ITAT reduces disallowance on bogus purchases by applying 18% gross profit rate under relevant tax rules

The ITAT Delhi reduced the disallowance related to bogus purchases by applying a gross profit rate of 18% instead of the 20% used by the CIT(A). The tribunal found that 18% was sufficient considering the payments made for accommodation entries and the overall facts, including GST rates. Consequently, the appeal was partly allowed by restricting the addition to 18% of the turnover.

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ISSUES:

Whether the application of Gross Profit (GP) rate @ 20% on bogus purchases is justified.Whether the GP rate of 12.5% or a different rate should be applied to determine taxable income from accommodation entries.Whether the entire amount of bogus purchases should be disallowed or only the profit element should be added to income.

RULINGS / HOLDINGS:

The application of GP @ 20% on bogus purchases is justified as a reasonable estimate of profit embedded in accommodation entries, considering the high GST rate of 28% on cement and additional costs such as commissions and logistics.The entire amount of bogus purchases cannot be disallowed; only the profit element should be taxed, consistent with the principle that additions must reflect a "fair estimate of the profit element."The GP rate of 18% is more appropriate than 20% or 12.5% in the present case, balancing the evidence and industry norms, and thus the addition is restricted to 18% of the bogus purchases.

RATIONALE:

The legal framework involves the disallowance of accommodation entries under the Income Tax Act, 1961, supported by evidence from search and seizure operations under section 132.Precedent in CIT vs. Simit P. Sheth upheld a 12.5% GP addition; however, the court recognized that higher GST rates and industry-specific factors justify a higher GP rate.The approach aligns with the principle that additions for bogus purchases must reflect a reasonable and fair estimate of the profit element rather than the entire purchase amount.The tribunal exercised discretion to modify the GP rate to 18% to reflect the cost of accommodation entries and the income derived, ensuring equitable treatment in the interest of justice.

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