2023 (8) TMI 770 - HC - Income Tax

Court upholds profit estimation on non-genuine purchases, stresses profit element only.

The Principal Commissioner of Income Tax Versus Ashwin Purshotam Bajaj

The High Court of Bombay upheld the decisions of the CIT(A) and ITAT regarding the estimation of profit on non-genuine purchases and the addition made by ... Estimation of income - bogus purchases - HELD THAT:- In the present case, one thing is clear is that the A.O. has not doubted the sales made by respondent against the purchases. Similar case of respondent was also considered by the Tribunal with regard to issues for AY 2010-11. In that also the Tribunal has observed that the A.O. has not doubted the sales made by assessee against the purchases and assessee has reconciled the quantitative details of stock as per sale invoices. A.O. has observed that respondent has purchased material from someone else while bogus bills were organized by these Hawala Traders. Therefore, at least to the extent even if it has been purchased from Hawala Traders the indisputable fact is that the purchases have been made and admittedly quantitative reconciliation of the stock was done by respondent of sale and purchase. ITAT therefore accepted the explanation of respondent that only the profit element in these accommodation entries are to be added to the income. CIT(A) has restricted the addition by estimating the gross profit at 12.5%. Whether that is the right estimate is a question of fact. Therefore, we see no reason to interfere. Issues:The judgment involves the following Issues:1. Interpretation of ITAT order in light of Supreme Court decision on 100% addition for bogus purchases2. Validity of CIT(A) decision on profit estimation for non-genuine purchases3. Consideration of AO's addition based on Sales Tax Department findings4. Request for amendment of grounds in the appealInterpretation of ITAT Order:The appellant contended that the ITAT erred in confirming the CIT(A) decision of restricting profit estimation at 12.5% for non-genuine purchases. The appellant argued that the ITAT overlooked the basis of AO's addition, which was supported by Sales Tax Department findings. However, the court held that the AO did not doubt the sales made by the respondent against the purchases. The court cited a similar case where the Tribunal observed that the purchases were made, and only the profit element should be added to the income. Therefore, the court found no reason to interfere with the ITAT decision and dismissed the appeal.Validity of CIT(A) Decision:The CIT(A) partially allowed the appeal by estimating the profit element at 12.5% of the non-genuine purchases. The CIT(A) relied on a Gujarat High Court decision and held that only the profit embedded in such purchases should be added to the assessee's income. Both the Revenue and the assessee were dissatisfied with this decision and appealed to the ITAT. The ITAT, however, dismissed both appeals, upholding the CIT(A) decision. The court noted that the AO did not doubt the sales made by the respondent, and the purchases were reconciled with quantitative details of stock. Therefore, the court found the CIT(A) decision to be reasonable and declined to interfere with it.AO's Addition based on Sales Tax Department Findings:The AO added the alleged accommodation entries taken by the respondent from Hawala dealers to his income based on information from the Sales Tax Authority. The AO treated purchases amounting to Rs. 90,33,191/- as bogus and added it to the returned income for Assessment Year 2009-10. The CIT(A) estimated the profit element at 12.5% and the ITAT upheld this decision. The court observed that the AO did not doubt the sales made by the respondent against the purchases and accepted the explanation that only the profit element in the accommodation entries should be added to the income. Therefore, the court found the AO's addition to be justified based on the facts presented.Conclusion:In conclusion, the High Court of Bombay upheld the decisions of the CIT(A) and ITAT regarding the estimation of profit on non-genuine purchases and the addition made by the AO based on Sales Tax Department findings. The court emphasized that only the profit element should be added to the income of the assessee in such cases. The appeal was dismissed, and the court found no reason to interfere with the lower authorities' decisions.