Bogus purchases additions not based on average GP or NP declared deleted by ITAT

Bogus purchases additions not based on average GP or NP declared by the assessee in preceding years or some reasonable or proper criteria deleted by ITAT

ABCAUS Case Law Citation:
ABCAUS 3071 (2019) (07) ITAT

This appeal by the assessee was directed against the order of the CIT (A) in sustaining the lump sum addition made by the Assessing Officer (AO) by disallowing 25 percent of total alleged bogus purchases.

The assessee was a partnership firm. During the year under consideration, the AO noted that the assessee had shown the purchases from five parties which were subjected to search and seizure action by the Investigation Wing and found to be involved in providing bogus entry.

Accordingly, the AO considered the purchases made by the assessee from those entities as bogus/unverifiable purchases and consequently made addition of 25% of such purchases after rejection of books of account.

The CIT (A) restricted the addition made by the Assessing Officer (AO).

Before the Tribunal, the assessee submitted that average GP of past years is a proper and reasonable basis for estimation of income. Therefore, by considering the GP declared by the assessee in the year under consideration, no addition was required even after rejection of books of account.

However the Revenue supported the addition for bogus purchases when the GP as well as the NP declared by the assessee were declined during the year under consideration.

The Tribunal noted that in an earlier decision when the GP declared by the assessee for those years were found to be in line or more than the average of the GP declared in the preceding years, the Tribunal deleted the addition made by the AO and confirmed by the CIT (A).

The Tribunal noted that in the instant case, authorities below had considered the fact that there was decline in GP as well as NP declared by the assessee for the year under consideration as compared with the GP and NP rate in the preceding years as under :-

 

Gross Profit Rate

Net Profit Rate

Relevant Year

18.39%

1.30%

Preceding year

18.89%

10.70%

Preceding year

18.55%

11.09%

In view of its earlier decision, the Tribunal held that the addition made for bogus purchases was not sustainable as it was not based on some reasonable or proper criteria being the average GP or NP declared by the assessee in preceding years.

Accordingly, the Tribunal set aside the orders of the authorities below and remitted the issue to the record of the AO to estimate the income of the assessee by applying the average of past GP declared in the preceding years by the assessee and thereafter the AO may examine the allowability of expenditure independently to find out the cause of sharp decline in NP.

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