ITAT restricts bogus purchase additions to profit element only, not entire purchase value

The ITAT Raipur held that additions for bogus purchases should be restricted to the profit element only, not the entire purchase value. Following the Bombay HC precedent in Pr. Commissioner of Income Tax-17 vs. Mohammad Haji Adam Company, the tribunal directed that the gross profit rate on bogus purchases should be equated with genuine purchases for quantification purposes. The matter was remanded to the Assessing Officer with directions to restrict additions accordingly. The assessee's appeal was allowed for statistical purposes.

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Issues Involved:
1. Validity of jurisdiction assumed by the A.O for framing the assessment without issuing a valid notice u/s 143(2).
2. Disallowance of Rs. 55,36,900/- made by the A.O after rejecting books of account u/s 145(3) and taking a rate of 25% on alleged bogus purchases of Rs. 2,21,47,600/-.
3. Adhoc disallowance of Rs. 12,064/- made out of "Fuel Expenses".

Summary:

Issue 1: Validity of Jurisdiction Assumed by the A.O

The assessee claimed that the jurisdiction assumed by the ITO, Ward-Mahasamund was invalid due to an unsigned notice issued u/s 143(2) of the Act dated 25.09.2017. However, upon review, it was found that the notice was duly signed by the Officer, Shri Mahendra Kumar, ITO, Ward-Mahasamund. Consequently, the claim of the assessee was rejected, and Ground of Appeal No.1 was dismissed as devoid of merit.

Issue 2: Disallowance of Rs. 55,36,900/- for Alleged Bogus Purchases

The A.O observed that the assessee had claimed purchases from five tainted parties amounting to Rs. 2,21,47,600/-. The purchases were found to be bogus based on survey operations u/s 133A, statements recorded u/s 131, and other incriminating evidence. The A.O rejected the books of accounts u/s 145(3) and disallowed 25% of the value of bogus purchases, making an addition of Rs. 55,36,900/- to the assessee's returned income. The CIT(Appeals) confirmed the disallowance.

Upon review, it was concluded that the assessee failed to substantiate the authenticity of the purchases. However, the Tribunal found that the A.O had not provided a cogent reason for the 25% disallowance rate. Referring to the judgment of the Hon'ble High Court of Bombay in the case of Pr. Commissioner of Income Tax-17 Vs. M/s. Mohhomad Haji Adam & Company, the Tribunal directed the A.O to restrict the addition by bringing the G.P rate of such bogus purchases at the same rate as that of other genuine purchases. The matter was restored to the file of the A.O for re-quantification based on this principle.

Issue 3: Adhoc Disallowance of Rs. 12,064/- for "Fuel Expenses"

No contentions were discernible from the written submissions regarding the adhoc disallowance of Rs. 12,064/-. Therefore, Ground of Appeal No.3 was dismissed as not pressed.

Conclusion:

The appeal of the assessee was allowed for statistical purposes concerning the disallowance of Rs. 55,36,900/-, with directions to the A.O to re-quantify the addition. The other grounds were dismissed.

Order Pronounced:

Order pronounced in open court on 18th day of April, 2024.

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