ITAT Mumbai limits disallowance to 5% of non-genuine purchases in recent appeal decision.

The ITAT Mumbai partially allowed the appeal filed by the assessee against the disallowance of non-genuine purchases amounting to Rs. 97,33,680. The Tribunal limited the disallowance to 5% of the non-genuine purchases, considering the normal profit rate for traders in non-ferrous metal. The assessing officer was directed to give credit for advance tax paid by the assessee and verify the facts and materials on record. The appeal was partly allowed, with the decision pronounced on 25/02/2021.

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Issues: Disallowance of non genuine purchases

Analysis:
The appeal was filed by the assessee against the order of the Commissioner of Income-tax (Appeals) for the assessment year 2010-11. During the hearing, no one represented the assessee, leading to an ex parte disposal of the appeal after hearing the Departmental Representative and reviewing the materials on record. The dispute centered around the disallowance of purchases claimed to be non genuine, amounting to Rs. 97,33,680 from fifteen parties identified as hawala operators. The assessing officer, based on information from the Sales-tax department, reopened the assessment under section 147 of the Act. The assessee provided various documents like ledger accounts, purchase bills, and bank statements to prove the genuineness of purchases. However, the assessing officer found the evidence insufficient as direct evidence like stock register and delivery challans were missing. Despite notices to selling dealers remaining unserved, the assessing officer disallowed Rs. 12,16,710 (12.5% of alleged non genuine purchases), a decision upheld by the Commissioner (Appeals).

The ITAT Mumbai, after hearing the Departmental Representative and examining the material on record, acknowledged that while the purchases were deemed non genuine, the assessee had indeed purchased goods from other sources and made corresponding sales. Therefore, the disallowance was limited to the profit element embedded in the purchases, estimated at 12.5%. However, considering the normal profit rate for traders in non ferrous metal ranging from 2% to 5%, the ITAT deemed the 12.5% disallowance excessive. Consequently, the ITAT directed the assessing officer to restrict the disallowance to 5% of the non genuine purchases. Additionally, the assessing officer was instructed to give credit for advance-tax paid by the assessee after verifying the facts and materials on record in compliance with the law. As a result, the appeal was partly allowed, with the order pronounced on 25/02/2021.

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