2022 (8) TMI 26 - AT - Income Tax

Bogus purchases - estimation of gross profit of whole of the business of the assessee - HELD THAT:- We hold that the learned CIT – A has erred in adopting the gross profit ratio for the whole business of the assessee for the purpose of making/sustaining the addition in the hands of the assessee with respect to the circular trading transactions entered into by it. There is no dispute with respect to sanctity of the other parts of the business of the assessee, such as manufacturing or any other segment of the business of the assessee. Therefore there is no reason why the profitability with respect to the genuine business of the assessee should be disturbed. By adopting the gross profit of whole business, ld CIT has done violence to the genuine business of the assessee, which is not permitted. He is only required to estimate profit embedded in the circular trading transaction of bogus purchases only. The bogus purchases were to the extent of ₹ 164,830,000/–. This has been accepted to be the circular trading purchases made by the assessee along with other parties. Therefore, the profit is required to be imputed only with respect to the bogus purchases - Therefore, the approach of the learned CIT – A of estimating the gross profit of whole of the business of the assessee instead of taking profit element embedded in the bogus purchases is not correct, hence same is rejected.

GP stimation @ 8.75% - what is the amount of income earned by the assessee out of the bogus purchases arising out of the circular trading? - HELD THAT:- As case involved in impugned appeal is of a listed limited company at the stock exchange, where 85.41% shares are held by non-promoters, i.e. Public and Director of the company, who is a trustee of the company, is engaged in circular trading. Further, the lower gross profit as has been depicted in the above two decisions of the coordinate benches were not at all justified looking at the gross profit ratio earned by the assessee in its regular business. Further, in those cases the bills were issued which were discounted by the purchaser for financing and in the another case it was the employee who was used for the purpose of issue of the bogus bills. Here, in this case the assessee himself is engaged in this activity. Therefore we reject the argument of the learned authorised representative for adopting such a low gross profit.

As we have the guidance available of the honourable High Court as well as the other coordinate benches that how much profit should be imputed to bogus purchases transactions, we deem it fit and proper that profit is required to be estimated only on the amount of bogus purchases. The quantum of the profit as generally estimated in the cases of bogus purchases should be at the rate of 12.5% of such purchases. Accordingly we reverse the order of the learned CIT – A and direct the learned assessing officer to compute the unaccounted profit earned by the assessee at the rate of 12.5% on bogus purchases.

Unexplained expenditure - HELD THAT:- We find that in the present case there existed some agreement between the director of the company with some other party where the other party would help raise the funds to the assessee to preferential allotment or write issue over the period of 12 months. In order to achieve the above object, the other party will move the stock market prices to make it a breach ₹ 60 – ₹ 80 within six months. The modus operandi was to acquire 12 – 15 lakh shares from the market and promoter would be providing funds to the tune of Rs 1 Cr to manipulate market prices.

The whole name of this price rigging mechanism was given as “ screen management charges”. We are not concerned with the mechanism as well as the people involved in that. It is for the other regulator to look into this. We are just supposed to know whether assessee has incurred any expenditure or not and consequently addition is sustainable or not. The learned AO has not brought on record any with dense that assessee has incurred this expenditure. Therefore the learned CIT – A deleted the same correctly.