SHRI MAFATLAL BACHHRAJ SANGHVI,MUMBAI vs. ITO 19(2)(3), MUMBAI

Brief facts of the case are that the assessee is an individual running a proprietary firm in the name and style of M/s. J.D. Steel Corporation which is trading in the business of 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 of Rs. 5,15,997/-. Upon assessee’s appeal Id CIT(A) confirmed the same.

Against above order assessee is in appeal before the ITAT. I have heard both the counsel and perused the records.

Upon careful consideration, I 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. As regards the quantification of the profit element embedded in making of such bogus/unsubstantiated purchases by the assessee, I find that it is the submission of learned Counsel of the assessee that it will be doubled prejudice if the gross profit already declared is not reduced from the standard 12.5% being disallowed on account of bogus purchases.

Upon careful consideration, I find considerable cogency in the above submission. Accordingly, I 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.

In the result, the appeal is partly allowed. Order has been pronounced in the Court on 14.11.2019.