2020 (4) TMI 326 - AT - Income Tax

Tribunal allows appeal, directs AO to estimate profit on alleged bogus purchases

Amrat B Prajapati Versus ITO-19 (1) (1), Mumbai

The Tribunal partly allowed the appeal filed by the assessee, directing the AO to estimate a 12.5% profit on the alleged bogus purchases and allow ... Bogus purchases - AO has made 12.50% additions - assessee is one of the beneficiary of accommodation entries of bogus purchase bills issued by Hawala dealers - Addition enhanced to 100% by the ld. CIT (A) - HELD THAT:- We find that both the sides failed to prove the case in their favour with necessary evidences. Although, assessee has filed certain basic evidences, but failed to file further evidences to conclusively prove purchases to satisfactions of the Ld.AO. At the same time, the Ld. AO had also failed to take the investigation to a logical conclusion by carrying out necessary enquires, but he solely relied upon information received from investigation wing, which was further supported by information received from Maharashtra Sales Tax Department. Under these circumstances, it is difficult to accept arguments of both the sides. Further, in a situation where purchase is made from alleged hawala dealers, various High Courts and Tribunals had considered an identical issue in light of investigation carried out by the Sales Tax Department and held that in case purchases claims to have made from alleged hawala dealers, only profit element embedded in those purchases needs to be taxed, but not total purchase from those parties. Consistent with view taken by the Co-ordinate Bench in number of cases, and also by following the decision of Hon’ble Bombay High Court in the case of The PCIT vs Mohammed Haji Adam & Co [2019 (2) TMI 1632 - BOMBAY HIGH COURT] we are of the considered view that a reasonable profit on alleged bogus purchases would meet ends of justice. Hence, we direct the ld. AO to estimate 12.50% profit on alleged bogus purchases and further allow deductions towards GP already declared for the year in regular books of accounts. Issues Involved:1. Disallowance and enhancement of purchase amount under Section 37(1) of the Income Tax Act, 1961.2. Validity of the addition percentage towards alleged bogus purchases.Issue-wise Detailed Analysis:1. Disallowance and Enhancement of Purchase Amount under Section 37(1) of the Income Tax Act, 1961:The core issue revolves around whether the purchases made by the assessee, amounting to Rs. 74,52,992/-, are genuine or bogus. The Assessing Officer (AO) initially made an addition of 12.5% of the purchase amount, equating to Rs. 9,31,624/-, under Section 37(1) of the Income Tax Act, 1961. This decision was based on information received from the Directorate General of Income Tax (DGIT), Mumbai, and the Sales Tax Authorities of Maharashtra, indicating that the assessee had taken accommodation bills of bogus purchases from various parties.During the appellate proceedings, the Commissioner of Income Tax (Appeals) [CIT(A)] enhanced the assessment, making a 100% addition towards the alleged bogus purchases. The CIT(A) pointed out that the assessee failed to produce vital documents such as delivery challans, transportation receipts, and goods inward register, which are necessary to substantiate the purchases. The CIT(A) emphasized that the burden of proof lies with the assessee to substantiate the claim of expenditure, which the assessee failed to do.The CIT(A) relied on various judicial precedents, including the Hon'ble High Court of Bombay in the case of Shoreline Hotel (P) Ltd., which upheld a 100% disallowance in the case of bogus purchases. The CIT(A) also referenced the Hon'ble ITAT, Pune, in Kolte Patil, which held that purchases are liable to be disallowed in toto if suppliers fail to produce primary evidence of the movement of goods.2. Validity of the Addition Percentage towards Alleged Bogus Purchases:The Tribunal observed that both the AO and the CIT(A) failed to conclusively prove their respective claims with necessary evidence. The AO relied heavily on the information from the investigation wing and the Maharashtra Sales Tax Department without carrying out further necessary inquiries. On the other hand, the assessee provided basic evidence but failed to conclusively prove the genuineness of the purchases.The Tribunal noted that in cases involving alleged bogus purchases from hawala dealers, various High Courts and Tribunals have held that only the profit element embedded in such purchases should be taxed, not the total purchase amount. The Hon'ble Gujarat High Court in CIT vs Simith P. Sheth (356 ITR 451) and the ITAT, Mumbai, in several cases, have directed the AO to estimate profit ranging from 10% to 15% on the total alleged bogus purchases.Considering the nature of the assessee's business and consistent with the view taken by the Co-ordinate Bench in similar cases, the Tribunal directed the AO to estimate a 12.5% profit on the alleged bogus purchases. Furthermore, the Tribunal allowed deductions towards the Gross Profit (GP) already declared for the year in the regular books of accounts.Conclusion:The Tribunal partly allowed the appeal filed by the assessee, directing the AO to estimate a 12.5% profit on the alleged bogus purchases and allow deductions towards the GP already declared. This decision aligns with the consistent judicial approach of taxing only the profit element embedded in such purchases rather than disallowing the entire purchase amount.