2017 (11) TMI 2072 - AT - Income Tax

ITAT upholds 4% addition on non-genuine purchases under Income-tax Act for unverifiable transactions

The ITAT Mumbai upheld the CIT(A)'s addition of 4% on non-genuine purchases based on third-party information without rejecting the assessee's books. The ... Non-genuine purchases - CIT(A) sustained addition @ 4% - AO made the re-opening on the basis of information received from Investigation Wing of Income-tax Department - AO has not rejected the books of account of the assessee - AO made the additions on the basis of third party information HELD THAT:- We are of the considered view that under the Income-tax Act only real income can be taxed by the Revenue. Even if the transaction is not verifiable, the only taxable is the taxable income component and not the entire transaction. In our considered view that in order to fulfill the gap of revenue leakage, the disallowance of reasonable percentage of such purchases/impugned purchases meet the end of justice. We have seen that the ld. CIT (A) passed the order after considering all material facts and the evidences available before him and the decisions of Sanjay Oil Cake [2008 (3) TMI 323 - GUJARAT HIGH COURT] and Simith P Seth[2013 (10) TMI 1028 - GUJARAT HIGH COURT]. As noted that the VAT applicable on the material purchased/ shown to have purchased by the assessee during the period on the Gems & Jewellery was 1% to 2% depending upon the nature of the items. Thus, percentage of disallowance sustained by CIT (A) @ 4% of the alleged purchases is reasonable one. In our view under the income tax the revenue is entitled to tax the real income and not the entire transaction. Even otherwise when the transaction is not verifiable due to any reason the reasonable disallowance of such transaction can meet the end of justice. In our view, the order of ld. CIT (A) does not require any further interference at our end. Hence, the appeal of the Revenue is dismissed. 1. ISSUES PRESENTED AND CONSIDERED Whether the deletion of the addition on the total purchase amount of Rs. 84,00,000/- from a specified party was correct. Whether sustaining only 4% of the total purchase amount as profit element embedded in such purchases was justified. Whether the reopening of assessment under section 147 was valid on the basis of information received from search and seizure operations. The extent to which purchases from alleged dummy concerns can be treated as bogus and the appropriate quantum of addition to income. The burden of proof regarding genuineness of transactions and applicability of evidentiary principles in income tax proceedings. The applicability of judicial precedents regarding treatment of bogus purchases and estimation of profit element embedded therein. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of Reopening of Assessment under Section 147 - Legal Framework: Section 147 permits reopening of assessment if the Assessing Officer (AO) has reason to believe that income has escaped assessment. The reopening must be based on credible information or evidence. - Court's Reasoning: The AO reopened the assessment based on information from a search and seizure operation conducted by the Investigation Wing, which revealed that certain group concerns were providing accommodation entries without actual supply of goods. The assessee was identified as a beneficiary of such entries. - Findings: The reopening notice was issued after recording reasons, and the information was supported by statements recorded during the search. - Conclusion: The reopening was validly initiated on the basis of credible information from the investigation wing, and the AO was justified in reopening the assessment. Issue 2: Genuineness of Purchases and Addition of Entire Purchase Amount - Legal Framework: The Income-tax authorities have the power to pierce the veil of corporate entity and look into the reality of transactions to prevent tax evasion. The burden of proof lies on the assessee to establish genuineness of transactions. - Court's Reasoning: The AO made addition of the entire purchase amount of Rs. 84,00,000/- from the specified party, relying on third-party information and statements indicating that the party was a dummy concern providing accommodation entries. - Evidence: Statements of the alleged supplier and group head admitted that no actual business was conducted and accommodation entries were provided. The assessee failed to provide concrete evidence disproving these findings or to prove the genuineness of the purchases. - Treatment of Arguments: The assessee contended that the AO did not provide copies of third-party evidence and did not allow cross-examination. However, the Tribunal noted that the assessee did not furnish any concrete evidence to rebut the statements or prove the genuineness. - Conclusion: The AO was justified in disbelieving the purchases as genuine; however, the addition of the entire purchase amount was not appropriate without considering the profit element embedded. Issue 3: Burden of Proof and Application of Evidence Principles - Legal Framework: The burden of proof lies on the party making a claim. Tax authorities are entitled to consider surrounding circumstances and human probabilities. The principles of Evidence Act apply in a relaxed manner in tax proceedings. - Court's Reasoning: The Tribunal relied on Supreme Court precedents establishing that apparent facts must be considered real unless disproved. The assessee failed to discharge the burden of proving the purchases were genuine. - Evidence: The assessee did not lead any evidence to rebut the statements or to establish the reality of transactions beyond the documentary evidence already on record. - Conclusion: The onus was on the assessee to prove genuineness, which was not discharged, justifying the AO's adverse findings. Issue 4: Quantum of Addition - Profit Element Embedded in Bogus Purchases - Legal Framework: Judicial precedents establish that where purchases are found to be from bogus parties but goods are procured from the grey market, only the profit element embedded in such purchases can be added to income, not the entire purchase amount. - Court's Reasoning: The Tribunal considered decisions where courts held that the entire purchase amount should not be added if goods were genuinely procured from other sources; only the profit margin embedded in such purchases should be taxed. - Evidence and Findings: The assessee's sales and exports were genuine and proceeds received through banking channels. The AO did not dispute sales or stock records. The profit margin on sales was found to be around 4.63%. - Treatment of Competing Arguments: The Revenue argued for addition of entire purchase amount; the assessee sought deletion or reduction based on Benign Assessment Procedure (BAP) profit margin of 8%. The Tribunal found 4% profit margin reasonable based on industry standards, VAT rates, and prior assessments. - Conclusion: The Tribunal upheld addition restricted to 4% of the purchase amount as profit element embedded in bogus purchases, aligning with judicial precedents and commercial realities. Issue 5: Validity of Addition Based on Third-Party Statements and Investigation Reports - Legal Framework: Statements recorded during search and seizure operations and post-search investigations are admissible and can form basis for additions if corroborated. - Court's Reasoning: The Tribunal noted that statements of group head and suppliers admitted provision of accommodation entries. The assessee's claim of retraction was unsubstantiated. - Evidence: Investigation wing's reports and statements provided overwhelming evidence of dummy concerns and accommodation entries. - Conclusion: The AO's reliance on such evidence was justified, and the findings were upheld by the Tribunal. Issue 6: Treatment of Sales and Stock Records in Assessment - Legal Framework: If sales and stock records are not disputed, additions on purchases must be carefully quantified to avoid taxing non-existent income. - Court's Reasoning: The AO did not dispute sales or stock statements, indicating genuine business operations. Therefore, addition of entire purchase amount would be excessive. - Conclusion: Only profit element embedded in purchases was taxable, as reflected in the Tribunal's direction for restricted addition. Issue 7: Applicability of Benign Assessment Procedure (BAP) and Industry Profit Margins - Legal Framework: BAP provides a benchmark profit margin for diamond traders, which can be used as a guide for estimating profit embedded in purchases. - Court's Reasoning: The Tribunal considered BAP's 8% profit margin and other assessments where 3% to 8% was adopted. Given the nature of the business and VAT exemptions, 4% was found reasonable. - Conclusion: Adoption of 4% profit margin was consistent with BAP and industry practice, justifying the quantum of addition. Issue 8: Scope of Taxation - Taxing Real Income Only - Legal Framework: Income tax law permits taxation only of real income, not the entire transaction value if part of it is artificial or non-genuine. - Court's Reasoning: The Tribunal emphasized that even if transactions are not verifiable, only the taxable income component (profit element) can be taxed to meet revenue interests. - Conclusion: The approach of restricting addition to profit element embedded in bogus purchases meets the ends of justice and is legally sound. Issue 9: Reliance on Judicial Precedents Regarding Bogus Purchases - Legal Framework: Precedents hold that where purchases are shown from bogus parties but goods are procured from grey market, addition should be limited to profit element embedded. - Court's Reasoning: The Tribunal relied on decisions where courts upheld partial disallowance based on estimated profit margins rather than entire purchase amounts. - Conclusion: These precedents support the Tribunal's approach in restricting addition to 4% profit margin embedded in purchases. Issue 10: Procedural Fairness and Opportunity to Assessee - Legal Framework: Assessee must be given opportunity to cross-examine witnesses and access evidence relied upon by AO. - Court's Reasoning: The assessee contended lack of opportunity to cross-examine third parties; however, the Tribunal found that the assessee failed to produce evidence or rebut statements. - Conclusion: No procedural infirmity was found to vitiate the assessment or appellate orders.