MR. SADASHIV BABURAO NIRMAL,MUMBAI vs. INCOME TAX OFFICER 19(3)(2), MUMBAI

Brief facts of the case are that pursuant to investigation wings information that the assessee has taken entries for non-genuine purchase from four parties amounting to Rs. 24,75,353/-, assessment was reopened. Sale were not doubted and it was observed by the Assessing Officer that the assessee is engaged in making purchases from grey market, hence he made estimated disallowance of 25% amounting to Rs. 6,18,838/-.

Upon assessee’s appeal, learned CIT(A) upheld the same. Against this order the assessee is in appeal before the ITAT.

Learned Counsel of the assessee submitted that the assessee has already disclosed gross profit rate of 10.78%, hence he submitted that while making disallowance 12.5% adjustment should be made for the gross profit rate already shown in this regard. Upon hearing both the counsel and perusing records, I find that in this case sales has not been doubted. Disallowance has only been done for the failure of the assessee to produce the said bogus suppliers.

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, 100% 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 100% 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.

Upon 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 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.