Income contained in unverified transaction can only be taxed and not the entire transaction -ITAT

Income contained in unverified transaction can only be taxed and not the amount of entire transaction.  ITAT upheld tax on profit embed in alleged bogus purchase

ABCAUS Case Law Citation:
ABCAUS 2031 (2017) (08) ITAT

Income contained in unverified transaction

The issue involved:
The only issue involved in present two appeals filed by the Revenue was the deletion of Addition made by the AO under section 69C of the Income Tax Act, 1961 on account of bogus purchase.

Assessment Year :  2009-10 and 2010-11

Important Case Laws Cited/relied upon by the parties:
CIT vs. Smit P. Sheth
Bholanath Polyfab Pvt. Ltd.
Sankest Steel Traders
CIT vs. Hariram Bhambani

Brief Facts of the Case:

On the basis of the information received from DGIT (Investigation), the Assessing Officer (AO) invoked section 147 of the Act to reopen the completed assessment by issuing notice under section 148.

The AO noted that the assessee had made purchases from six parties which had been declared by the Sales Tax Department as ingenuine dealers involved in issuing accommodation bills. During the assessment proceedings the assessee filed ledger accounts, conformation of suppliers, purchase bills, delivery bank statements, purchase bills and other documentary evidences to justify the genuineness of the purchases.

The AO did not find the disputed purchases having nexus with the corresponding sales. Therefore, he made an addition under section 69C for the entire amount as alleged unexplained payment of the disputed purchases.

The assessee went in appeal before the CIT(A). Before the CIT(A) the assessee contended that the AO has not rejected the books of account by invoking the provisions of Section 145(3) and therefore he was not justified in invoking the provisions of Section 69C. The assessee also stated that during the impugned year as well as preceding two years the assessee had declared gross profit @4.23%, @4.28% and @4.74% respectively.

The assessee contended that in respect of the disputed purchases the disclosed gross profit was @0.27% which was lower by 4.47% than the normal gross profit margin of 4.74% in respect of other accepted genuine transactions. If the said disallowance is sustained there will be an abnormal increase in the G.P. at 17.81% which was almost impossible in trading activity of the assessee.

Accordingly, the assessee requested the CIT(A) as an alternate to estimate the total income @5% on the purchases.

The CIT(A) relying on various case laws estimated the profit at 12.5% on these purchases. Since the assessee had shown the gross profit @ 4.74% in the impugned year, the CIT(A) reduced the same out of the 12.5% and confirmed the addition to the extent or 7.76%.

Observations made by the Tribunal:

It was observed that the AO reopened the case as he noted on the basis of the information received from the Sales Tax Department that the assessee made bogus purchases from six parties.  The CIT(A) had concluded that where the purchases were made from bogus parties itself were not bogus, the only profit margin earned in such purchases would be subject to tax and not the entire purchases. The CIT(A) while holding so relied on the order of the Hon’ble Gujarat High Court .

The ITAT opined that if the transaction is not verifiable the only taxable amount is the taxable income contained therein and not the amount of entire transaction. If the assessee had procured bills from the other party and the purchases has been made not through those parties the assessee would have saved vat.

It was also noted that the Hon’ble Bombay High Court also held that Revenue was not entitled to bring the entire sale consideration to tax, but only the profit attributable on the total unrecorded sale consideration alone can be subjected to tax.

The ITAT opined that when the CIT(A) had rightly estimated the profit embed in the purchase @12.5% he was not correct in reducing the gross profit already returned by the assessee @4.74% out of the 12.%% because the gross profit returned by the assessee related to the sales made by the assessee and does not have link to the purchases for which assessee might have procured bills by making savings in vat, etc.

Partly allowing the ground taken by the Revenue, the Tribunal directed the AO to estimate the income @12.5% in each of the assessment year on the purchases so made.

Income contained in unverified transaction

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