2024 (10) TMI 475 - AT - Income Tax

Assessee wins partial relief as tribunal adopts 5% GP rate instead of revenue's proposed 25% addition for bogus purchases

ITAT Jaipur-AT partially allowed the assessee's appeal regarding bogus purchases addition. The tribunal rejected the revenue's proposal to add 25% of ... Estimation of income - bogus purchases - addition on account of gross profit by applying GP Rate of 6% against 4.91% declared by the assessee - HELD THAT:- We do not have any hesitation in confirming the action of the CIT-A in stating that the 25 % of the purchases cannot be added in the hands of the assessee. As decided in Clarity Gold (P) Ltd [2017 (9) TMI 1640 - RAJASTHAN HIGH COURT] while estimating the gross profit the industry gross profit which is running the business and that gross profit shown by the comparable cases should be considered. As is evident from the above comparable cases cited, the highest gross profit is 4.37 % as against the assessee has declared profit @ 4.91 % which is higher than the comparable cases. As against this information filed by the assessee revenue did not brought any cases having higher profit we direct the ld. AO to adopt 5 % as gross profit to end justice in the matter. While holding so we have respectfully followed the finding of our high court taking the industry comparable profit in the case of Clarity Gold [supra] and direct the ld. AO to adopt the Gross Profit @ 5%. As the assessee has already disclosed Gross Profit @ 4.91% balance gross profit to be add @ 0.09% and determine the Income accordingly. Appeal of the assessee is partly allowed. Issues Involved:1. Sustaining the addition on account of gross profit by applying a higher GP rate.2. Sustaining the amount on account of alleged commission payment.3. Legitimacy of the reopening of assessment under section 147 of the Income Tax Act.4. Determination of the appropriate gross profit rate to be applied.Issue-wise Detailed Analysis:1. Sustaining the Addition on Account of Gross Profit:The primary issue was whether the addition of Rs. 11,476,762/- on account of gross profit by applying a GP rate of 6% against the 4.91% declared by the assessee was justified. The assessee argued that the GP rate should reflect the industry standard, as highlighted in the Rajasthan High Court judgment in the case of M/s Clarity Gold (P.) Ltd. The assessee's GP rate was compared against industry peers, revealing that the declared GP rate of 4.91% was higher than the industry average. The Tribunal, respecting the jurisdictional High Court's guidance, directed the Assessing Officer (AO) to adopt a GP rate of 5%, resulting in an additional GP of 0.09% over the declared rate, thereby partially allowing the appeal.2. Sustaining the Amount on Account of Alleged Commission Payment:The CIT(A) had reduced the addition on account of alleged commission payment from Rs. 31,58,913/- to Rs. 6,88,603/-. The Tribunal upheld this reduction, acknowledging the CIT(A)'s rationale that the GP rate should cover any potential revenue leakage, thereby providing relief to the assessee.3. Legitimacy of the Reopening of Assessment:The reopening of the assessment was challenged by the assessee on the grounds of reliance on third-party information without proper verification. The AO had reopened the assessment based on information indicating that the assessee was involved in bogus purchases. The Tribunal found that the AO had sufficient grounds to reopen the assessment, as the information was corroborated by inquiries conducted by the investigation wing, revealing the assessee's involvement in non-genuine transactions. Thus, the reopening was deemed legitimate.4. Determination of the Appropriate Gross Profit Rate:The Tribunal considered the comparable industry GP rates provided by the assessee, which ranged between 0.045% and 4.37%. The Tribunal noted that the assessee's declared GP rate of 4.91% was higher than the industry average. In line with the High Court's judgment in the Clarity Gold case, which emphasized using industry standards for GP estimation, the Tribunal directed the AO to apply a GP rate of 5%. This decision was made to ensure fairness and consistency with industry practices, resulting in a minor addition to the declared GP rate.Conclusion:The Tribunal's decision reflected a balanced approach, considering both the AO's findings and the assessee's arguments. By aligning the GP rate with industry standards, the Tribunal ensured a fair assessment, partially allowing the appeal and providing relief to the assessee on the grounds of reduced commission and a justified GP rate. The decision underscores the importance of industry comparables in determining profit rates and the necessity for thorough verification in cases of alleged bogus transactions.