2021 (11) TMI 998 - AT - Income Tax

Tribunal rules in favor of assessee, directing AO to estimate gross profit, disallowances deemed unfounded

The Tribunal allowed the assessee's appeals, finding that the additions made by the Assessing Officer and confirmed by the CIT(A) were not justified. The ... Estimation of income - bogus purchases - CIT-A confirming addition being 25% of the bogus purchases - CIT (A) treated the balance amount of purchases in cash which is the violation of the provisions of section 40A(3) - HELD THAT:- There remains no ambiguity to the fact that the assessee has not debited any purchases in its profit and loss account. Admittedly, the audited financial statements were available before the AO during the assessment proceedings. Thus, the finding of the AO that the assessee has not furnished any supporting documents to justify it’s (the assessee) contention, is contrary to the facts available on record. Once, it is established beyond doubt that the assessee has not debited the purchases in the profit and loss account, the question of making any disallowance either treating them as bogus or against the violation of the provisions of section 40A(3) of the Act does not arise. On this count only, the assessee succeeds in its appeal. At the time of hearing, there were various arguments which were advanced by both the sides being the learned AR and the DR. However, we do not find any reason to entertain the argument of both sides for the reason that the assessee has not made claim of expenditure on account of purchases in its audited financial statement. Thus the ground of appeal of the assessee is allowed. Estimation of income of Bogus purchases - A.Y. 2013-14 - HELD THAT:- The income which has been generated to the assessee out of such bogus transaction of purchase and sales. There is no standard jacket formula to work-out the income from the bogus activity carried out by the assessee. Some element of guesswork is required to determine the income of the assessee which is embedded in the bogus activities carried out by the assessee. It is also pertinent to note that the assessee has already disclosed the income in its income tax return for ₹ 77,07,990.00 which is inclusive of the income earned by the assessee with respect to its bogus purchases. Accordingly, in the interest of justice and fair play, we are inclined to estimate the gross profit at the rate of 8% of such bogus purchases as discussed above. Accordingly, we set aside the order of the learned CIT (A) and direct the AO to estimate the gross profit on the purchases at the rate of 8% of the purchases. Violation of the provisions of section 40A(3) - There in conclusive evidence that cash were paid in violation section 40A(3) i.e. cash payment above ₹ 20,000/- was made in a day to a particular supplier. Further the AO has doubted the genuineness of the purchase. In this scenario we are of the view that once the genuineness of transaction is doubted then only profit embedded under such transaction should be brought to tax - See VIJAY PROTEINS LTD. VERSUS COMMISSIONER OF INCOME TAX [2015 (1) TMI 828 - GUJARAT HIGH COURT] - we set aside the order of the learned CIT (A) with the direction to the AO to confirm the addition to the extent of 6% of the purchases as discussed above. Issues Involved:1. Addition of Rs. 97,28,955/- as 25% profit of alleged bogus purchases.2. Addition of Rs. 2,91,86,865/- under section 40A(3) of the Income Tax Act.3. Opportunity to cross-examine concerned deponents.4. Confirmation of additions in respect of purchases held to be bogus.Issue-wise Detailed Analysis:1. Addition of Rs. 97,28,955/- as 25% profit of alleged bogus purchases:The assessee contested the addition of Rs. 97,28,955/- being 25% profit of the alleged bogus purchases amounting to Rs. 3,89,15,820/-. The assessee argued that the purchases were genuine and supported by documentary evidence such as purchase bills, confirmations, bank statements, and purchase ledger. The Assessing Officer (AO) disallowed the purchases, treating them as bogus based on the post-search investigation findings and the statement of Shri Bhavesh R. Patel, who admitted to issuing bogus bills. The AO's dissatisfaction stemmed from the non-appearance of parties for cross-examination and cash withdrawals from the suppliers' bank accounts, suggesting payments were returned to the assessee. The CIT(A) concluded that the entire purchase amount could not be disallowed and only the profit element embedded in such purchases should be taxed, thus confirming the addition of Rs. 97,28,955/-.2. Addition of Rs. 2,91,86,865/- under section 40A(3) of the Income Tax Act:The AO also added Rs. 2,91,86,865/- under section 40A(3), alleging that the assessee made cash purchases from unregistered parties, violating the provision. The CIT(A) upheld this addition, noting that the assessee received goods from unregistered persons and made payments in cash, which was reflected in the books of accounts. However, the Tribunal found that the assessee had not debited any purchases in its profit and loss account and had transferred all purchases to the principal's account. As the purchases were not claimed as expenses, the disallowance under section 40A(3) was not warranted.3. Opportunity to cross-examine concerned deponents:The assessee argued that the addition was made without providing an opportunity to cross-examine the concerned deponents. The AO extended the opportunity for cross-examination twice, but neither the suppliers nor the assessee attended. The Tribunal noted that the non-availing of the cross-examination opportunity went against the assessee, but since the purchases were not debited in the profit and loss account, the question of disallowance did not arise.4. Confirmation of additions in respect of purchases held to be bogus:The Tribunal reviewed the entire case and concluded that since the assessee had not debited the purchases in its profit and loss account, the additions made by the AO and confirmed by the CIT(A) were not justified. The Tribunal allowed the appeals of the assessee in ITA Nos. 1105/Ahd/2018 and 1106/Ahd/2018, and partly allowed the appeal in ITA No. 1107/Ahd/2018, directing the AO to estimate the gross profit at 8% of the purchases instead of making the entire addition.Conclusion:The Tribunal found that the assessee had not debited the purchases in its profit and loss account and had transferred them to the principal's account. Therefore, the disallowances made by the AO under section 40A(3) and the addition of 25% profit on alleged bogus purchases were not justified. The Tribunal allowed the appeals, directing the AO to estimate the gross profit at 8% of the purchases.