Ad hoc 7% disallowance of purchases from flagged suppliers as "bogus purchases" struck down as arbitrary; addition deleted

The dominant issue was whether an ad hoc disallowance of 7% of purchases as "bogus purchases" was sustainable. The HC held that the appellate authority's disallowance lacked any evidentiary material or legal basis explaining why 7% of purchases from specified suppliers should be disallowed, especially after recording that the purchases could not be termed bogus. Upholding the tribunal's finding that the disallowance was arbitrary and contradictory to the appellate authority's own conclusions, the HC affirmed deletion of the addition, resulting in relief to the assessee.

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Issues Involved: Appeal against ITAT order deleting addition made by CIT(A) based on alleged bogus purchases of packaging materials.

Details of the Judgment:

1. Issue 1: Alleged Bogus Purchases
- The assessee was involved in importing oil, packing, and selling it. The case was selected for scrutiny due to suspicions of bogus purchases of packaging materials.
- A survey revealed alleged bogus purchases of packaging materials worth Rs. 4.67 crores from eight parties.
- The partner initially admitted to the bogus purchases during the survey but later retracted the statement.

2. Issue 2: Addition by Assessing Officer (AO)
- The AO added Rs. 4.67 crores to the assessee's income based on the partner's retracted statement, despite no further corroborative or incriminating evidence.
- The books of accounts were well-maintained, and the AO confirmed the purchases and consumption of materials for packing oil.

3. Issue 3: CIT(A) Decision
- CIT(A) deleted the addition made by the AO, stating that there was no evidence to term the purchases as bogus.
- CIT(A) found no discrepancy in the consumption pattern of packaging materials and allowed the appeal, disallowing only 7% of the alleged bogus purchases.

4. Issue 4: ITAT Decision
- ITAT concluded that there was no justification for disallowing 7% of the total purchase of packing material.
- ITAT found CIT(A)'s decision strange, as CIT(A) had earlier stated that there was no question of any purchase being termed as bogus.

5. Conclusion
- The High Court upheld ITAT's decision to delete the addition made by CIT(A) and dismissed the appeal.

This judgment revolves around the alleged bogus purchases of packaging materials by the assessee, the conflicting decisions of the AO and CIT(A), and the subsequent intervention by ITAT and the High Court in resolving the matter.

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