SHRI MAGANLAL M. PATEL,MUMBAI vs. THE ITO 22(1)(3), NAVI MUMBAI

The assessee is aggrieved that the Learned CIT(A) has erred in sustaining 12.5% percent disallowance on account of bogus purchases, vide order dated 14.06.208.

The brief facts of the case are that assessee in this case is engaged in the business of trading in timber. 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% percent addition on account of Shri Maganlal M. Patel bogus purchases resulting in disallowance of `3,39,222/-. Upon assessee’s appeal the learned CIT(A) confirmed the same. Against this order assessee is in appeal before the ITAT.

Up on 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 Hon’ble Jurisdictional High Court decision in the case of Nikunj Eximp Enterprises (in Writ Petition No. 2860, order dated 18.06.2014). In this case the Hon’ble 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 it is the submission of the learned counsel of the assessee that it will be double prejudice if the gross profit already declared, which is 6.16%, is not reduced from the standard 12.5% being disallowed on account of bogus purchases.

Upon careful consideration we find considerable cogency in the above submissions. Accordingly we direct that disallowance in this case be restricted to 12.5% of the bogus purchase as reduced by the gross profit already declared by the assessee. Learned counsel of the assessee fairly agreed to the above.