Bogus purchases: Assessee Failed to prove existence of parties, ITAT estimated net profit at 12.5%

Dy. CIT Vs. Fagioli India (P) Ltd. (ITAT Mumbai)

In this case assessing officers main allegation is that  two parties from whom appellant made purchases are involved in providing accommodation entries as per the list published by Maharashtra Sales Tax Department. On the other hand, assessee has furnished certain evidences in the form of purchase order, purchase bill, delivery challan, consignment note and payment details to prove the purchases. The assessee also furnished complete details of quantitative stock statement and argued that there is no difference in stock details. Though the assessee has produced certain details to prove the purchases from the said parties, in view of the fact that the assessee could not prove the existence of the parties and also could not rebut the finding of Maharashtra State Sales-tax department that the parties were hawala operators, involved in providing accommodation entries, the purchases from the said parties cannot be accepted as genuine. But keeping in view the fact that the assessing officer had not doubted sales declared by the assessee, a reasonable inference can be drawn that the assessee has purchased goods from the grey market and obtained bills from these parties to cover up the purchases. Therefore, under these facts and circumstances, what needs to be taxed is only the profit element embedded in such purchases, but not the entire purchases from these parties.

Various Courts and Tribunals upheld estimation of net profit ranging from 12.5% to 25% depending upon facts and circumstances of each case. The Hon’ble Gujarat High Court in the case of Vijay Proteins Ltd. v. ACIT (1996) 58 ITD 428 (Guj), under similar set of facts, has upheld estimation of net profit of 15% on bogus purchases. No uniform yardsticks could be applied to estimate net profit because various of various nature of risk involved in various types of business. In this case, the assessee is involved in specialized business of providing lifting solutions of heavy equipment from the ground level to the critical point of its final placement which requires specialized skills and knowledge. The assessee also declared a gross profit of 37% on its gross receipts. Keeping in view overall facts and circumstances of the case, we are of the considered view that a reasonable net profit of 12.5% on total bogus purchases would be sufficient to meet the ends of justice. Hence, we direct the assessing officer to estimate net profit of 12.5% on total purchases made from the above two parties.

Full Text of the ITAT Order is as follows:-