Rakesh Metal & Tubes Vs ITO (ITAT Mumbai)
The assessee, engaged in dealing in ferrous and non-ferrous metal, appealed against the CIT(A)’s order sustaining a 12.5% disallowance on alleged bogus purchases for A.Ys. 2010-11 and 2011-12. The assessments were reopened after information was received from the Sales Tax Department alleging that the assessee had made bogus purchases. The assessee produced purchase vouchers and stated that payments were made through banking channels, but the suppliers were not produced before the Assessing Officer. The sales corresponding to the purchases were not doubted. The Assessing Officer made additions of Rs. 7,22,275 for A.Y. 2010-11 and Rs. 1,20,675 for A.Y. 2011-12, representing 12.5% of the alleged bogus purchases. The CIT(A) confirmed the additions, following which the assessee appealed to the ITAT. Despite notice, none appeared on behalf of the assessee before the Tribunal. The ITAT observed that documentary evidence for the purchases had been provided and that the adverse inference arose from the assessee’s inability to produce the suppliers. It noted that the sales were not doubted and referred to the decision in Nikunj Eximp Enterprises, where the jurisdictional High Court had upheld 100% allowance for purchases treated as bogus when sales were not doubted, although the facts there involved supplies to a government agency. In the present case, the Tribunal noted that the assessee had made purchases from the grey market, resulting in savings from non-payment of tax and others at the expense of the exchequer. On quantification, it relied on the Bombay High Court judgment in principle Commissioner of income tax versus M Haji Adam & Co, which held that the addition relating to bogus purchases should be limited to bringing the gross profit rate on such purchases to the same rate as that of other genuine purchases. The ITAT accordingly set aside the matter to the Assessing Officer with directions to restrict the addition by applying the gross profit rate applicable to genuine purchases and to provide the assessee adequate opportunity of being heard. The appeals were partly allowed.
Cases Discussed
- Principle Commissioner of income tax versus M Haji Adam & Co (Bombay High Court), ITA number 1004 of 2016 dated 11/2/2019
- Nikunj Eximp Enterprises (jurisdictional High Court), writ petition no 2860,order dt.18.6.2014
FULL TEXT OF THE ORDER OF ITAT MUMBAI
These are appeals by the assessee wherein the assessee is aggrieved that the learned CIT-A has erred in sustaining 12.5% disallowance on account of bogus purchases pertaining to A.Ys. 2010-11 & 2011-12.
2. Brief facts of the case are that assessee in this case is engaged in the business of dealing in ferrous and non-ferrous metal. The Assessment in this case was reopened upon receipt of information from the sales tax Department that assessee has made bogus purchases. The assessee submitted the purchase vouchers and the payments were made through banking channel. However the suppliers were not produced before the assessing officer. Sales in this case were not doubted.
3. The income tax officer in this case has made 12.5% addition on account of bogus purchase resulting in disallowance of Rs. 7,22,275/- for A.Y. 2010-11 and Rs. 1,20,675/- for A.Y. 2011-12.
4. Upon assessees appeal Id CIT(A) confirmed the same.
5. Against above order assessee is in appeal before the ITAT. I have heard learned Departmental Representative and perused the records. None appeared on behalf of the assessee despite notice.
6. Up on careful consideration I find that assessee has provided the documentary evidence for the purchase. Adverse inference has been drawn due to the inability of the assessee to produce the suppliers. I find that in this case the sales have not been doubted. It is settled law that when sales are not doubted, hundred percent disallowance for bogus purchase cannot be done. The rationale being no sales is possible without actual purchases. This proposition is supported from honourable jurisdictional High Court decision in the case of Nikunj Eximp Enterprises (in writ petition no 2860,order dt.18.6.2014). In this case the honourable High Court has upheld hundred percent allowance for the purchases said to be bogus when sales are not doubted. However in that case all the supplies were to government agency. In the present case the facts of the case indicate that assessee has made purchase from the grey market. Making purchases through the grey market gives the assessee savings on account of non-payment of tax and others at the expense of the exchequer. As regards the quantification of the profit element embedded in making of such bogus/unsubstantiated purchases by the assessee, I find that as held by honourable High Court of Bombay in its recent judgement in the case of principle Commissioner of income tax versus M Haji Adam & Co (ITA number 1004 of 2016 dated 11/2/2019 in paragraph 8 there off) ,the addition in respect of bogus purchases is to be limited to the extent of bringing the gross profit rate on such purchases at the same rate as of other genuine purchases.
7. I respectfully following the aforesaid judgement of the honourable High Court set aside the matter to the file of the assessing officer with the direction to restrict the addition as regards the bogus purchases by bringing the gross profit rate on such bogus purchases at the same rate as that of the other genuine purchases. Needless to add the assessee should be granted adequate opportunity of being heard
8. In the result assessee’s appeals are partly allowed.
Order has been pronounced in the Court on 6.9.2019.
