Profit estimated at 7.5% of bogus purchases instead of treating entire purchase value as taxable addition

ITAT Rajkot upheld CIT(A)'s decision to estimate profit at 7.5% of bogus purchases instead of treating entire purchase value as addition. CIT(A) considered assessee's gross profit rate of 9.52% and net profit of 2.09%, factoring probable VAT savings of 5% in grey market transactions. The estimation methodology followed established precedents from Sandeep Kumar Chandak and Sun Steel cases, later confirmed by Gujarat HC. Revenue failed to provide supporting documents for sustaining AO's complete addition. Appeal decided against revenue.

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Issues Involved:
1. Disallowance of bogus purchase.
2. Estimation of profit derived from bogus purchase.
3. Reliance on judicial precedents and relevant case laws.

Summary:

1. Disallowance of Bogus Purchase:
The Revenue filed appeals against the orders by the Commissioner of Income Tax (Appeals) concerning the disallowance of bogus purchases for the Assessment Years 2014-15 and 2015-16. The assessee, a Private Limited Company engaged in manufacturing Craft Papers, had its assessment reopened based on information from DGCEI about bogus suppliers. The Assessing Officer (A.O.) added the purchase from M/s. Chauhan Suppliers as bogus and included it as the income of the assessee.

2. Estimation of Profit Derived from Bogus Purchase:
The Commissioner (Appeals) considered various submissions and financial ratios of the assessee, estimating the profit at 7.5% on the bogus purchase, reducing the addition to Rs. 7,90,739/- from Rs. 97,52,444/-. The Commissioner noted discrepancies in purchases but did not doubt the production, sales, yield ratio, or other financial ratios. The Commissioner concluded that the appellant might have purchased raw materials from sources other than the impugned vendor, benefiting from non-payment of VAT and other savings.

3. Reliance on Judicial Precedents and Relevant Case Laws:
The Commissioner relied on the Gujarat High Court judgment in PCIT Vs. Sandeep Kumar Chandak, which dealt with similar issues. The Tribunal noted that the assessee made sales against the purchases, and there was no defect in the books of accounts. The Tribunal held that only the profit element embedded in such purchases should be added to the income. The Revenue's appeal argued that the entire bogus purchase should be disallowed, citing the Gujarat High Court decision in N.K. Industries vs. DCIT. However, the Tribunal found that the case law cited by the Revenue was distinguishable and upheld the Commissioner's decision.

Conclusion:
The Tribunal confirmed the Commissioner's order, emphasizing that only the profit element from the bogus purchases should be added to the income. The grounds raised by the Revenue were dismissed, and both appeals filed by the Revenue were dismissed. The order was pronounced in open court on 03-11-2023.

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