2024 (12) TMI 1568 - AT - Income Tax

Estimation of income - bogus purchases - HELD THAT - Admittedly the Assessee before the AO as well as before the Ld. Commissioner except filing the reply has not produced proper documents to establish genuineness of the purchases made and therefore the same has been considered as bogus by the authorities below and thus on this aspect no interference is warranted. However coming to the second/alternate claim raised by the Ld. Counsel on behalf of the Assessee this Court is in concurrence with the alternate claim of the AR and not refuted by the DR that profit element only can be subjected to addition and hence the AO is directed to verify whether the bogus purchases have already been shown by the Assessee in its profit loss account and on finding answer affirmative then to apply GP rate @5% of the bogus purchases over and above the GP/profit already shown on the same if any by the Assessee and recompute the income accordingly. Appeal filed by the Assessee stands partly allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the purchases amounting to Rs. 19,43,378/- made by the Assessee from certain parties were genuine or constituted bogus/accommodation bills.

- Whether the addition of the entire amount of such purchases in the income of the Assessee was justified.

- Whether the impugned orders passed by the Assessing Officer and the Commissioner of Income Tax (Appeals) were erroneous or warranted interference.

- Whether, in case the purchases are held to be bogus, the entire amount or only the profit element embedded in such purchases should be added to the income of the Assessee, in light of relevant judicial precedents.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Genuineness of Purchases amounting to Rs. 19,43,378/-

Relevant legal framework and precedents: The Income Tax Act, 1961 empowers the Assessing Officer (AO) to disallow expenses or purchases which are not genuine or are accommodation entries, thereby preventing tax evasion. The burden lies on the Assessee to substantiate the genuineness of such transactions by producing cogent evidence such as purchase and sales registers, inventory records, and other relevant documents.

Court's interpretation and reasoning: The AO, relying on information from the Sales Tax Department, found that the parties from whom the purchases were made were not engaged in genuine business activities but were involved in furnishing accommodation bills. The Assessee was given opportunity to substantiate the claim but failed to produce any documentary evidence to prove the genuineness of the purchases.

The Commissioner of Income Tax (Appeals) upheld the AO's findings after considering the submissions and concluded that the Assessee indulged in booking bogus purchases to reduce taxable profits, with no evidence supporting the claim of bogus sales.

Key evidence and findings: The primary evidence was the communication from the Sales Tax Department indicating the non-genuine nature of the parties involved. The Assessee's failure to produce purchase and sales registers or inventory records was a critical factor in affirming the bogus nature of the purchases.

Application of law to facts: Given the lack of documentary evidence and the corroborative information from the Sales Tax Department, the AO and the Commissioner rightly treated the purchases as bogus and added the amount to the income of the Assessee.

Treatment of competing arguments: The Assessee argued that the impugned order was cryptic and did not consider factual aspects properly. However, this was rejected as the authorities had adequately considered the available material and the Assessee's failure to substantiate the claim was decisive.

Conclusion: The addition of Rs. 19,43,378/- as bogus purchases was justified and no interference was warranted on this issue.

Issue 2: Quantum of Addition - Entire Purchase Amount vs. Profit Element Only

Relevant legal framework and precedents: The principle that only the profit element embedded in bogus purchases should be added to the income is supported by judicial precedents, including the judgment of the Hon'ble Jurisdictional High Court in the case of Principal CIT vs. M/s. Mohammad Haji Adam & Co., which held that the entire amount of bogus purchases should not be added, but only the profit element embedded therein.

Court's interpretation and reasoning: The Tribunal agreed with the alternate claim made by the Assessee's counsel that if the purchases are held to be bogus, then the addition should be limited to the profit element embedded in such purchases rather than the entire amount. The Revenue did not refute this position.

Key evidence and findings: The Tribunal noted that the AO should verify whether the Assessee had already shown the bogus purchases in the profit and loss account. If so, then the AO should apply a gross profit rate of 5% on the bogus purchases over and above the profit already declared, and recompute the income accordingly.

Application of law to facts: The Tribunal directed the AO to re-examine the computation of income by limiting the addition to the profit element, thereby aligning with the principle established by the High Court.

Treatment of competing arguments: The Revenue's contention that the entire amount should be added was not supported by law and was not pressed before the Tribunal. The Tribunal accepted the Assessee's alternate submission as legally sound.

Conclusion: The addition should be restricted to the profit element embedded in the bogus purchases, and the AO was directed to recompute the income accordingly.

3. SIGNIFICANT HOLDINGS

- "There is clear evidence that appellant has indulged in accommodation bills through booking bogus purchases thereby reducing profit and thus evaded taxes. There are no evidences for bogus sales." This observation underscores the distinction between bogus purchases and sales and justifies the addition on the purchase side.

- The Tribunal held: "The AO is directed to verify whether the bogus purchases have already been shown by the Assessee in its profit & loss account and on finding answer 'affirmative' then to apply GP rate @5% of the bogus purchases over and above the GP/profit already shown on the same, if any by the Assessee, and recompute the income accordingly." This establishes the principle that only the profit element embedded in bogus purchases should be added.

- The Tribunal affirmed the addition of Rs. 19,43,378/- as bogus purchases but allowed the appeal partly by restricting the addition to the profit element, demonstrating a balanced application of law to facts and judicial precedents.