12.5% Addition justified in absence of direct one to one relationship between purchases and sales

RELEVANT EXTRACT OF THE JUDGMENT

2.1 The assessee, Proprietor of M/s. Citizen Sales Corporation, engaged in the business as wholesale dealer of iron and steel, filed her return of income for A.Y. 2009-10 on 25.09.2009 declaring total income of Rs. 1,81,900/-. The return was processed under section 143 (1) of the Income Tax Act, 1961 (in short ‘the Act’). On the basis of the information received, that the assessee was taking bogus bills from certain parties on payment of commission, the Assessing Officer (AO) initiated proceedings under section 147 of the Act for reopening the assessment for A.Y. 2009-10 and notice under section 148 of the Act dated 12.03.2013 was issued and served o the assessee. The assessment was completed under section 143 (3) r.w.s. 147 of the Act vide order dated 18.03.2014, wherein the assessee’s income was determined at Rs. 42,75,360/-, in view of an addition of 41,23,015/- under section 69C of the Act as unexplained expenditure on account of bogus purchases for which accommodation/bogus bills were taken by the assessee from nine parties listed in page 2 of the order of assessment.

2.2 Aggrieved by the order of assessment for A.Y. 2009-10 dated 18.03.2016_‘ the assessee preferred an appeal before the CIT (A)-40_‘ Mumbai. The learned CIT (A) disposed off the assessee’s appeal by way of the impugned order dated 10.02.2016 allowing the assessee partial relief; whereby only the profit on bogus purchases estimated @12.5% of 41_‘23_‘015/- i.e. 5_‘15_‘377/- was held to be taxable in the assessee’s hands_‘ as against the entire value of bogus purchases of 4 1_‘23_‘015/- brought to tax under section 69C of the Act by the AO.

2. Addition by estimating the profit at the rate of 12.5% on alleged bogus purchases (i.e. 12.5% on Rs.41,23,015/-) – Rs.5,15,377/-ases of 41,23,O15/-

6.1 In these grounds the assessee assai is the impugned order of the learned CIT (A) in making an addition of 5_‘ 15_‘377/- on account of estimated profit @12.5% on bogus purchase of 41_‘23_‘015/-. It is contended that the learned CIT (A) failed to appreciate that the material purchased during the year are fully recorded in the assessee’s books of account_‘ which were not rejected by the AO and that the same goods were subsequently sold and the profit earned thereon is offered to tax. Without prejudice to the above_‘ the assessee contends that the addition hoc estimation of her profits at 5_‘ 15_‘377/- is unjustified and to be deleted since the basis for the said estimation was certain information received from the Sales Tax Department_‘ without providing the assessee opportunity to cross-examine the persons on whose statements an adverse inference was drawn against the assessee.

6.2 The learned D.R. for Revenue placed strong reliance on the decision of the learned CIT (A) in determining the profits from bogus purchases at 5_‘ 13_‘777/- @12.5% thereof. It is submitted that the decision of the learned CIT (A) was a detailed and well reasoned decision_‘ rendered after consideration of the facts of the case on hand and the relevant judicial pronouncements in this regard and therefore should be upheld.

6.3.1 We have heard the learned D.R. for Revenue and perused and carefully considered the material on record. We find that the learned CIT (A) has addressed this issue in detail and after considering the submissions of the assessee_‘ the AO’s findings and various judicial pronouncements on this issue_‘ has held that since the direct one to one relationships between purchases and sales have not been established_‘ bringing the profit element embedded in the impugned purchase estimated @12.5% thereof_‘ i.e. 5_‘ 15_‘377/- to tax in the hands of the assessee would meet the ends of justice.

7.31. As narrated earlier, the Ld. A.O. in this case has held that the parties from whom the purchases were made by the appellant were found to be bogus and that is the reason for which it was not produced during the assessment proceedings. Not having doubted the consumption/sales, the motive behind obtaining bogus bills thus, appears to be inflation of purchase price so as to suppress true profits. As mentioned above, the AO had never disputed or examined the sales. Once sales are accepted, corresponding purchases have to be considered and cannot be disregarded in totality. Looking to the market trend, the appellant may have made purchases from other parties which were not recorded in the books, and took only bills from these parties as accommodation, to explain the purchases. The purchases themselves are not bogus but the purchase parties shown in books are. Therefore, the entire purchase from these parties cannot be added as bogus and what needs to be taxed is the profit element embedded in such transactions. Estimations ranging from 12.5% to 25% have been upheld by the Hon’ble Gujarat High Court, depending upon the nature of the business. As he” n the case of Simit P. Sheth (supra), no uniform yardstick could be applied to estimate the rate of profit and it varies with the nature of business. Taking all facts into consideration as also the findings of the Hon’ble Courts on this issue and the fact that direct one to one relationship between purchases and sales have not been established, I am of the view that estimation of 12.5% as profit embedded in impugned purchases shown from these tainted parties and adding the same to the total income returned, would meet the ends of justice. Therefore, I direct the AO to estimate profit of 12.5% in the alleged bogus purchases, which works out to Rs.5,15,377/- (12.5% of Rs. 41,23,015/-) and restrict the addition to Rs. 5,15,377/-. The appellant get the relief for the balance Rs.36,07,638/-. The Grounds of Appeal, is partly allowed to this extent.”

6.3.2 On an appreciation of the facts on record and the findings rendered by the learned CIT (A) in the impugned order (supra)_‘ we find that apart from raising these grounds (supra)_‘ the assessee has failed to place on record any material evidence to controvert the findings of the learned CIT (A). In this view of the matter_‘ we uphold the order of the learned CIT (A) on this issue of bringing to tax in the assessee’s hands the profits embedded in the bogus purchase @ 12% of the purchase cost i.e. Rs. 515377/-_‘ since the direct one to one relationship/nexus between the said purchases and sales have not been established by the assessee. Consequently ground No. II (iii to vii) is dismissed.