2025 (1) TMI 1493 - AT - Income Tax

Unverifiable purchases from 22 parties require income estimation at 2.5% profit margin despite accepted books of accounts

The ITAT Delhi held that where an assessee made purchases from 22 parties that could not be verified beyond reasonable doubt, despite books of accounts ... Bogus purchases - Estimation of income - HELD THAT:- The entire books of accounts have been placed before the Learned AO and the book results were accepted by the Learned AO and the same were not rejected by him. At the same time, the assessee also from its side could not prove the purchases made from 22 parties beyond reasonable doubt. Hence, it becomes a case of unverifiable purchases. We find that the average of last 3 years gross profit rate worked out to 1.55 percent and during the year under consideration, the assessee had earned gross profit of 1.6 percent. AR also submitted that in most of the earlier years, the assessments were completed u/s 143(3) of the Act in the case of the assessee and no adverse inference was drawn thereon. But the case involved herein is a case of unverifiable purchases where the profit margin would be slightly higher as purchases had been made in the grey market. Accordingly, we deem it fit and appropriate to estimate the profit margin embedded in the value of such disputed purchases at 2.5%, which in our considered opinion, would meet the ends of justice. Appeal of the assessee is partly allowed. ISSUES PRESENTED and CONSIDEREDThe primary issue in this appeal was whether the Commissioner of Income Tax (Appeals) was justified in confirming the addition made by the Assessing Officer on account of unverifiable purchases made by the assessee. The secondary issue, initially raised but later withdrawn, was whether the assessment was time-barred.ISSUE-WISE DETAILED ANALYSISUnverifiable PurchasesRelevant Legal Framework and PrecedentsThe assessment was conducted under Section 143(3) of the Income-tax Act, 1961. The Assessing Officer issued notices under Section 133(6) to verify the purchases made by the assessee. The legal question revolved around the verification of purchases and the subsequent disallowance when suppliers fail to respond to such notices.Court's Interpretation and ReasoningThe Tribunal noted that the Assessing Officer had issued notices to 58 suppliers, out of which 22 did not respond. The purchases from these non-responding suppliers amounted to Rs. 244,00,28,880/-. The Tribunal emphasized that while the non-response from suppliers raised questions, the corresponding sales from these purchases were not doubted by the revenue.Key Evidence and FindingsThe assessee provided detailed records of purchases and corresponding sales, which were not challenged by the revenue. The stock registers reflected the purchases and sales accurately, and the books of accounts were accepted by the Assessing Officer without rejection.Application of Law to FactsThe Tribunal applied the principle that without purchases, there cannot be sales. Given that the sales were not disputed, the Tribunal inferred that the purchases were indeed made, albeit potentially from the grey market to benefit from indirect tax savings or cash discounts.Treatment of Competing ArgumentsThe Department's argument focused on the lack of response from the suppliers, suggesting unverifiable purchases. The assessee countered by highlighting the acceptance of their books and the undoubted sales. The Tribunal balanced these arguments by considering the practical aspects of business operations and the likelihood of grey market purchases.ConclusionsThe Tribunal concluded that the purchases were unverifiable but not necessarily fictitious. It determined that a profit estimation approach was appropriate, estimating a profit margin of 2.5% on the disputed purchases to be added to the assessee's income.SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal ReasoningThe Tribunal noted, 'without effecting purchases, there cannot be any sales,' highlighting the logical inference that sales validate the occurrence of purchases, even if the latter are unverifiable.Core Principles EstablishedThe Tribunal established that when purchases are unverifiable but sales are not in question, a reasonable profit estimation on such purchases should be made rather than a complete disallowance.Final Determinations on Each IssueThe Tribunal directed the Assessing Officer to add 2.5% of the disputed purchase value to the assessee's income, thereby partially allowing the appeal. The issue of time-barred assessment was dismissed as it was withdrawn by the assessee.