2019 (2) TMI 2143 - AT - Income Tax

Bogus purchase profit taxed at 12.5 percent minus disclosed gross profit to reflect grey market benefit

ITAT Mumbai upheld the finding that the assessee had made bogus purchases from hawala parties and that only the profit element embedded in such purchases ... Estimation of income - addition on account of bogus purchases made from hawala parties - as argued addition of alleged bogus purchase to the extent of 12.5% of alleged bogus purchase is on a very high side and same may be reduced - HELD THAT:- Making purchases through the grey market gives the assessee savings on account of non-payment of tax and others at the expense of the exchequer. In such situation, in our considered opinion, on the facts and circumstances of the case, 12.5 % disallowance out of the bogus purchases meets the end of justice. However, in this regard the learned counsel of the assessee has prayed that when only the profits earned by the assessee on these bogus purchase transaction is to be taxed the gross profit already shown by the assessee and offered to tax should be reduced from the standard 12.5% being directed to be disallowed on account of bogus purchase. We modify the order of learned CIT-A and direct that the disallowance in this case be restricted to 12.5 % of the bogus purchases as reduced by the gross profit rate already declared by the assessee on these transactions. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether alleged purchases can be disallowed as bogus where evidence of payments by account-payee cheque, invoices and ledger entries are produced but transport documentation is not furnished. 2. Whether 100% disallowance of purchase value is permissible where sales are accepted by the assessing authority and not doubted. 3. Whether an established or accepted rule permitting a presumptive percentage disallowance (12.5%) on purchases found to be from bogus suppliers is appropriate on the facts, and whether the assessed disallowance should be reduced by gross profit already declared and taxed on related sales. 4. Whether admissions by alleged hawala operators or departmental information relating to suppliers suffice to sustain complete disallowance in absence of independent verification/notice to suppliers. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Admissibility of purchase claims where payments are by account-payee cheque, invoices and ledger entries produced but transport evidence absent Legal framework: The assessment of genuineness of purchases rests on documentary evidence, mode of payment and corroborative material such as invoices, bank transactions and transport documents. The assessee bears initial onus to prove genuineness; AO may draw adverse inference where corroborative evidence is lacking. Precedent Treatment: The Court referred to established decisions of higher fora (including a jurisdictional High Court decision and a High Court decision in another State) that hold that bank payments and invoices, when not impeached, afford evidentiary value; transport evidence is relevant but absence does not automatically negate purchases if other evidence supports purchases. Interpretation and reasoning: The Tribunal observed that the assessee produced invoices, ledger accounts and account-payee cheque payments reflected in bank statements. The AO drew an adverse inference because transport documents were not produced. The Tribunal accepted that lack of transport evidence weakens the claim but held that the existence of accepted sales receipts and banking evidence materially supports the actuality of purchases. Ratio vs. Obiter: Ratio - where sales are accepted and payments are through banking channel with supporting invoices and books, absence of transport particulars alone is insufficient to sustain total disallowance of purchases as bogus. Obiter - remarks on the evidentiary value of transport documents in general. Conclusion: The Tribunal declined to sustain a 100% disallowance based solely on absence of transport documents, given the other documentary evidence and undisputed sales. Issue 2 - Permissibility of 100% disallowance where sales are not doubted Legal framework: Taxation principle that taxation of presumed undisclosed income cannot result in double denial where outgoing corresponds to accepted income; if sales are accepted, it is generally implausible that attendant purchases did not occur. Precedent Treatment: The Tribunal relied on higher court authority holding that where sales are accepted, wholesale disallowance of corresponding purchases is not warranted; contrasted with a reported decision where 100% disallowance was sustained on facts (noted to involve supplies wholly to a government agency and different factual matrix). Interpretation and reasoning: The Tribunal reasoned that accepted sales receipts indicate that goods were supplied and therefore some level of purchases must have occurred. Complete disallowance would be inconsistent and punitive absent cogent proof that no goods ever existed or were used for the assessed sales. Ratio vs. Obiter: Ratio - 100% disallowance is inappropriate where sales are not doubted; the factual context may nonetheless warrant heavier disallowance in cases involving grey-market purchases that evade taxation. Obiter - comparative remarks on cases involving government agency supplies. Conclusion: 100% disallowance was not sustained; the Tribunal limited the disallowance to a proportionate estimate. Issue 3 - Application of a presumptive 12.5% disallowance and offset by gross profit already declared Legal framework: Revenue authorities and courts have recognized application of a standard presumptive percentage to estimate profit element from alleged bogus purchases where complete disallowance is not justified; equitable relief requires avoiding double taxation of profit already offered to tax. Precedent Treatment: The Tribunal referred to a High Court decision (from another State) which applied a 12.5% disallowance as sufficient where invoices and bank payments exist; it also noted an instance where higher disallowance was sustained on distinct facts. The Tribunal applied the 12.5% benchmark endorsed by the appellate authority below. Interpretation and reasoning: The Tribunal accepted that a proportionate estimate (12.5%) meets the ends of justice in the present facts (accepted sales; evidence of banking payments; suppliers in grey market). Further, it accepted the assessee's submission that taxing the notional profit should not amount to double taxation where the assessee has already offered gross profit on those sales; accordingly, the presumptive percentage should be reduced by the gross profit rate already declared and taxed on the relevant transactions. Ratio vs. Obiter: Ratio - where a presumptive disallowance is applied to alleged bogus purchases, the tax demand on the resulting notional profit must be adjusted to avoid taxing profit already offered; specifically, the Tribunal directed that the 12.5% estimate be reduced by the gross profit rate already declared. Obiter - the appropriateness of the exact percentage in differing factual matrices. Conclusion: Disallowance fixed at 12.5% of the value of purchases held bogus, subject to reduction by the gross profit rate already offered to tax on those transactions; this modification prevents double jeopardy. Issue 4 - Weight of departmental information and admissions by hawala operators where AO did not issue notice to alleged suppliers Legal framework: Information from investigation wings and admissions recorded elsewhere form part of the material but require corroboration and fair opportunity to the parties; principles of natural justice and requirement of independent verification may limit reliance on such material absent procedural steps (e.g., notice to suppliers). Precedent Treatment: The Tribunal noted higher court dicta cautioning against sustaining severe adverse conclusions solely on third-party admissions or departmental inputs without independent verification or giving the assessee an opportunity to test such material. Interpretation and reasoning: The Tribunal observed that the AO had relied on information from investigative agencies and alleged admissions by hawala operators but had not issued notices to the suppliers. In that factual backdrop, the Tribunal found it inappropriate to effectuate complete disallowance on that basis alone. Ratio vs. Obiter: Ratio - reliance on external investigative information or third-party admissions, without independent verification and without issuing notice to alleged suppliers, will not automatically sustain full disallowance of purchases. Obiter - comments on propriety of departmental inputs in stronger factual matrices. Conclusion: Departmental information and alleged third-party admissions did not justify 100% disallowance where suppliers were not confronted or independently verified; a proportionate disallowance was directed instead.