Bogus purchase addition deleted; no unrecorded INSIGHT parties, no basis for best judgment profit estimation

The ITAT Ahmedabad set aside the AO's addition for alleged bogus purchases and rejection of books. It found as an uncontroverted fact that the assessee had not recorded any purchases from the parties flagged on the Department's INSIGHT portal, a fact also acknowledged by the AO. In absence of any actual accommodation entries or purchases from tainted parties, there was no factual or legal basis to treat the purchases as bogus or to invoke best judgment assessment. Consequently, the estimated profit addition was deleted and the assessee's appeal was allowed.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether rejection of books of account and estimation of business profits under the Act was justified solely on the basis of departmental INSIGHT portal information alleging bogus purchases.

1.2 Whether the consequent addition made by applying an estimated profit rate on turnover, despite acceptance that no purchases were made from the alleged bogus suppliers, was sustainable.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Rejection of books of account based on alleged bogus purchases reflected in INSIGHT portal

Interpretation and reasoning

1.3 The Tribunal recorded that the sole basis for alleging bogus purchases was information available on the departmental INSIGHT portal showing substantial purchases from two specific suppliers characterized as non-filers, non-business return filers, or having lower turnover in income-tax returns vis-à-vis GSTR-1.

1.4 During assessment proceedings, the assessee produced complete books of account and supporting documents relating to its wholesale business in waste, scrap and recycling materials, and specifically demonstrated that no purchases had been made from the two parties named in the INSIGHT portal.

1.5 The Tribunal noted that, after examining these details, the Assessing Officer himself accepted that the assessee had not made any purchases from the two named parties. Notwithstanding this acceptance, the Assessing Officer presumed that the assessee must have purchased goods from other undisclosed parties, possibly from the grey market at lower rates, and thereby earned higher profits.

1.6 The Tribunal held that once it stood established and accepted by the Assessing Officer that no purchases were made from the two parties identified on the INSIGHT portal, there was no factual foundation to characterize any part of the assessee's recorded purchases as bogus on that basis.

1.7 The Tribunal further held that mere presumptions about possible grey market purchases, unsupported by any specific material or detection of unrecorded transactions, could not justify rejection of the duly produced and examined books of account.

Conclusions

1.8 The rejection of the books of account on the ground of alleged bogus purchases was held to be without any basis in the admitted facts and therefore unjustified.

1.9 The order of the appellate authority confirming such rejection of books, despite the Assessing Officer's own acceptance that no purchases were made from the alleged parties, was held to be unsustainable.

Issue 2: Sustainability of estimated profit addition after rejection of books

Interpretation and reasoning

2.1 The Assessing Officer, after rejecting the books, estimated profit by applying a higher rate to turnover, partly on the premise that the assessee's gross profit and net profit rates were allegedly lower than normal and lower than the preceding year.

2.2 The Tribunal observed that the entire estimation exercise was consequential to and premised upon the allegation of bogus purchases and the resultant rejection of books.

2.3 As the foundational allegation of bogus purchases had failed, and the books stood supported by documentation with no specific defects established, the Tribunal held that there remained no legal basis for discarding the declared results and substituting them with an estimated profit rate.

Conclusions

2.4 The estimation of profits and the consequential addition of Rs. 1,50,07,646/-, based purely on presumption following an unjustified rejection of books, was held to be unwarranted.

2.5 The Tribunal directed deletion of the entire addition of Rs. 1,50,07,646/- made on account of estimated profits.

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