2025 (6) TMI 2000 - AT - Income Tax

Estimation of income - bogus purchases - rejection of books of account - CIT(A) found it fair and reasonable to estimate profit by applying a 5% GP rate (for A.Y. 2018-19) on the aggregate purchases from the five flagged suppliers and accordingly restricted the addition to that extent - HELD THAT - CIT(A) while sustaining the rejection of books of account under section 145(3) has correctly applied a fair and industry-consistent gross profit (GP) rate after appreciating the nature of the assessee s business the consistency in profitability ratios over the years and the evidentiary material placed on record. CIT(A) has also drawn support from multiple binding judicial precedents to hold that full disallowance of purchases is not justified when corresponding sales are accepted and no discrepancy is found in the stock records or turnover. We further note that the additions sustained by the CIT(A) at 5% (for A.Y. 2018 19) and 6% (for A.Ys. 2020 21 and 2021 22) are in line with past adjudications in similar cases and take into account the profit element embedded in disputed purchases. The application of an inflated GP rate of 12.5% by the AO in our considered view lacks justification and fails to account for business realities and past profit margins of the assessee.

Summary

The primary legal questions considered in this case revolve around the treatment of alleged bogus purchases made by the assessee company for the assessment years 2018-19, 2020-21, and 2021-22. Specifically, the issues include:

1. Whether the reopening of the assessment under section 147 of the Income Tax Act, 1961 (the Act) was justified and lawful for the assessment year 2018-19.

2. Whether the Assessing Officer (AO) was justified in rejecting the books of account under section 145(3) of the Act for the relevant years.

3. Whether the AO was correct in applying a gross profit (GP) rate of 12.5% on the alleged bogus purchases to estimate income.

4. Whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in reducing the GP rate applied by the AO to 5% for A.Y. 2018-19 and 6% for A.Ys. 2020-21 and 2021-22.

5. Whether the additions made by the AO and upheld partially by the CIT(A) violated principles of natural justice by not providing the assessee with documents or opportunity for cross-examination.

6. Whether the assessee was entitled to set off profits declared in the return of income against the estimated profit additions.

7. Legality of levy of interest under sections 234A/B/C/D and penalty under section 270A of the Act.

Issue-wise Detailed Analysis

1. Legality of Reopening Assessment under Section 147 (A.Y. 2018-19)

The assessee challenged the reopening of the assessment on the ground that it was without jurisdiction and not permissible either in law or on facts. The AO had reopened the case based on information from the Investigation Wing indicating transactions with accommodation entry providers and purchases from GST-flagged bogus suppliers.

The Court examined the facts and found that reopening was triggered by credible information from the Investigation Wing, which is a recognized ground under section 147. The reopening complied with procedural safeguards and was therefore held to be valid. The reopening was not found to be mala fide or arbitrary.

2. Rejection of Books of Account under Section 145(3)

For all three years, the AO rejected the books of account under section 145(3) due to the assessee's failure to satisfactorily establish the genuineness of purchases and the identity of suppliers. The CIT(A) upheld this rejection but emphasized that rejection of books does not automatically justify full disallowance of purchases.

The Court noted that the assessee had furnished purchase invoices, ledger confirmations, PAN and GST details, stock registers, and bank payment proofs. The sales were not disputed, and stock records were maintained and audited. The rejection was thus limited to the question of supplier verification, not the entire transaction.

3. Application of Gross Profit Rate by AO and CIT(A)

The AO applied a uniform GP rate of 12.5% on the alleged bogus purchases to estimate income, resulting in substantial additions (e.g., Rs. 11.61 crore for A.Y. 2018-19). The CIT(A) found this rate excessive and reduced it to 5% for A.Y. 2018-19 and 6% for the subsequent years.

The Court analyzed the historical GP and net profit (NP) ratios of the assessee from A.Y. 2016-17 to 2021-22, which showed consistent GP rates ranging from approximately 3.47% to 7.91% and NP rates from 1.58% to 3.00%. The average GP rate hovered around 5-6%. The AO's 12.5% was thus significantly higher than the assessee's business history.

The Court relied on multiple judicial precedents, including decisions of the Gujarat and Bombay High Courts and ITAT, which held that in cases of alleged bogus purchases where corresponding sales are accepted and stock records are intact, the addition should be limited to the profit element embedded in such purchases rather than the entire purchase value. The Court cited cases where additions were restricted to 4%-8% of the impugned purchases.

Accordingly, the CIT(A)'s approach of applying a GP rate consistent with industry and historical data was deemed reasonable and justified. The Court held that the AO's application of an arbitrary 12.5% GP rate was not sustainable.

4. Treatment of Competing Arguments on Genuineness of Purchases

The assessee argued that purchases were genuine, supported by documentation, and payments were made through banking channels. The AO and CIT(A) acknowledged that while supplier identity verification was problematic, the sales and stock records were not disputed, indicating that goods were indeed received and sold.

The Court accepted the CIT(A)'s reasoning that the suppliers might have provided accommodation bills for locally purchased material, but there was no evidence of money being routed back to the assessee or of inflated purchases. The Court emphasized that full disallowance of purchases is not justified where goods and sales are genuine, and only the profit margin should be taxed.

5. Principles of Natural Justice and Evidence Disclosure

The assessee contended that additions were confirmed without providing documents or opportunity for cross-examination, violating natural justice. The Court observed that the CIT(A) had considered all submissions and evidentiary material placed on record by the assessee, including purchase registers, invoices, bank statements, and stock records.

No specific finding was made that principles of natural justice were violated. The Court found that the assessee was given adequate opportunity to present its case and that the CIT(A)'s orders were reasoned and based on material evidence.

6. Set Off of Profit Declared Against Estimated Profit Addition

The assessee argued that profits already declared on the alleged bogus purchases should be set off against the estimated profit addition. The Court did not explicitly discuss this issue in detail but implicitly recognized the CIT(A)'s approach of estimating profit element consistent with declared profits and business history, effectively addressing this concern by moderating the additions.

7. Levy of Interest and Penalty

The assessee challenged the levy of interest under sections 234A/B/C/D and penalty under section 270A. The Court did not find merit in these grounds and did not interfere with the orders confirming interest and penalty, as these are consequential to the assessment findings upheld.

Significant Holdings

The Court upheld the reopening of assessment under section 147 based on credible information from the Investigation Wing.

The rejection of books of account under section 145(3) was sustained due to failure to conclusively prove supplier identity, but it was held that such rejection does not justify treating entire purchases as bogus.

The Court emphasized that where sales are accepted and stock records are intact, only the profit element embedded in alleged bogus purchases can be taxed, not the entire purchase value.

The arbitrary application of a gross profit rate of 12.5% by the AO was held to be excessive and unjustified, and the CIT(A)'s reduction to 5% (A.Y. 2018-19) and 6% (A.Ys. 2020-21 and 2021-22) was upheld as reasonable and consistent with historical profit margins and judicial precedents.

In the words of the CIT(A), "It is only logical to conclude that without corresponding purchases being made, the appellant could not have affected the sales. The entire purchase transaction cannot be treated as unexplained expenditure."

Further, the Court relied on authoritative precedents such as:

"Where assessment was reopened on the basis of information received from Sales Tax Department that assessee had made purchases which seemed to be accommodation entries, entire purchase made by assessee could not be added back as income, but only profit element embedded therein was to be treated as income of assessee."

And,

"If such purchases are treated as non-genuine then the corresponding sales should also be considered as non-genuine. Therefore, in such types of transactions only the profit margin embedded in such transaction could be taxed."

The Court concluded that the CIT(A)'s orders were well-reasoned, judicious, and in line with legal principles and past adjudications. The appeals by both the Revenue and the assessee were dismissed, affirming the partial relief granted by the CIT(A) in restricting the additions to the profit element embedded in the alleged bogus purchases.