2025 (7) TMI 1165 - AT - Income Tax

Estimation of income - bogus purchases - AO added 25% of the turnover as gross profit earned by the assessee - CIT (A) restricted addition of 2.46% - HELD THAT - From the facts available on record we observe that no doubt the purchases seem to be nongenuine based on the findings of the lower authorities. However the assessee has also declared sales which were not doubted by the AO. Without there being any purchases the assessee would not have achieved the sales. Therefore we are inclined to accept the findings of the CIT (A). We observe that ld. CIT (A) after analyzing the financial data of three years from AYs 2020-21 to 2022-23 he observed that assessee has declared average GP of 2.46% and also accepted that assessee has declared 2.46% that being the case he should have proposed the addition to that extent of different between 2.46% to 0.72% however he proposed 2.46% net GP considering the factual matrix in this case. After going through the facts on record the various ITAT Benches have proposed addition in the case of bogus purchases in and around GP of 5%. In the given case assessee has already declared 2.46% as GP and CIT (A) has sustained the addition of 2.46% which is in line with the overall percentage of 5%. Therefore we do not see any reason to disturb the findings of ld. CIT (A). Appeal filed by the Revenue is dismissed.

Summary

ISSUES:

Whether purchases claimed by the assessee from certain parties can be disallowed on the ground of non-response to notices issued under section 133(6) of the Income Tax Act, 1961.Whether the Assessing Officer (AO) was justified in rejecting the books of account under section 145(3) without pointing out specific defects or discrepancies.Whether addition of net profit at 25% of total turnover is justified in absence of acceptance of books of account.Whether the burden lies on the assessee to ensure suppliers respond to notices issued under section 133(6).Whether the net profit addition should be estimated based on historical gross profit trends or arbitrary percentages.Whether non-response of suppliers to section 133(6) notices can alone justify disallowance of purchases.Whether the AO's failure to issue summons under section 131 affects the validity of additions made.Whether documentary evidence such as bills, bank statements, GSTR-2A, and ledger confirmations suffice to prove genuineness of purchases.Whether additions based on profit element embedded in bogus purchases are appropriate instead of disallowing entire purchase amount.Whether the CIT(A)'s reduction of addition from 25% to 2.46% of turnover is justified.

RULINGS / HOLDINGS:

The AO's reliance solely on non-response to notices under section 133(6) to disallow purchases is not justified; non-response by third parties cannot lead to automatic disallowance when the assessee has furnished comprehensive documentary evidence including bills, bank payments, and GSTR-2A data.The rejection of books of account under section 145(3) without pointing out any specific defect or discrepancy is improper; books maintained regularly and audited under section 44AB cannot be rejected on mere suspicion.The addition of net profit at 25% of turnover by the AO is arbitrary and unsupported by industry norms or the assessee's historical profit trends; such estimation must be based on reasonable grounds.The burden to prove genuineness of purchases lies on the assessee, but this burden is discharged by furnishing proper documentation and audited accounts; the AO cannot shift the burden to compel suppliers to respond to notices under section 133(6).Estimation of net profit addition should be grounded on past profit trends and comparable cases; the CIT(A)'s approach of applying the assessee's declared gross profit rate of 2.46% on turnover to estimate addition is upheld.Non-response of suppliers to section 133(6) notices, without further independent enquiry or adverse material, cannot alone justify disallowance of purchases or rejection of books.The AO's failure to issue summons under section 131 to verify statements of suppliers is a lack of due diligence but does not invalidate the entire assessment if other evidence supports findings.Documentary evidence such as tax invoices, transport documents, bank payment proofs, ledger confirmations, and GSTR-2A matching entries are sufficient to establish genuineness of transactions.Additions should be made only on the profit element embedded in bogus purchases rather than disallowing the entire purchase amount; this principle is supported by judicial precedents.The CIT(A) correctly restricted the addition to Rs. 31,68,277/- (2.46% of turnover), giving credit for net profit declared by the assessee, and this finding is affirmed.

RATIONALE:

The court applied the statutory provisions of the Income Tax Act, 1961, including sections 133(6), 142(1), 143(2), 143(3), 145(3), and 44AB, alongside established judicial principles regarding burden of proof and assessment procedures.Precedents such as the Supreme Court ruling in Orissa Corporation Pvt. Ltd. v. CIT (1986) and various Tribunal and High Court decisions emphasize that mere non-response of third parties to departmental notices does not invalidate transactions when the assessee provides credible and comprehensive documentary evidence.The court recognized that rejection of books of account requires specific, cogent reasons and cannot be based on suspicion or absence of supplier responses alone.The principle that additions should reflect the profit element embedded in bogus purchases rather than the entire purchase amount was adopted, referencing cases such as Deputy Commissioner of Income-tax v. Rajeev G. Kalathil and Belmarks Metal Works v. ITO.The CIT(A)'s approach to estimate addition based on the assessee's own historical gross profit rate aligns with judicial guidance against arbitrary profit estimation and reflects a doctrinal adherence to reasoned assessment methodology.The court noted the AO's failure to issue summons under section 131 as a procedural deficiency but found it did not vitiate the assessment given the overall evidence and findings.No dissenting opinions were recorded; the decision reflects a consolidation of principles balancing procedural fairness, burden of proof, and evidentiary standards in tax assessments involving alleged bogus purchases.