PRIYAL TRADING COMPANY,MUMBAI vs. INCOME TAX OFFICER 17(2)(5), MUMBAI

The assessing officer in this case has made 12.5% addition on account of bogus purchase amounting to Rs. 4,48,726/-.

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. In this regard I note the decision of honourable Gujarat High Court in the case of Pr. CIT vs T R Kapadia in Tax Appeal No. 691 of 2017. In this case the honourable High Court has confirmed the deletion of disallowance on account of alleged bogus purchase as necessary documentary evidence for the purchases were on record. The special leave petition against this order has been dismissed by the honourable Supreme Court in its decision dated 4/ 5/ 2018 SLP CIVIL Diary no 12670/2018.

Upon careful consideration I find that assessee has provided the documentary evidence for the purchase. Adverse inferences have 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 allowances for the purchase 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. Learned counsel of the assessee submitted that assessee has already shown a gross profit of 3%.

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 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.