2021 (1) TMI 1136 - AT - Income Tax

Estimation of income on bogus purchases - CIT-A directing to make an addition of 5% of unverified purchases - HELD THAT - As under Income Tax Act only real income can be taxed by the Revenue. We may further note that even in cases where the whole transaction is not verifiable due to various reasons the only taxable is the taxable income component and not the entire transaction. Hon ble Bombay High Court in the case of CIT vs. Hariram Bhambani 2015 (2) TMI 907 - BOMBAY HIGH COURT held that the Revenue is not entitled to bring the entire sales consideration to tax but only the profit attributable on the total unrecorded sale consideration alone can be subject to income tax. In our view wherein the allegation bogus purchases if the assessee is failed to prove the complete transaction beyond doubt the Assessing Officer is not entitled to make 100% disallowance of purchases without bringing sufficient material on record. In such cases only profit element embedded in such transaction is liable to be disallowed. Therefore we affirm the order of ld.CIT(A) - Appeal of the Revenue is dismissed.

Summary

Issues:
- Disallowance of non-genuine purchases
- Application of Gross Profit estimation
- Reopening of assessment based on hawala entry information
- Assessment of bogus purchases
- Relief granted by the CIT(A)
- Validity of disallowance and assessment

Detailed Analysis:

1. Disallowance of non-genuine purchases: The Revenue appealed against the CIT(A)'s order restricting the addition made by the AO on account of disallowance of non-genuine purchases. The CIT(A) had directed to make an addition of 5% of unverified purchases, which the Revenue contended was not in accordance with the law. The Revenue argued that either the entire purchases should be disallowed or the books of accounts should have been rejected with an estimated Gross Profit (GP).

2. Application of Gross Profit estimation: The CIT(A) considered various submissions by the assessee, including the fact that the assessee's sales represented 100% export sales, following a legitimate process. The assessee argued that the GP and Net Profit margins were fair in the diamond trade industry. The CIT(A) relied on precedents, including a decision of the Hon'ble Guj. High Court, to restrict the disallowance of impugned purchases to 5%.

3. Reopening of assessment based on hawala entry information: The assessment was reopened under section 147 of the Act based on information received from the DDIT about hawala entry providers engaging in bogus transactions. The AO treated the entire purchases from three hawala parties as bogus, leading to the addition in the assessment order.

4. Assessment of bogus purchases: The AO's decision to treat the purchases as bogus was based on the report from the DDIT, Surat, and the inability of the assessee to substantiate the purchases. The AO believed the purchases were fabricated to inflate profits.

5. Relief granted by the CIT(A): The CIT(A) reviewed the submissions and evidence provided by the assessee, directing the AO to provide additional investigation reports and relevant documents. After considering the submissions and the remand report, the CIT(A) concluded that a 5% disallowance of the impugned purchases was reasonable.

6. Validity of disallowance and assessment: The ITAT affirmed the CIT(A)'s decision, emphasizing that only the profit component of unverifiable transactions should be disallowed for taxation. Citing legal precedent, the ITAT stated that the Revenue cannot tax the entire sales consideration in such cases and upheld the CIT(A)'s order in favor of the assessee.

In conclusion, the ITAT dismissed the Revenue's appeal, highlighting the importance of proving the complete transaction beyond doubt and only disallowing the profit element in cases of unverifiable transactions.