2023 (7) TMI 1600 - AT - Income Tax

Suspicious purchase bills: only 4% embedded profit added where declared sales accepted and no inventory discrepancy

ITAT MUMBAI held that, given acceptance of declared sales and no inventory discrepancy, the possibility of procurement from the grey market cannot be ... Estimation of income - bogus purchases - AO accepted sales declared by the assessee and no discrepancy was pointed by the AO with respect to the inventory - HELD THAT:- The possibility of assessee procuring diamonds from grey market cannot be ruled out. As in the case of PCIT vs. Paramshakhti Distributors Pvt. Ltd [2019 (7) TMI 838 - BOMBAY HIGH COURT] in such like transactions entire purchases cannot be added. It is only the profit embedded in purchases covered by bogus bills that can be added. Suppressed profit on bogus purchases is estimated at 4%. AO is directed to restrict addition on bogus purchases, accordingly. Consequently, ground of appeal are partly allowed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the reopening of the assessment (grounds 1 and 2) requires adjudication when the assessee does not press those grounds. 2. Whether additions can be made on the entirety of alleged bogus purchases where the assessee has, inter alia, declared and the Assessing Officer has accepted corresponding sales and inventory; and if not, what is the proper basis and quantum for any addition (grounds 3-6). 3. Whether any other general ground (ground 7) requires separate adjudication. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Reopening of assessment (grounds 1 & 2): Legal framework Legal framework: The validity of reopening is governed by the provisions permitting assessment to be reopened where relevant material indicates income has escaped assessment; however an appellant may elect not to press grounds challenging reassessment. Precedent treatment: No specific precedent was relied upon in the reasoning; treatment follows ordinary practice of deeming unpressed grounds as not pursued. Interpretation and reasoning: The assessee's counsel expressly stated grounds 1 and 2 were not pressed at the hearing; consequently the Tribunal declined to adjudicate those grounds on merits and dismissed them as not pressed. Ratio vs. Obiter: Ratio - where a party does not press grounds, the Tribunal may dismiss them as not pressed and proceed to consider only contested issues. Conclusion: Grounds 1 and 2 were dismissed as not pressed; no substantive ruling on the validity of reopening was made. Issue 2 - Addition of entire alleged bogus purchases vs. profit- element addition: Legal framework Legal framework: Burden lies on the assessee to prove genuineness of purchases. Where purchases are held to be accommodation/bogus entries, the Assessing Officer may make additions; the scope of such addition requires assessment of whether the entire purchase value or only the concealed profit portion should be added, consistent with principles that sales accepted by the AO and inventory not questioned weigh against treating entire purchases as undisclosed income. Precedent treatment: The Department relied on a Supreme Court decision (referred to by the Departmental Representative). The Tribunal relied on a decision of its High Court (PCIT v. Paramshakhti Distributors Pvt. Ltd.) holding that in similar transactions the entire purchases should not automatically be added and that only the profit embedded in purchases covered by bogus bills can be added. The Tribunal followed the High Court position and applied it to the facts. Interpretation and reasoning: Facts found by the authorities: (a) the assessee failed to discharge the onus of proving genuineness of purchases from the group concern alleged to provide accommodation entries; (b) the Assessing Officer accepted the sales declared by the assessee; (c) no discrepancy was noted in inventory records. The Tribunal reasoned that acceptance of sales and inventory evidence creates a realistic possibility that goods could have been sourced from the grey market or other legitimate channels. Therefore, treating the full purchase value as unexplained income would be disproportionate. Applying the guiding High Court precedent, the Tribunal limited the addition to the suppressed profit portion of the alleged bogus purchases rather than the entire purchase value. On the facts, taking into account industry norms and declared gross profit rates, the Tribunal estimated the suppressed profit at 4% and directed the Assessing Officer to restrict the addition accordingly. Ratio vs. Obiter: Ratio - where (i) the assessee's sales are accepted by the tax authority, (ii) inventory records are not disputed, and (iii) purchases are found to be from concerns involved in accommodation entries, the appropriate addition is the concealed profit embedded in the bogus purchases (estimated on a reasoned basis), not the entire purchase value. Obiter - the Tribunal's observation that diamonds may be procured from the grey market is a factual inference supporting the ratio but not a general legal rule beyond the case facts. Conclusion: The Tribunal partly allowed the appeal by directing the Assessing Officer to restrict the addition to 4% of the alleged bogus purchases (i.e., the estimated suppressed profit), thereby setting aside the Assessing Officer's addition of the entire Rs.13,00,556. Cross-reference: The conclusion on Issue 2 is applied notwithstanding the assessee's failure to discharge the onus of proving genuineness; the Tribunal mitigated the consequence by following High Court authority that prescribes profit-element addition where sales and inventory are otherwise accepted. Issue 3 - General ground (ground 7) Legal framework: General grounds that are not specific require no separate adjudication when they do not raise distinct legal questions. Interpretation and reasoning: Ground 7 was general in nature and did not call for independent consideration in view of the disposal of other grounds. Ratio vs. Obiter: Ratio - general grounds lacking specificity need not be separately adjudicated where the substantive issues have been addressed. Conclusion: Ground 7 required no separate adjudication. Overall disposition The appeal was partly allowed: reopening grounds not pressed were dismissed as not pressed; the addition of entire alleged bogus purchases was reduced to an addition equal to the estimated suppressed profit (fixed at 4% on the facts), applying High Court authority that the profit element - not the full purchase amount - is the proper basis for addition where sales and inventory are accepted.