Tribunal Adjusts Gross Profit Rate to 8% on Alleged Bogus Purchases, Recognizes Only Profit Element as Income.

The Tribunal partly allowed the assessee's appeal, determining that adding the entire amount of alleged bogus purchases, without disputing sales, would result in an unreasonable gross profit rate. Instead, the Tribunal applied a reasonable gross profit rate of 8% on these purchases, treating only the profit element as income, consistent with judicial precedents.

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Issues:
Challenge of addition on account of alleged bogus purchases.

Analysis:
The appeal was filed against an order passed for the assessment year 2011-12, challenging the addition of Rs. 7,60,43,860 on account of disallowance of 100% alleged bogus purchases. The assessee, a wholesale trader in coal, had filed the return of income declaring total income from business at Rs. 8,38,714. The case was reopened under section 147 based on information received regarding accommodation entries towards bogus purchases. The Assessing Officer (AO) noted purchases made from specific entities, and upon inquiry, it was found that these parties did not exist at the addresses mentioned. The AO added the entire purchases amounting to Rs. 7,60,43,860, which was confirmed by the CIT(A).

The assessee argued that all purchases were recorded in the books of accounts and made through account payee cheques. The assessee contended that if the sales were not disturbed, adding the entire purchases would result in an unrealistic gross profit rate of 60%. The assessee relied on various High Court judgments to support the contention that only the profit element in alleged bogus purchases should be treated as income if the sales were not disputed. The AO did not challenge the sales made by the assessee, leading the Tribunal to conclude that adding the entire purchases without disputing the sales would result in an absurdly high gross profit rate for a wholesale coal dealer. The Tribunal applied a reasonable gross profit rate of 8% on the alleged purchases, considering the historical GP rates of the assessee and upheld by previous High Court judgments. The appeal of the assessee was partly allowed based on these considerations.

In conclusion, the Tribunal found that adding the entire amount of alleged bogus purchases without disputing the sales would lead to an unreasonable gross profit rate. By applying a reasonable gross profit rate on the purchases, only the profit element in the alleged bogus purchases was treated as income, in line with established judicial precedents. The appeal of the assessee was partly allowed based on these findings.

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