Tribunal Upholds 25% Restriction on Bogus Purchases; Adjusts Gross Profit Rate to Align with Genuine Transactions.

The Tribunal upheld the decision to restrict the addition to 25% of bogus purchases, aligning with the precedent set by the Bombay HC in Pr.CIT v. M/s. Mohommad Haji Adam & Co. The AO was instructed to adjust the Gross Profit rate on the alleged bogus purchases to match genuine purchases. The Tribunal dismissed the Revenue's appeals and partially allowed the assessee's cross objections, emphasizing that the sales were accepted without discrepancies. The Tribunal's decision was delivered in open court on February 28, 2020, directing the assessee to provide necessary documentation for verification.

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Issues Involved:
1. Restriction of addition to 25% of bogus purchases.
2. Correlation between items purchased and corresponding sales.
3. Application of the Apex Court's decision in N.K. Proteins Ltd. Vs. DCIT regarding bogus purchases.
4. Validity of the Assessing Officer's decision to treat purchases as non-genuine.

Issue-wise Detailed Analysis:

1. Restriction of Addition to 25% of Bogus Purchases:
The Revenue challenged the decision of the Learned Commissioner of Income Tax (Appeals) [Ld.CIT(A)] to restrict the addition to 25% of the bogus purchases amounting to Rs. 1,06,18,400, arguing that the assessee was unable to substantiate its purchases from suppliers identified as hawala dealers. The Assessing Officer (AO) had treated the entire amount of Rs. 1,06,18,400 for A.Y. 2010-11 and Rs. 51,65,318 for A.Y. 2011-12 as non-genuine and added it to the income of the assessee. The Ld.CIT(A), however, reduced this to 25%, considering the evidences and various submissions provided by the assessee.

2. Correlation Between Items Purchased and Corresponding Sales:
The Revenue contended that the Ld.CIT(A) erred in restricting the addition to 25% despite the assessee's failure to produce primary documents that could establish the correlation between the items purchased and the corresponding sales. The AO had observed that the notices issued under sections 133(6) and 131 of the Act to the parties were returned unserved, and the assessee did not produce the parties before the AO.

3. Application of the Apex Court's Decision in N.K. Proteins Ltd. Vs. DCIT:
The Revenue argued that the Ld.CIT(A) did not follow the ratio of the Apex Court's decision in N.K. Proteins Ltd. Vs. DCIT, where it was held that the addition on the basis of undisclosed income could not be restricted to a certain percentage when the entire transaction was found to be bogus. The AO had treated the purchases as non-genuine and unverifiable, leading to the rejection of the Books of Accounts.

4. Validity of the Assessing Officer's Decision to Treat Purchases as Non-Genuine:
The AO received information from the Sales Tax Department, Mumbai, about accommodation entries provided by various dealers, which included the assessee. The AO concluded that the purchases were non-genuine based on the information that the dealers were hawala operators providing accommodation entries without actual transportation of goods. The assessee attempted to substantiate the purchases by providing purchase bills, orders, sales invoices, and bank statements, but the AO was not convinced and treated the purchases as non-genuine.

Judgment:
The Tribunal referred to the decision of the Hon'ble Bombay High Court in the case of Pr.CIT v. M/s. Mohommad Haji Adam & Co., which held that the Tribunal correctly restricted the addition to the extent of bringing the Gross Profit rate on purchases at the same rate as other genuine purchases. The High Court noted that the department had accepted the sales, and there was no discrepancy between the purchases and sales declared by the assessee. Therefore, the Tribunal was correct in concluding that the purchases could not be rejected without disturbing the sales in the case of a trader.

Following this precedent, the Tribunal directed the AO to restrict the addition/disallowance to the extent of bringing the Gross Profit rate on the alleged bogus purchases at the same rate as the other genuine purchases declared by the assessee, after calling for details and verification of records. The assessee was directed to furnish the necessary information.

Conclusion:
The appeals of the Revenue were dismissed, and the cross objections filed by the assessee were partly allowed. The Tribunal's decision was pronounced in the open court on February 28, 2020.

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