2017 (5) TMI 1844 - AT - Income Tax

Tribunal upholds bogus purchase findings, applies 12.5% and 8% profit rates while allowing credit for embedded profits

ITAT upheld the finding that the assessee's purchases were bogus, noting failure to produce transport documents, proof of movement of goods, or a stock ... Estimation of income - bogus purchases - confirmation of disallowance of bogus purchase by applying gross profit rate at 12.5% assessee is in second appeal before Tribunal - HELD THAT:- As assessee could not submit the transport invoices of the goods and also could not prove the movement of the goods. The assessee is also not maintaining any stock register and in such circumstances we are of the view that the AO has reasonably estimated the profit rate at 12.5%. But now, before us assessee, on query from the Bench stated that profit element is already disclosed which is embedded in the sales carried out by the assessee corresponding to the same purchases. One further query was put to assessee, he stated that the profit margin in assessee’s case is around 3 to 5 % but he could not give profit ratio of the previous three years. As regards to the application of profit rate of 12.5%, we find no infirmity in the orders lower authorities however, we direct the AO in both the appeals of the assessee that credit of already disclosed profit should be allowed to assessee in regard to these bogus purchases. The assessee has to provide profit rate of this year to the AO and accordingly, AO will allow credit for the disclosed profit and re-compute the income accordingly. The appeals of assessee are partly allowed for statistical purposes. Determination of profit rate at the rate of 8% - As fair profit ratio would be needed to be added back to the income of the assessee. Therefore, 8% of the purchases i.e. 8% is upheld for lack of credible evidence being provided by the appellant to substantiate the purchase. ISSUES PRESENTED AND CONSIDERED 1. Whether purchases shown in books can be treated as 'bogus' on the basis of information from Sales Tax/Investigation authorities and, if so, whether the Assessing Officer (AO) may disallow the purchases in full or estimate income by applying a gross profit rate. 2. What is the burden of proof on the taxpayer when genuineness of purchase transactions is specifically questioned by departmental enquiries. 3. Whether rejection of books of account under the applicable provisions is permissible when purchases remain unverifiable, and the scope and effect of such rejection. 4. If a gross profit rate is to be applied, how should credit for profit already embedded in disclosed sales be treated on reassessment/recomputation. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Treatment of alleged 'bogus' purchases and application of gross profit rate Legal framework: AO has powers to examine genuineness of transactions and, where books are unreliable or purchases are unverifiable, to make additions by estimation; authorities may rely on investigative inputs to question genuineness. Rejection of books and estimation of income may follow when basic details remain unverifiable. Precedent treatment: The Tribunal and Appellate Authority applied established principle in earlier High Court authority that, when total sales are accepted but purchases are held to be bogus, the entire purchase amount need not be added back; instead a fair gross profit margin may be determined and added to income. Interpretation and reasoning: The Court accepted that investigative findings (statements/affidavits) indicating accommodation entries and non-delivery of goods can impugn genuineness. However, where sales recorded in the books are not disputed and there is no conclusive proof that sales themselves are fabricated, treating the entire purchases as income would be excessive. Accordingly, estimation by applying a gross profit percentage is an appropriate and proportionate method to reflect the profit element attributable to suspect purchases while recognizing recorded sales. Ratio vs. Obiter: Ratio - where purchases are held to be suspect but sales are accepted, AO/ appellate authority may estimate taxable income by applying a fair gross profit rate rather than disallowing entire purchases; investigative inputs may justify such approach. Obiter - detailed selection of a particular percentage absent case-specific comparators. Conclusions: The Tribunal upheld the approach of estimating income via gross profit rate rather than a blanket disallowance, finding no infirmity in the AO/CIT(A) applying such a rate where evidentiary gaps persisted as to movement of goods and existence of suppliers. Issue 2 - Burden of proof on taxpayer when departmental enquiries raise doubt Legal framework: The taxpayer bears onus to substantiate claimed purchases and to establish genuineness of transactions when challenged; filing of books, vouchers and bank evidence is relevant but may be insufficient if independent enquiries cast doubt. Precedent treatment: Authorities followed the proposition that once independent departmental enquiries indicate false billing/accommodation entries, the taxpayer must discharge an increased onus to demonstrate genuineness. Interpretation and reasoning: Tribunal noted taxpayer produced purchase invoices, bank payments and ledgers but failed to produce transport documents or stock registers showing movement/receipt of goods. Given Sales Tax/Investigation findings and lack of convincing material demonstrating delivery/receipt, the taxpayer did not fully discharge the onus. Mere production of books and bank payments does not conclusively prove existence of underlying goods where external evidence suggests accommodation entries. Ratio vs. Obiter: Ratio - taxpayer must produce cogent evidence (including corroborative third-party documents like transport papers/stock registers) to counter independent enquiries suggesting bogus billing. Obiter - commentary on adequacy of particular documentary sets in other contexts. Conclusions: Where independent enquiries raise doubt, the taxpayer's failure to produce corroborative documents justified AO/CIT(A) in treating purchases as unverifiable and estimating income; Tribunal endorsed that burden rests on taxpayer and was not discharged here. Issue 3 - Rejection of books of account and invocation of statutory provision for unverifiable purchases Legal framework: Statutory provision allows AO to treat accounts as unreliable where basic details remain unverifiable; rejection permits assessment on best judgment/estimation basis. Precedent treatment: Lower authorities invoked the provision to the extent of rejecting books for the disputed items and proceeding to estimate profit element rather than mechanical disallowance of entire purchases. Interpretation and reasoning: Tribunal observed that AO did not mechanically disallow whole purchases but pointed out deficiencies in books and invoked the statutory power to treat books as unverifiable vis-à-vis disputed purchases. Because AO made a reasoned estimation (applying a gross profit rate) rather than a blanket addition, the exercise of statutory power was within permissible bounds. Ratio vs. Obiter: Ratio - statutory power to disregard books and estimate income can be exercised where purchases are unverifiable; estimation must be reasoned and not arbitrary. Obiter - extent to which full books rejection should affect unrelated items. Conclusions: Rejection of books (limited to contested purchases) and estimation of income by applying a gross profit rate was held to be justified on the facts; Tribunal found no infirmity in such exercise where AO had recorded reasons and evidentiary gaps persisted. Issue 4 - Quantification: choice of gross profit rate and allowance of disclosed profit already embedded in sales Legal framework: When a gross profit rate is applied to estimate disallowed purchases, credit for profit already realized/disclosed in the assessee's accounts must be considered; AO should allow adjustment for profit element reflected in recorded sales. Precedent treatment: Lower authorities relied on prior judicial ratio endorsing application of a fair profit margin; Tribunal directed allowance of profit already disclosed to avoid double addition. Interpretation and reasoning: Tribunal found AO/CIT(A) estimates (12.5% in two cases; 8% in the Revenue appeal case) to be within a reasoned discretionary range based on available material and precedential guidance. However, recognising the assessee's contention that some profit element was already embedded in sales, Tribunal directed AO to allow credit for the profit disclosed in the relevant year after the assessee furnishes the profit rate/quantum of disclosed profit. The Tribunal observed that the assessee had indicated a likely profit margin (3-5%) but had not provided prior years' ratios; hence a direction to compute and allow disclosed profit on production of particulars was issued. Ratio vs. Obiter: Ratio - where estimation by gross profit is made, credit for already disclosed profit must be given; AO should recompute income after allowing such credit. Obiter - precise percentage to be applied in other cases absent case-specific evidence. Conclusions: Tribunal upheld application of a gross profit rate as a permissible estimation device, but ordered remand to AO to grant credit for profit already disclosed by the assessee upon submission of supporting particulars; appeals were accordingly partly allowed (assessee appeals) and Revenue appeal dismissed where CIT(A)'s lower percentage was sustained.