2021 (2) TMI 711 - AT - Income Tax

Tribunal Upholds Decision on Taxing Profit Element Only

The Tribunal dismissed the revenue's appeal, upholding the decision to restrict the addition to 13.71% of alleged bogus purchases. Emphasizing judicial ... Estimation of income - Bogus purchases - disallowance/addition to the extent of 12.5% of such bogus purchases - HELD THAT:-12.5% of such suspicious purchases have been considered the profit element embedded in such purchases. However, the estimation of rate of profit return must necessarily vary with the nature of business and no uniform yardstick can be adopted. In the present case, the appellant himself has agreed for estimation of profit element, on above referred purchases @13.71% on such suspicious purchases. In view of the facts and circumstances of the case and above discussions, the Ld. AO is directed to restrict the addition @13.71% on above referred suspicious purchases. No infirmity in the order passed by the Ld.CIT(A) in restricting the addition to 13.71% as against the entire bogus purchases disallowed by the Assessing Officer. SHRI SIMIT P SHETH L/R OF SHRI PANKAJ J SHETH C/O MANISH G SHAH case followed - [2012 (2) TMI 598 - ITAT AHMEDABAD] - Grounds raised by the revenue are dismissed. Issues Involved:1. Legitimacy of the addition of 13.71% of the alleged bogus purchases.2. Verification of the genuineness of purchases.3. Treatment of entire bogus purchases versus profit element embedded in such purchases.4. Reference to judicial precedents in similar cases.Detailed Analysis:1. Legitimacy of the Addition of 13.71% of the Alleged Bogus Purchases:The appeal by the revenue contested the order of the Learned Commissioner of Income Tax (Appeals) [“Ld.CIT(A)”] which restricted the addition to 13.71% of the alleged bogus purchases. The Assessing Officer (AO) had originally disallowed the entire amount of Rs. 3,49,677/- as non-genuine purchases. The Ld.CIT(A) reduced this to 13.71%, considering various judicial pronouncements and the nature of the business. The Tribunal found no infirmity in the Ld.CIT(A)’s decision, referencing the case of CIT v. Simit P. Seth, which upheld a similar approach.2. Verification of the Genuineness of Purchases:The assessee had filed a return of income declaring Rs. 2,98,580/- for the A.Y. 2009-10. The AO reopened the assessment based on information from the DGIT (Inv.), Mumbai, indicating that the assessee had availed accommodation entries from dealers without actual transportation of goods. The assessee provided purchase bills and bank statements but failed to produce the parties before the AO. The AO treated the purchases as non-genuine due to the lack of verifiable evidence, such as transportation receipts or third-party confirmations.3. Treatment of Entire Bogus Purchases Versus Profit Element Embedded in Such Purchases:The AO’s stance was that the entire amount of Rs. 3,49,677/- should be disallowed as non-genuine. However, the Ld.CIT(A) and the Tribunal agreed that while the purchases were not made from the alleged parties, the assessee likely made purchases from the grey market. Therefore, only the profit element embedded in such purchases should be taxed. This approach aligns with judicial precedents where courts have sustained additions based on the profit margin rather than the entire purchase amount. The Tribunal referenced multiple cases, including Vijay Proteins Ltd. and Bholanath Poly Fab (P.) Ltd., which supported this method.4. Reference to Judicial Precedents in Similar Cases:The judgment heavily relied on precedents where courts have dealt with similar issues of bogus purchases. In CIT v. Simit P. Seth, the Gujarat High Court upheld the Tribunal’s decision to estimate the profit element at 12.5% of the bogus purchases. The Tribunal also cited cases like Vijay Proteins Ltd. and Bholanath Poly Fab (P.) Ltd., where courts have consistently ruled that only the profit margin should be added to the income, not the entire purchase amount. The Tribunal noted that the Ld.CIT(A) had considered these precedents and the nature of the business in arriving at the 13.71% figure.Conclusion:The Tribunal dismissed the revenue’s appeal, upholding the Ld.CIT(A)’s decision to restrict the addition to 13.71% of the alleged bogus purchases. The judgment emphasized the importance of judicial precedents and the need to tax only the profit element embedded in such purchases rather than disallowing the entire purchase amount. This approach ensures a fair assessment, acknowledging the possibility of grey market purchases while preventing undue tax burdens on the assessee.