2024 (5) TMI 1616 - AT - Income Tax

Taxpayer's bogus purchase disallowance limited to 3.27% after comparing genuine and bogus gross profit rates

ITAT MUMBAI - AT partly allowed the appeal for AY 2009-10, holding that the assessee's addition for bogus purchases should be restricted to the difference ... Estimation of income - bogus purchases - HELD THAT:- For AY 2009-10 during the year under consideration the assessee has shown gross profit on genuine purchases @5.99% and gross profit on bogus purchases @2.72%. Therefore, following the decision of ITAT for the assessment year 2009-10 we restrict the addition to the extent of difference between the gross profit of the genuine purchases and gross profit of bogus purchases, i.e., @ 3.27% of bogus purchase. Therefore, the appeal of the assessee is partly allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer was justified in making an addition of gross profit at 12.5% on purchases alleged to be accommodation/bogus entries where corresponding sales were shown and banking evidence was produced. 2. Whether, in the circumstances where the assessee has shown corresponding sales and books evidencing lower gross profit on those transactions, the addition can be restricted to the difference between gross profit on genuine purchases and gross profit on alleged bogus purchases. 3. Whether the assessment completed under section 143(1) read with section 147 (reassessment) is vitiated for violation of principles of natural justice by not permitting cross-examination of third parties (Hawala/accommodation parties) despite a request. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of addition of gross profit @ 12.5% on alleged bogus purchases Legal framework: The Assessing Officer, on receipt of information from investigative authorities, reopened assessment under section 148/147 and made an addition by estimating gross profit on unverifiable/presumed bogus purchases to negate reduction of taxable income via accommodation entries. Precedent treatment: The Tribunal relied on a Coordinate Bench decision in respect of the same assessee for earlier assessment years dealing with identical facts, where the addition was moderated after comparison of gross profit ratios. Interpretation and reasoning: The Tribunal noted that the assessee furnished ledgers, purchase and sale invoices, bank payment evidence, and declared corresponding sales. The AO nonetheless treated the purchases as accommodation entries and applied a blanket gross profit addition of 12.5% on the total amount of such purchases. The Tribunal found that where corresponding sales are recorded and gross profit arising from those sales is ascertainable from books, a mechanical addition of gross profit on purchases without accounting for the actual gross profit on those transactions is not appropriate. Ratio vs. Obiter: Ratio - An addition based on an estimated gross profit percentage cannot be made in full where books and sale evidence demonstrate actual lower gross profit on the suspect transactions; the correct approach is to compute addition by reference to the difference in gross profit ratios where appropriate evidence exists. Conclusion: The AO's blanket addition of 12.5% on the alleged bogus purchases was not sustained in full. Issue 2 - Extent of addition: restriction to difference between gross profit on genuine purchases and gross profit on alleged bogus purchases Legal framework: Taxable income adjustments for undisclosed profits must reflect the realistic profit attributable to the challenged transactions; where genuine and alleged bogus purchases can be segregated and their respective GP ratios determined from books, the excess reduction in gross profit caused by bogus purchases may be quantified. Precedent treatment: The Tribunal followed the Coordinate Bench decision for prior assessment years of the same assessee, where the addition was restricted to the difference between the general/genuine GP ratio and the GP ratio on the alleged bogus purchases. The Tribunal also referred to the decision of the High Court (cited by counsel) as supporting context, though the operative reliance was on the Coordinate Bench ruling on identical facts. Interpretation and reasoning: For the year under consideration the assessee's records showed gross profit on genuine purchases at 5.99% and gross profit on the alleged bogus purchases at 2.72%. Applying the principle adopted in the Coordinate Bench decision, the Tribunal computed the permissible addition as the difference between these GP ratios, i.e., 3.27% of the amount of alleged bogus purchases, rather than the AO's fixed 12.5%. Ratio vs. Obiter: Ratio - Where books, invoices and banking evidence establish corresponding sales and enable computation of actual GP on suspect transactions, the addition should be limited to the shortfall in GP (difference of GP ratios) and not a standard or higher estimated GP percentage. Conclusion: The addition was restricted to 3.27% of the alleged bogus purchases (being the differential between genuine GP and GP on those transactions); appeal partly allowed on this basis. Issue 3 - Alleged violation of principles of natural justice for not permitting cross-examination of accommodation parties Legal framework: Principles of natural justice require that a party adversely affected by evidence should be given an opportunity to test that evidence, including by cross-examination of witnesses where such is necessary and appropriate in the facts of the case; however, the exercise of statutory reassessment powers and making additions is fact-sensitive and depends on material on record. Precedent treatment: The Tribunal's order does not undertake a detailed independent adjudication on the validity of the assessment on natural justice grounds; instead the Tribunal proceeded to examine the quantum of addition in light of material produced by the assessee and Coordinate Bench jurisprudence. Interpretation and reasoning: Although the assessee raised a specific ground that no opportunity to cross-examine the said parties was given, the Tribunal's analysis focused on the tangible record produced (ledgers, bills, bank payments and declared sales) and on the applicability of the Coordinate Bench decision limiting additions where corresponding sales and GP figures exist. The Tribunal did not set aside the assessment as null and void on procedural grounds; it implicitly treated the material on record as sufficient to decide the quantum issue. Ratio vs. Obiter: Obiter (limited) - The Tribunal's decision is primarily on the quantification of addition; any resolution of the natural justice contention is implicit and subordinate to the finding that evidence on record warranted restriction of the addition. No affirmative ruling declaring the assessment void for procedural lapse was made. Conclusion: The contention that the assessment was void for lack of cross-examination was not accepted as a basis to quash the reassessment; the Tribunal disposed of the appeal by recalculating the addition on merits using available records and binding Coordinate Bench guidance. Interconnected reasoning and ultimate conclusion The Tribunal applied the principle (followed from a Coordinate Bench decision on identical facts) that where the assessee demonstrates corresponding sales, records and banking transactions and where the gross profit on such suspect transactions can be ascertained, the addition should be limited to the shortfall between the gross profit on genuine purchases and the gross profit on the alleged bogus purchases. On the facts the genuine GP was 5.99% and the GP on alleged bogus purchases was 2.72%, hence the addition was restricted to 3.27% of the alleged bogus purchases. The appeal was therefore partly allowed and the AO's full 12.5% addition was reduced accordingly.