2017 (10) TMI 1671 - AT - Income Tax

Only profit element in bogus purchases should be taxed, not entire purchase amount - net profit estimated at 12.5%

Shri Sandeep Kewalchand Mehta Versus ACIT 13 (3), Mumbai

ITAT Mumbai held that when assessee made purchases from alleged bogus suppliers, only the profit element embedded in such purchases should be taxed, not ... Bogus purchases - Estimation of income - assessee submitted that CIT(A) erred in sustaining addition without providing copy of affidavits / statement of suppliers and also without affording an opportunity of cross examination of such suppliers - HELD THAT:- It is very difficult to accept that the purchases from those parties are explained to the satisfaction of the AO. Under these facts and circumstances what needs to be taxed is only the profit element in such purchases but not the total purchases made from alleged bogus parties. This view has been further supported by the decision of Vijay Protiens Ltd. [1996 (1) TMI 144 - ITAT AHMEDABAD-C] wherein it was held that only profit element embedded in bogus purchases needs to be taxed. As in the case of Bholanath Poly Fab Pvt. Ltd. [2013 (10) TMI 933 - GUJARAT HIGH COURT] observed that whether purchases themselves were to be taxed or whether parties from whom such purchases made were bogus is essentially a question of fact and the Tribunal having examined the evidence on record concluded that the assessee did purchase cloth and sold goods, the entire purchase would not be subjected to tax. In yet another case in the case of Simit P Sheth [2013 (10) TMI 1028 - GUJARAT HIGH COURT] has held that no uniform yardstick can be applied for estimation of net profit which is dependent upon facts and circumstances of each case. The co-ordinate bench of ITAT, Mumbai in several cases has taken a view that only the profit element embedded in bogus purchases needs to be taxed. Accordingly, estimated net profit of 12.5% on bogus purchases. We are of the view that only profit element embedded in purchases needs to be taxed. Hence, we direct the AO to estimate net profit of 12.5% on total purchases made from the above parties. Appeal filed by the assessee is partly allowed. The appeal in this case was filed by the assessee against the order of CIT(A)-42, Mumbai dated 09-08-2016, relating to the assessment year 2009-10. The brief facts are that the assessee, engaged in civil construction, filed a return of income declaring total income of Rs.44,08,204. The assessment completed under section 143(3) determined a total income of Rs.47,92,956. Subsequently, based on information from the office of the DGIT (Inv), Mumbai regarding alleged bogus purchase bills, the AO reopened the assessment under section 147. The AO disallowed purchases from three parties listed as hawala operators by the Sales-tax department, totaling Rs.43,48,834, and added it back to the total income. The CIT(A) upheld the AO's decision, concluding that the purchases were bogus to reduce taxable income. The assessee appealed to the Appellate Tribunal.The main issue before the Tribunal was whether the addition towards alleged bogus purchases was justified. The AO relied on information from the Sales-tax department, while the assessee provided evidence such as purchase bills and payment proof to support the genuineness of the purchases. The Tribunal noted that the notices issued under section 133(6) were returned unserved, making it difficult to accept the genuineness of the purchases. However, the Tribunal held that only the profit element in such purchases should be taxed, not the total amount. Citing precedents, the Tribunal directed the AO to estimate a net profit of 12.5% on total purchases made from the alleged bogus parties.In conclusion, the Tribunal partly allowed the appeal by directing the taxation of the profit element embedded in the purchases at 12.5%. The decision was pronounced on 31st October 2017.