AO's additions on bogus purchases reduced from 25% to 5% lack proper basis for profit quantification under precedent

ITAT Raipur held that additions made by AO at 25% of bogus purchases value, later reduced to 5% by CIT(Appeals), lacked proper basis for profit quantification. Following precedent in Balaji Rice Industries, the Tribunal directed AO to restrict additions to the difference between gross profit rates of genuine versus bogus purchases, equalizing GP rates. Additionally, the Tribunal deleted the commission addition of 1% (scaled down from 5%) made on presumptive basis without supporting evidence. Matter remanded to AO for recalculation per directions.

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Issues Involved:
1. Legitimacy of the CIT(A)'s decision to maintain 5% of alleged bogus purchases.
2. Justification of maintaining 1% of purchase value as hypothetical commission.
3. Non-consideration of the written submission by the appellant.
4. Admissibility of the revenue's appeal due to delay and monetary ceiling limit.
5. Quantification of profit/income from bogus purchases.
6. Legitimacy of the addition towards alleged commission.

Detailed Analysis:

1. Legitimacy of the CIT(A)'s decision to maintain 5% of alleged bogus purchases:
The assessee contested the CIT(A)'s decision to maintain 5% of the alleged bogus purchases, arguing that the rate of alleged bogus purchases was equal to or less than the rate of other genuine purchases. The CIT(A) had scaled down the disallowance from 25% to 5% based on the value of the impugned purchases, but the assessee argued that the disallowance should be restricted to the profit element realized by procuring goods at a discounted value from the open market. The tribunal found that the issue was covered by the ITAT Raipur's order in a similar case, where the addition was restricted to the difference between the gross profit of genuine and bogus purchases.

2. Justification of maintaining 1% of purchase value as hypothetical commission:
The CIT(A) had maintained 1% of the purchase value as a hypothetical commission, which the assessee argued was unjustified. The tribunal agreed with the assessee, noting that no substantial evidence was presented to prove that such an expenditure was incurred. Consequently, the tribunal vacated the addition of Rs. 87,200/- towards the alleged commission.

3. Non-consideration of the written submission by the appellant:
The assessee argued that the CIT(A) did not consider the written submission filed on 07.02.2024, which relied on a jurisdictional ITAT Raipur decision. The tribunal noted that the CIT(A) should have considered the submission and directed the AO to re-examine the issue in light of the relevant judicial pronouncements.

4. Admissibility of the revenue's appeal due to delay and monetary ceiling limit:
The revenue's appeal involved a delay of 15 days, which was condoned by the tribunal due to justifiable reasons such as huge pendency with the AO. The assessee also argued that the appeal was below the monetary ceiling limit as per CBDT Circular No.05/2024, but the tribunal found that the appeal was maintainable as it was based on information from the Investigation Wing, Raipur, which falls under an exception to the circular.

5. Quantification of profit/income from bogus purchases:
The tribunal observed that both lower authorities had erred in quantifying the profit element of the bogus purchases. The tribunal directed the AO to restrict the addition by bringing the GP rate of bogus purchases to the same rate as that of genuine purchases, following the precedent set by the Hon'ble High Court of Bombay in a similar case. The tribunal restored the matter to the AO for re-quantification based on the bifurcated details of average purchase rates provided by the assessee.

6. Legitimacy of the addition towards alleged commission:
The tribunal found no substance in the addition towards the alleged commission, as there was no substantial evidence to prove that such an expenditure was incurred. The tribunal vacated the addition of Rs. 87,200/-, agreeing with the assessee's contention.

Conclusion:
The tribunal partly allowed the appeals of both the assessee and the revenue for statistical purposes, directing the AO to re-examine the issues based on the observations and judicial precedents discussed. The tribunal vacated the addition towards the alleged commission and directed the AO to consider the bifurcated details of average purchase rates provided by the assessee in the set-aside proceedings.

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