Hardev Recycling Private Limited Vs Assessment Unit (ITAT Delhi)
In a case involving disputed business expenses, the Income Tax Appellate Tribunal (ITAT), Delhi Bench, has partially allowed an appeal by Hardev Recycling Private Limited, directing the tax authorities to apply a lower net profit rate than initially assessed. The company had challenged the estimation of its income after the genuineness of certain purchases was questioned by the Income Tax Department.
Hardev Recycling Private Limited, engaged in the manufacturing and trading of Pet Flakes, had its case selected for scrutiny after filing its return for Assessment Year 2021-22. The primary concern for the Assessing Officer (AO) was substantial purchases made by the company from suppliers who were identified as non-filers, had filed non-business income tax returns, or reported significantly lower turnovers.
The AO’s attempts to verify these purchases through notices issued under section 133(6) of the Income Tax Act, 1961, proved problematic. Some notices were returned unserved, while several parties reportedly denied having any transactions with Hardev Recycling Private Limited. Based on these findings and the company’s failure to provide satisfactory details to substantiate the purchases, the AO rejected the company’s books of account.
Subsequently, the AO estimated the company’s income by applying a net profit rate of 20% on the declared turnover of Rs. 8,76,17,876, arriving at an estimated income of Rs. 1,75,23,575. This resulted in a substantial increase compared to the company’s declared income of Rs. 15,66,450.
Hardev Recycling Private Limited appealed the AO’s order before the Commissioner of Income Tax (Appeals) [CIT(A)], National Faceless Appeal Centre (NFAC). However, the CIT(A) dismissed the appeal, upholding the AO’s findings and the estimation of income, citing the appellant’s failure to provide details to counter the AO’s observations.
Aggrieved by the CIT(A)’s order, the company approached the ITAT Delhi. Hardev Recycling Private Limited argued that the estimation of income was arbitrary and lacked justification. The company contended that the AO concluded the purchases were fake without sufficient credible evidence, relying primarily on uncorroborated responses from suppliers and general market trends rather than specific transaction details.
The appellant also highlighted that the AO did not provide adequate opportunity to clarify the nature of purchases or respond to the allegations before making the additions. The company claimed to have provided relevant documentation, including purchase invoices, payment receipts, GSTR 2A copies, and transport documentation (Bilty), which were allegedly not adequately considered by the AO. The assessee’s grounds of appeal also included a reference to seeking consideration of judicial precedents where additions based on presumed fake purchases were overturned due to lack of evidence, arguing that suspicion should not replace factual evidence.
Before the ITAT, the company reiterated its submissions, while the Senior Departmental Representative supported the lower authorities’ orders, arguing that the 20% net profit rate was reasonable given the finding of bogus purchases and non-existent/unknown parties.
The ITAT, after reviewing the assessment and appellate orders, acknowledged that the assessee had not definitively proven the genuineness of all disputed purchases. The tribunal noted the AO’s findings based on enquiries where some suppliers denied transactions or were found to be non-existent. The ITAT agreed that the assessee failed to discharge the onus to prove the purchases.
However, the ITAT also observed that the AO had accepted the sales declared by the assessee, which were presumably derived from the goods whose purchases were doubted. In light of these circumstances, the tribunal found the 20% net profit rate applied by the AO to be excessive.
The ITAT concluded that it would be “fair and reasonable” to apply a lower net profit rate. Accordingly, the tribunal directed the AO to apply a net profit rate of 12.5% on the total sales turnover of Rs. 8,76,17,876. This decision provides partial relief to Hardev Recycling Private Limited, reducing the tax liability compared to the original assessment. The appeal was thus partly allowed. The order was pronounced on February 25, 2025.
FULL TEXT OF THE ORDER OF ITAT DELHI
