Bogus purchases addition restricted to gross profit margin when corresponding sales not disallowed

The ITAT Surat upheld the CIT(A)'s decision regarding bogus purchases. While CIT(A) acknowledged the possibility of grey market purchases at inflated recorded prices, it noted that disallowing entire purchases without ignoring corresponding sales was improper. Given the assessee's recent business operations and 13.05% gross profit margin, CIT(A) restricted the addition to Rs. 9,80,121 (13.05% of Rs. 75,10,503). The ITAT found no infirmity in CIT(A)'s reasoning and dismissed the Revenue's appeal, upholding the deletion of additions.

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Issues Involved:
1. Addition of Rs. 75,10,503/- related to purchases from M/s Veer Corporation and M/s Dhaval Gems.
2. Addition of Rs. 80,00,000/- under section 69A of the Income Tax Act.

Summary:

Issue 1: Addition of Rs. 75,10,503/- related to purchases from M/s Veer Corporation and M/s Dhaval Gems

The Revenue challenged the restriction of the addition made by the Assessing Officer (AO) from Rs. 75,10,503/- to 13.05% of the same, arguing that the assessee failed to prove the genuineness of transactions with M/s Dhaval Gems and M/s Veer Corporation, identified as bogus entry providers. The AO had disallowed the entire purchase amount, treating it as bogus and taxed it under section 69C at 60%. The CIT(A) noted that only the profit element embedded in the purchases should be disallowed, relying on various judicial precedents, and restricted the addition to 13.05% of Rs. 75,10,503/-. The Tribunal upheld the CIT(A)'s decision, stating that the AO erred in making a 100% addition of purchases and only the profit element should be added to the income. The Tribunal dismissed the Revenue's grounds on this issue.

Issue 2: Addition of Rs. 80,00,000/- under section 69A of the Income Tax Act

The AO noticed that the assessee deposited Rs. 1.90 Crores in his bank account during the demonetization period and made an addition of Rs. 80,00,000/- under section 69A, as the assessee failed to prove the source of these deposits. The CIT(A) deleted the addition, accepting the assessee's claim that Rs. 1.10 Crores was disclosed under the PMGKY Scheme, 2016, and the remaining amount was from cash sales, supported by documentation. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had sufficient cash on hand and the books of accounts were not rejected. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's grounds on this issue.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The order was pronounced on 21/12/2023 in the open court.

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