2025 (5) TMI 2181 - AT - Income Tax

Assessee partly allowed where AO failed to investigate bogus purchase claims; 12.5% retention of disputed purchases ordered

ITAT held that the assessee failed to discharge the primary onus regarding alleged bogus purchases, but the AO had not adequately investigated the ... Estimation of income - bogus purchases - addition to the extent of 12.5% of purchases Restricted - onus to prove - contention of assessee that only profit ration of assessee which was at 1.54% should have been considered and not 12.5% HELD THAT:- We find that the assessee has not discharged his primary onus by filing details of purchases except details of delivery of goods, however, the assessing officer has not investigated on the evidences furnished by assessee. AO simply insisted to call all the parties which may or may not be possible by assessee to call all such persons after the gap of 6-7 years from transaction. Thus, considering the decision of Mohammad Haji Adam & Co.[2019 (2) TMI 1632 - BOMBAY HIGH COURT] and Amrat B Prajapati [2020 (4) TMI 326 - ITAT MUMBAI] we are of the view that reasonable profit on alleged bogus purchases would meet the end of justice. Hence, AO is directed to retain the estimated addition 12.5% of the impugned / bogus purchases from 16 parties and but to allow deduction towards gross profit already declared in the regular books of account. Ground of appeal raised by assessee is partly allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the assessing authority validly estimated and added 12.5% of aggregate purchases as income where purchases were alleged to be accommodation/bogus entries and the assessee furnished purchase documents but could not produce the sellers for verification. 2. What is the onus of proof on the assessee in respect of genuineness of purchases and what evidentiary standard and procedure must the assessing officer follow before making an estimated addition. 3. Whether, if an addition is sustained on estimate for alleged bogus purchases, the assessee is entitled to set off or deduct the gross profit already declared in books attributable to those purchases. 4. Whether decisions upholding full disallowance or estimation of 100% of such purchases are applicable on materially different facts where some documentary evidence and prior year/subsequent year profit ratios are available. ISSUE 1 - Validity of AO's estimation of 12.5% of purchases as income Legal framework: Income may be assessed by estimating unrecorded income where transactions are unproved; AO has power to make additions on basis of material gathered including investigation reports; reopening under section 148 and reassessment proceedings permit re-examination of returned income. Precedent treatment: Authorities have recognised AO's power to estimate suppressed profit where purchases are found to be bogus, but principles of reasoned conclusion and need for enquiry into evidence are also recognised by appellate fora. Interpretation and reasoning: The Tribunal found that AO relied primarily on investigation/Sales Tax reports and accepted the assessee's alternative offer for a 12.5% addition without independent examination of documentary evidence furnished by the assessee or findings on consumption/sales. The Tribunal regarded the AO's approach as a mechanical acceptance of the assessee's compromise proposal rather than an independent, reasoned determination after verification. Ratio vs. Obiter: Ratio - AO cannot make an addition purely by adopting an offered compromise rate without independent application of mind and evaluation of available documents; where AO bases addition on investigation reports, he must still address the specific documents and sales/consumption records supplied by assessee. Conclusion: The Tribunal retained the 12.5% estimated addition as the working estimate accepted in assessment but treated the AO's procedure as insufficiently investigative; therefore the addition was sustained subject to adjustment on other grounds (see Issue 3). ISSUE 2 - Onus of proof and evidentiary standard for genuineness of purchases Legal framework: Burden lies on the assessee to prove the genuineness of expenditures/purchases; income tax proceedings are not bound by strict rules of evidence but principles of natural justice and application of mind are mandatory; AO entitled to act on material from investigative agencies but must consider and record findings on evidence produced by assessee. Precedent treatment: Appellate tribunals and High Courts have held that where primary onus is discharged by producing corroborative documents and records, the AO must make independent inquiry and cannot rest solely on investigation reports. Interpretation and reasoning: The Tribunal observed that the assessee produced purchase bills and provided details of delivery and profit ratios for adjacent years, thereby discharging part of the primary onus. However, delay and inability to produce sellers for verification after many years weakened the evidentiary position. The AO nevertheless failed to evaluate the evidence and to record specific findings rejecting it before making the addition. Ratio vs. Obiter: Ratio - While onus is on the assessee, the AO must evaluate and record reasons for disbelieving documentary evidence; inability to produce sellers long after transactions is a relevant factor but does not absolve the AO from making findings on the evidence presented. Conclusion: Assessee did not fully discharge onus but provided sufficient documentary material to require AO to conduct independent assessment of that material; AO's failure to do so rendered his procedure inadequate though the estimation itself was not overturned entirely. ISSUE 3 - Allowance of gross profit already declared against estimated addition Legal framework: When part of purchases is treated as bogus and addition is made on estimated profit, it is equitable to allow deduction/credit for gross profit already recorded in regular books to avoid double taxation of the same profit; appellate practice recognises possibility of granting benefit of declared gross profit when estimating suppressed profit. Precedent treatment: Prior tribunal decisions have allowed adjustment/benefit for gross profit already accounted for in regular books when estimating addition on bogus purchases; some higher court rulings have limited additions to gross profit rate rather than applying a mechanical percentage on purchases. Interpretation and reasoning: Considering that the assessee had declared gross/net profit ratios in the year under consideration and adjacent years (showing consistent profitability), and given the absence of AO's independent findings rejecting those figures, the Tribunal deemed it just to retain the estimated addition but permit deduction of gross profit already declared in books against that addition. Ratio vs. Obiter: Ratio - Where estimate of suppressed income is made in respect of alleged bogus purchases but books reflect gross profit attributable to such purchases, the assessee is entitled to the benefit of the gross profit declared in regular books, and the AO must allow such deduction unless specific reasons disallowing it are recorded. Conclusion: The Tribunal directed that the 12.5% addition be retained but modified by allowing deduction of gross profit already declared in the books attributable to the impugned purchases; appeal thus partly allowed. ISSUE 4 - Applicability of decisions upholding full disallowance (100%) on differing facts Legal framework: Precedential value depends on factual parity; decisions upholding complete disallowance where assessee failed entirely to substantiate purchases and assessment completed under summary provisions are not automatically applicable to cases where documentary material exists. Precedent treatment: Higher court decisions upholding 100% addition were distinguished where assessments were completed on summary basis (e.g., under section 144) and where no substantive evidence was placed on record by assessee; tribunal practice distinguishes cases with partial documentary proof. Interpretation and reasoning: The Tribunal distinguished such higher court authority on the ground that in those cases the assessee had not produced any supporting evidence and assessments were completed under summary procedure, whereas in the present matter documentary evidence and profit ratios were placed before the AO and the assessee himself offered an estimate to avoid extended litigation. Therefore the high-authority ratio was held inapplicable. Ratio vs. Obiter: Ratio - Authority upholding full disallowance is distinguishable and not binding where the assessee has furnished documents and the AO has not given independent, reasoned rejection of that material; such cases require fact-sensitive application of precedents. Conclusion: The Tribunal declined to apply the full-disallowance precedent to the present facts and treated those decisions as inapplicable on variance of factual matrix. OVERALL CONCLUSION The appeal was partly allowed: the Tribunal sustained the AO's estimate of 12.5% of the impugned purchases as addition but directed that the gross profit already declared in the regular books attributable to those purchases be allowed as a deduction against the addition. The Tribunal held that the AO should have independently evaluated the evidence produced and recorded reasons before making the addition; full-disallowance precedents were distinguished on facts.