2017 (2) TMI 1084 - AT - Income Tax

Estimation of gross profit on bogus purchases - rejection of books of accounts - Held that - Once the rejection of books of accounts are accepted by assessee the CIT(A) has no option but to estimate profit because the Revenue has not doubted the sales. We also find that the assessee could file the details of purchase and sales i.e. bills and vouchers but could not submit stocks statements. Even parties are not verifiable being Hawala dealers. In such circumstances only profit rate is to be estimated which CIT(A) has rightly estimated. However the rate of profit is a little on lower side reasons being the assessee himself declare profit on the disclosed purchases and sales at 7.87%. But assessee made purchases of these items from Grey market and for that he has saved sale tax octori tax and other benefits. We are of the view that a reasonable estimate should be made and according to us 10% of profit will made the end of justice. Accordingly we are directed the AO to apply profit rate of 10% and accordingly assess the income. We directed the AO accordingly and appeal of Revenue is partly allowed.

Summary

Issues:
Estimation of gross profit on bogus purchases at the rate of 7.87%.

Analysis:
1. The Revenue raised two grounds challenging the deletion of addition of Rs. 34,95,000 on account of bogus purchase due to failure in proving genuineness, identity, and creditworthiness of the transactions, which were alleged to be Hawala entries. The CIT(A) confirmed the addition of Rs. 2,98,571 at 7.87% on bogus purchases of Rs. 37,93,785, emphasizing that the profit and loss were not affected as the purchases were not fully sold but appeared as closing stock.

2. The investigation revealed that the assessee had taken bogus bills from various parties, leading to the rejection of books of accounts by the Assessing Officer (AO) under Section 145(3) of the Income Tax Act. The CIT(A) referred to relevant case laws to determine that only the profit element on the disputed purchases should be added to the income. The CIT(A) estimated the profit at 7.87% amounting to Rs. 2,98,571, partially allowing the appeal.

3. The Tribunal noted that the rejection of books of accounts by the assessee led to the estimation of profit by the CIT(A) since the Revenue did not doubt the sales. Despite the submission of purchase and sales details without stock statements and unverifiable parties, the Tribunal found the profit rate estimated by the CIT(A) to be slightly low. The Tribunal directed the AO to apply a profit rate of 10% to assess the income, partially allowing the Revenue's appeal and dismissing the Cross Objection of the assessee.

4. In conclusion, the Tribunal partially allowed the Revenue's appeal and dismissed the Cross Objection of the assessee, directing the AO to assess the income at a profit rate of 10%. The judgment highlighted the importance of substantiating transactions and the impact on profit estimation in cases of disputed purchases, ultimately emphasizing the need for accurate financial documentation and compliance with tax regulations.