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2025 (5) TMI 1663 - AT - Income TaxEstimation of income - bogus purchases - additions made to the returned income by estimating net profit at 12% on total turnover - HELD THAT - CIT(A) estimated the net profit rate of 12% of the bogus purchases without giving any specific finding as to why the net profit rate of 12% was attracted in the assessee s set of facts. Assessee had relied on several judicial precedents in which the net profit rate of 1% to 2% had been taken by various Courts / Tribunals. While passing the order CIT(A) did not give any specific finding on the applicability / non-applicability of the judicial precedents relied upon by the assessee. It is a well-settled law that just because the parties from whom purchases have been made are unverifiable does not mean that the purchases itself are bogus specifically when the figure of sale / turnover have not been disputed by the Tax Authorities. Matter is hereby restored to the file of Ld. CIT(A) to give a specific finding on assessee s challenge to rejection of books of accounts u/s 145(3) and also to give a finding / basis of the correct net profit rate taking into consideration the assessee s set of facts and the judicial precedents on the subject. Appeal of the assessee is allowed for statistical purposes.
The core legal questions considered in this appeal include:
1. Whether the Commissioner of Income Tax (Appeals) (CIT(A)) erred in law and on facts by issuing the impugned order without fair and objective application of mind, thereby violating principles of natural justice. 2. Whether the additions made to the returned income by estimating net profit at 12% on total turnover were justified, especially given the declared income was significantly lower. 3. Whether the CIT(A) had jurisdiction to make additions when no defect or error was found during scrutiny. 4. Whether the additions were justified solely on the basis of test check verification of third-party statements without adequate documentary evidence or cross-examination. 5. Whether the rejection of books of accounts under Section 145(3) of the Income Tax Act was justified. 6. Whether the net profit rate of 12% applied by the authorities was appropriate given the facts of the case, including the turnover growth and profit margins. 7. Whether the assessee was denied the opportunity to cross-examine third parties whose statements were relied upon. 8. Whether the CIT(A) ignored mandatory CBDT instructions and passed the order with pre-conceived notions and non-application of independent mind. Regarding the rejection of books of accounts under Section 145(3), the legal framework mandates that if the Assessing Officer (AO) has reasons to believe that the books of accounts are not reliable, he may reject the same and estimate income. Precedents establish that such rejection must be based on cogent reasons and not merely on inability to verify transactions with third parties. The AO in this case observed that purchases amounting to Rs. 23,48,12,550/- were unverifiable as the three parties from whom purchases were made did not respond to notices under Section 133(6). Physical verification revealed that one supplier's address was occupied by another person for 15 years, and no one knew the supplier. Based on this, AO invoked Section 145(3) and estimated net profit at 12% of total turnover, disallowing the purchases. The CIT(A) upheld the addition but modified the quantum by applying the 12% net profit rate only on the unverifiable purchases rather than the entire turnover, granting partial relief to the assessee. The assessee challenged the rejection of books of accounts, arguing that no default was found in the books and that the basis for rejection was arbitrary. The assessee also contended that since sales were accepted as correct, corresponding purchases should not be disallowed merely because the suppliers were unverifiable. Further, the assessee highlighted a massive increase in turnover (over 70 times from the previous year) and low profit margins (~1%), contending that applying a 12% net profit rate was unjustified and inconsistent with the facts. The Court observed that the CIT(A) failed to give specific findings on the rejection of books of accounts under Section 145(3), despite detailed submissions by the assessee challenging it. This omission amounted to a failure to apply mind to a crucial issue. Regarding the net profit rate, the Court noted that CIT(A) did not explain why the 12% rate was appropriate in the facts of the case, nor did he address judicial precedents relied upon by the assessee, which indicated lower net profit rates (1%-2%) in similar circumstances. The Court emphasized that applying a uniform net profit rate without considering the assessee's specific facts and precedents was improper. Furthermore, the Court reiterated the settled legal principle that unverifiable suppliers do not ipso facto imply bogus purchases, especially when sales figures are undisputed. This principle calls for a nuanced approach rather than blanket disallowance. The Court also noted the assessee's contention that the CIT(A) did not provide an opportunity for cross-examination of third parties whose statements were relied upon, raising concerns about violation of natural justice. On competing arguments, the Revenue relied on the CIT(A)'s observations, but the Court found these insufficiently reasoned and incomplete in addressing the assessee's challenges. In application of law to facts, the Court found that the CIT(A) erred by not addressing the rejection of books of accounts and by applying an arbitrary net profit rate without proper justification. The Court also found procedural lapses regarding natural justice principles. Consequently, the Court restored the matter to the file of the CIT(A) with directions to:
The appeal was allowed for statistical purposes, indicating that the matter requires reconsideration in light of these directions. Significant holdings include the following verbatim excerpt from the Court's reasoning: "Just because the parties from whom purchases have been made are unverifiable does not mean that the purchases itself are bogus, specifically when the figure of sale / turnover have not been disputed by the Tax Authorities." Core principles established or reaffirmed are:
Final determinations on each issue were deferred to the CIT(A) on remand, with directions to address the identified deficiencies and provide reasoned findings consistent with law and facts.
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