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2022 (8) TMI 26 - AT - Income TaxBogus 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 Rs. 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 Rs. 60 Rs. 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.
Issues Involved:
1. Bogus Purchases and Circular Trading. 2. Unexplained Cash Expenditure for Share Price Manipulation. Detailed Analysis: 1. Bogus Purchases and Circular Trading: Background: The case involves appeals filed by the Dy. Commissioner of Income Tax against the orders of the Commissioner of Income-tax (Appeals), which partly allowed the appeals of the assessee, a pharmaceutical company, regarding the assessment years 2009-10, 2010-11, and 2011-12. The primary issue pertains to the alleged bogus purchases and circular trading transactions amounting to Rs. 16,48,30,000/- for A.Y. 2009-10. Assessing Officer's Position: The AO made an addition of Rs. 16,48,30,000/- on account of bogus purchases and further Rs. 1,18,00,000/- for manipulation of share prices under Section 69C of the Income-tax Act. The AO's findings were based on a survey under Section 133A, which revealed that the assessee had obtained bogus purchases and accommodation bills. Statements from the Managing Director and employees corroborated that no physical delivery of goods occurred, and the transactions were circular in nature. CIT (A)'s Decision: The CIT (A) partly upheld the AO's findings but modified the quantum of addition. The CIT (A) acknowledged the circular trading but estimated the gross profit at 8.75% on these transactions, reducing the addition to Rs. 1,62,531/- from Rs. 16,48,30,000/-. The CIT (A) relied on various judicial precedents, emphasizing that only the income component from such transactions should be taxed, not the entire transaction value. ITAT's Analysis and Decision: The ITAT scrutinized the findings and upheld that the entire sales could not be taxed as income. However, it found flaws in the CIT (A)'s approach of applying a gross profit rate of 8.75% to the entire business. The ITAT emphasized that the profit should be imputed only on the bogus purchases. Following the jurisdictional High Court's guidance, the ITAT directed the AO to compute the unaccounted profit at the rate of 12.5% on bogus purchases: - For A.Y. 2009-10: Rs. 20,603,750/- (12.5% of Rs. 16,48,30,000/-) - For A.Y. 2010-11: Rs. 15,161,200/- (12.5% of Rs. 12,12,89,600/-) - For A.Y. 2011-12: Rs. 2,176,625/- (12.5% of Rs. 1,74,13,000/-) 2. Unexplained Cash Expenditure for Share Price Manipulation: Background: The AO made an addition of Rs. 1,18,00,000/- as unexplained cash expenditure, alleging that the assessee manipulated its share price. This conclusion was based on a loose paper found during the survey, indicating an agreement between the Managing Director and a third party to manipulate share prices. CIT (A)'s Decision: The CIT (A) deleted the addition, noting that the AO did not provide a rationale for the Rs. 1,18,00,000/- figure. The CIT (A) observed that the agreement was between individuals, not the company, and the company could not benefit from such price manipulation due to legal restrictions. ITAT's Analysis and Decision: The ITAT upheld the CIT (A)'s decision, finding no evidence that the company incurred the alleged expenditure. The ITAT confirmed that the addition was based on mere suspicion without substantive proof. Conclusion: The ITAT partly allowed the appeals of the AO by directing a profit estimation of 12.5% on bogus purchases instead of the gross profit rate applied by the CIT (A). However, it upheld the deletion of the Rs. 1,18,00,000/- addition for unexplained cash expenditure, finding no concrete evidence of such expenditure. The cross objections filed by the assessee were dismissed, affirming the CIT (A)'s decision to some extent but modifying the quantum of additions.
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