HABIB AZINULLAH SHAH PROP. OF TIP TOP DRUM SUPPLY CO.,MUMBAI vs. INCOME TAX OFFICER 26(1)(5), MUMBAI

Brief facts of the case are that assessee is engaged in the retail business of drums and barrels. Assessment was reopened upon information from sales tax Department that assessee was making bogus purchases. In the course of assessment the assessee provided the purchase vouchers and the payments were made through banking channel. The sales are not doubted. However taking adverse inference for non-production of suppliers and non-maintenance of stock records the assessing officer made ad hoc disallowance of 12.5% of the bogus purchases. Upon assessee's appeal learned 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. Learned counsel of the assessee

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. In such situation in my considered opinion on the facts and circumstances of the case the 12.5 % disallowance out of the bogus purchases meets the end of justice. However in this regard learned counsel of the assessee has prayed that when only the profits earned by the assessee on these bogus purchase 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 purchase.

Up on careful consideration I find considerable cogency in the submission of the learned counsel of the assessee, as otherwise it will be double jeopardy to the assessee. Accordingly I modify the order of learned CIT- A and direct that the disallowance in this case be restricted to 12.5 % of the bogus purchases as reduced by the gross profit rate already declared by the 3 Mr. Habib Azimullah Shah assessee on these transactions. Ld counsel of the assessee fairly accepted this proposition.

In the result this appeal filed by the assessee stands partly allowed. Order has been pronounced in the Court on 14.6.2019.