RAJENDRA NARSINGHMAL SANGHVI,MUMBAI vs. ITO 19 (3)(1), MUMBAI

Brief facts of the case are that assessee in this case is engaged in trading 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.

The income tax officer in this case has made 12.5% addition on account of bogus purchase resulting in disallowance as under :-

Upon assessee’s appeal learned CIT(A) restricted the same to 10%.

Against above order assessee is in appeal before the ITAT. We have heard both the counsel 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. We 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, we find that 12.5% disallowance out of bogus purchase meets the ends of justice. However, learned Counsel of the assessee submitted that gross profit already disclosed should be reduced from this, as otherwise there will be double prejudice to the assessee. We find considerable cogency in the submission. We direct that the disallowance should be 12.5% as reduced by 3 Shri Rajendra Narsinghmal Sanghvi the gross profit already shown by the assessee and reflected in tax audit report as under :- 7.18% 8.88% ITA No.5380/Mum/2018 7.74%

In the result, assessee's appeals are partly allowed. Order has been pronounced in the Court on 6.1.2020.