2019 (5) TMI 2042 - AT - Income Tax

Tribunal confirms 5.83% gross profit estimation, adding only profit element on alleged bogus purchases, dismissing Revenue appeal

ITAT upheld the CIT(A)'s rejection of the assessee's books and adoption of gross profit estimation at 5.83% on alleged bogus purchases, based on the ... Estimation of income - bogus purchases - gross profit estimation @ 5.83% - HELD THAT:- CIT(A) appears to have rejected the books and estimated the taxpayer’s G.P @ 5.83% in these peculiar facts only. We find that assessee’s G.P ratio right from A/ys. 2008-09 to 2012-13 read 6.73%,10.38%, 5.42%, 3.97%, 4.58% and 5.16% respectively in succeeding A/y 2013-14, formed basis for the CIT(A) to disallow the profit element coming to 5.83% in issue. Hon’ble apex court’s decision in N.K Proteins [2017 (1) TMI 1090 - SC ORDER], Vijay Proteins Ltd [2015 (1) TMI 828 - GUJARAT HIGH COURT] also disallowed only portion of unverifiable purchases case in similar facts and circumstances. Revenue has quoted this tribunal’s co-ordinate bench’s decision in Debasish Banerjee [2015 (8) TMI 646 - ITAT KOLKATA] disallowed the entire purchases on account of assessee’s failure in reconciling difference between purchases as debited in trading account and purchases as per TCS certificate(s). Revenue’s appeal is dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether, in respect of purchases held to be unverifiable from four suppliers, the entire purchase value was liable to disallowance as bogus, or only the profit element embedded in such purchases could be added by applying a gross profit rate. 1.2 Whether rejection of books of account and estimation of gross profit at 5.83% on the impugned purchases, based on the assessee's past and subsequent years' gross profit history, was justified, and whether precedents permitting only partial disallowance of unverifiable purchases were applicable. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Scope of disallowance on unverifiable purchases and validity of GP estimation at 5.83% Interpretation and reasoning 2.1 The Tribunal proceeded on the factual premise that the assessee, engaged in manufacture, processing and trading in leather and leather chemicals, had produced relevant documents to support the claim of purchases from the four suppliers and that the corresponding stock/sales arising out of such purchases were not disputed by the Revenue. 2.2 The Tribunal noted that the first appellate authority had treated the purchases from the said parties as not verifiable (noting the failure of notices/summons and non-production of parties), rejected the books of account and, instead of sustaining the entire disallowance, estimated the gross profit at 5.83%, treating only the profit element embedded in the unverifiable purchases as income. 2.3 The Tribunal examined the assessee's gross profit ratios for assessment years 2008-09 to 2012-13 (6.73%, 10.38%, 5.42%, 3.97%, 4.58%) and in the immediately succeeding assessment year 2013-14 (5.16%), and accepted that these figures, particularly 2013-14, formed a reasonable basis for the CIT(A) to adopt 5.83% as the appropriate gross profit rate for estimation. 2.4 The Tribunal relied on the principle that, in cases of unverifiable or suspect purchases where corresponding stock/sales are accepted, only a portion representing the profit element is ordinarily liable to be brought to tax and not the entire purchase value. For this proposition, it referred to the decisions in N.K. Proteins v. DCIT and Vijay Proteins Ltd. v. CIT, where only part of the unverifiable purchases was disallowed. 2.5 The Tribunal considered the Revenue's reliance on an earlier decision (Debasish Banerjee v. ITO), wherein the entire purchases had been disallowed on account of a failure to reconcile purchases as per books with purchases as per TCS certificates. The Tribunal distinguished that decision on facts, observing that in the present case there was no reconciliation issue between recorded purchases and third-party data; rather, the controversy was confined to verifiability of suppliers, with the resultant stock/sales not being doubted. Conclusions 2.6 The Tribunal held that, since the assessee's actual stock/sales corresponding to the impugned purchases were not in dispute, disallowance of the entire purchase amount as bogus was not warranted. 2.7 The Tribunal upheld the action of rejecting the books of account in the peculiar facts and sustained the estimation of gross profit at 5.83% on the impugned unverifiable purchases as a reasonable and justified approach. 2.8 The Tribunal affirmed the order restricting the disallowance to the profit element embedded in the disputed purchases and dismissed the Revenue's appeal.