides failed to conclusively prove their case with necessary evidence and that the Ld. CIT(A)'s approach was a reasonable method to settle the dispute.