LAXI STEEL (INDIA),MUMBAI vs. ITO 19(2)(1), MUMBAI

Brief facts of the case are that assessee in this case is engaged in business of trading of ferrous and non-ferrous metals. Information was received from the sales tax Department that assessee has made bogus purchases. The assessment was accordingly reopened. The Assessing Officer in this case has made 12.5% addition on account of bogus purchases amounting to Rs. 16,84,687/- for A.Y. 2010-11 & Rs. 8,78,092/- for A.Y. 2011-12.

Upon assessee’s appeal Id CIT(A) confirmed the same.

Against above order assessee is in appeal before the ITAT. We have heard learned Departmental Representative and perused the records.

Upon careful consideration we 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. In such situation in our considered opinion on the facts and circumstances of the case 12.5% disallowance out of the bogus purchases meets the end of justice. However, in this regard it is noted that when only the profits earned by the assessee on these bogus purchases transaction is to be taxed the gross profit already shown by the assessee and offered to tax should be reduced from the standard 12.5% being directed to be disallowed on account of bogus purchases.

Accordingly, we modify the order of learned CIT(A) and direct that the disallowance in this case be restricted to 12.5% of the bogus purchase as reduced by the gross profit already declared by the assessee on these transactions. Learned Counsel of the assessee fairly accepted this proposition.

In the result, these assessee's appeals stand partly allowed. Order has been pronounced in the Court on 06.01.2020.