2019 (5) TMI 2030 - AT - Income Tax

Estimation of income - bogus purchases - CITA(A) restricted G.P Ratio @ 12.5% on purchase - HELD THAT - As decided in M/s. Mohhomad Haji Adam Company 2019 (2) TMI 1632 - BOMBAY HIGH COURT addition in respect of purchases which were found to be bogus in the case of the assessee before them who was a trader was to be worked out by bringing the G.P. rate of such bogus purchases at the same rate as that of the other genuine purchases. Restore the matter to the file of the A.O with a direction to restrict the addition as regards the bogus/unproved purchases aggregating to Rs.1, 23, 82, 428/- in the case before us by bringing the G.P rate of such bogus purchase at the same rate as that of the other genuine purchases. Needless to say the assessee in the course of the set aside proceedings shall furnish the requisite details before the A.O who shall after making necessary verifications restrict the addition in terms of our aforesaid observations. Appeal of the assessee is allowed for statistical purposes.

Summary

The core legal questions considered by the Tribunal in this appeal are:

1. Whether the disallowance of purchases amounting to Rs.1,23,82,428/- on the ground that they were non-genuine and supported by bogus bills was justified under the Income Tax Act, 1961.

2. Whether the quantification of addition at 12.5% of the aggregate value of such purchases as profit element was legally sustainable.

3. The appropriate method for determining the addition in respect of unsubstantiated or bogus purchases in a trading business, particularly the applicability of gross profit rate adjustments.

Issue 1: Legitimacy of Disallowance of Purchases on Grounds of Bogus Bills

Relevant legal framework and precedents: The reopening of assessment under Section 147 of the Income Tax Act was triggered based on information from the DGIT (Inv.) Wing that the assessee was a beneficiary of bogus bills procured from hawala parties. The Assessing Officer (A.O.) invoked Section 143(3) r.w.s 147 to reassess the income and Section 145(3) to reject the books of account due to unverifiable transactions. The burden was on the assessee to substantiate the genuineness of the purchases with cogent documentary evidence and to produce the parties for examination as per the directions of the A.O.

Court's interpretation and reasoning: The Tribunal noted that the assessee failed to provide irrefutable documentary evidence to establish the authenticity of the purchases. Despite furnishing ledger accounts, purchase invoices, bank statements, and partial details of transportation, the assessee did not produce the parties for examination. Notices issued under Section 133(6) to the alleged sellers were returned unserved with remarks such as "not known" and "no such address." These facts led the A.O. and subsequently the CIT(A) to conclude that the purchases were not genuine but rather involved bogus billing from hawala parties.

Key evidence and findings: The returned notices, absence of parties for examination, lack of complete transportation and delivery proofs, and the assessee's failure to fully comply with A.O.'s directions collectively established the unverifiability of the purchases.

Application of law to facts: Given the statutory provisions and the evidentiary requirements, the rejection of the purchases as non-genuine was justified under the Income Tax Act. The assessee's failure to discharge the onus of proof led to the disallowance.

Treatment of competing arguments: The assessee contended that the disallowance was arbitrary and that the gross profit ratio method applied was erroneous. However, the Tribunal found that the primary issue of genuineness was not rebutted by the assessee's submissions.

Conclusion: The Tribunal upheld the finding that the purchases were bogus and non-genuine, warranting disallowance under the provisions of the Income Tax Act.

Issue 2: Quantification of Addition at 12.5% of Aggregate Purchases

Relevant legal framework and precedents: The A.O. applied a flat gross profit (G.P.) ratio of 12.5% on the aggregate purchases to compute the addition of Rs.15,47,800/-. The CIT(A) confirmed this quantification. However, the Tribunal referred to a recent decision of the Hon'ble Bombay High Court in the case of Pr. Commissioner of Income Tax-17 Vs. M/s Mohhomad Haji Adam & Company, which dealt with the appropriate method of quantifying additions in cases of bogus purchases.

Court's interpretation and reasoning: The Tribunal observed that the lower authorities failed to provide any cogent reason for adopting the 12.5% G.P. ratio. The High Court judgment emphasized that additions in respect of bogus or unproved purchases should be restricted to bringing the gross profit rate on such purchases to the same level as that of other genuine purchases, rather than making an arbitrary addition on the entire purchase value.

Key evidence and findings: The High Court's rationale was that since the sales declared by the assessee were not disputed and corresponded with the purchases, the entire purchase amount could not be added as income. Instead, the profit element embedded in the bogus purchases should be adjusted to reflect the gross profit margin consistent with genuine transactions.

Application of law to facts: Applying the High Court's principle, the Tribunal directed the matter to be remanded to the A.O. for recalculation of the addition by aligning the gross profit rate of the bogus purchases with that of the genuine purchases.

Treatment of competing arguments: The assessee's objection to the arbitrary 12.5% addition was accepted, and the Tribunal rejected the lower authorities' approach for lack of justification.

Conclusion: The quantification of addition at 12.5% was set aside, and the matter was remanded for re-computation in accordance with the gross profit rate principle established by the High Court.

Issue 3: Appropriate Methodology for Additions in Cases of Bogus Purchases

Relevant legal framework and precedents: The Tribunal relied heavily on the Bombay High Court's ruling which clarified the principle that when bogus purchases are found but sales are accepted, the addition should be limited to the difference in gross profit rates rather than the entire purchase amount. The Gujarat High Court's decision in N.K. Industries Ltd. was distinguished on facts, noting that the principle cannot be applied universally without regard to the nature of the business and facts of the case.

Court's interpretation and reasoning: The Tribunal accepted the High Court's reasoning that the assessee should not be "punished" by adding the entire purchase amount as income when sales are accepted. Instead, the addition should reflect the profit margin differential, ensuring that the taxable income is adjusted fairly without distorting the true profit position.

Key evidence and findings: The High Court's judgment emphasized the need to reduce the selling price accordingly, thereby adjusting the profit rate to a realistic level. This approach was found to be equitable and legally sound.

Application of law to facts: The Tribunal directed the A.O. to apply this principle in recalculating the addition, thus ensuring compliance with judicial precedent and fairness in tax assessment.

Treatment of competing arguments: The Tribunal rejected the lower authorities' approach of arbitrary addition and endorsed the tested judicial principle for quantification.

Conclusion: The Tribunal established that additions in cases of bogus purchases must be computed by normalizing the gross profit rate rather than by blanket disallowance of purchase values.

Significant holdings:

"The addition in the hands of the assessee as regards the bogus/unproved purchases was to be made to the extent of bringing the G.P rate of such purchases at the same rate as that of the other genuine purchases."

"The assessee cannot be punished since sale price is accepted by the revenue. Therefore, even if 6 % gross profit is taken into account, the corresponding cost price is required to be deducted and tax cannot be levied on the same price."

"The Tribunal, therefore, correctly restricted the additions limited to the extent of bringing the G.P. rate on purchases at the same rate of other genuine purchases."

"No cogent reason has been given for working out the profit element embedded in the purchases under consideration @ 12.5% of their aggregate value."

"The purchase transactions under consideration had remained unverified. The assessee had failed to substantiate the veracity of the purchases claimed to have been made from the aforementioned parties."

The Tribunal set aside the CIT(A)'s order on the quantification aspect and remanded the matter to the A.O. with directions to recalculate the addition by applying the gross profit rate of genuine purchases to the bogus/unverified purchases totaling Rs.1,23,82,428/-. The assessee was directed to furnish requisite details during the remand proceedings. The appeal was allowed for statistical purposes, and the matter was restored for fresh computation consistent with the principles laid down by the Hon'ble High Court.