SEHRULLAH KARAMDAR KHAN,MUMBAI vs. ITO 26(3)(2), MUMBAI

This is an appeal by the assessee, wherein the assessee is aggrieved that the learned CIT(A)-38, Mumbai, dated 30/06/2017 has erred in sustaining 12.5 percent disallowance on account of bogus purchases.

The Assessing Officer in this case has made 12.5% addition on account of bogus purchases amounting to Rs.32,31,272/-.

Upon assessee’s appeal, ld. CIT(A) confirmed the same.

Against above 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 inferences have 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 honourable jurisdictional High Court decision in the case of Nikunj Eximp enterprises (in writ petition no 2860 ,order dated 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.

We also take note of 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 purchases were on record. The Hon’ble Apex Court has dismissed SLP against this by order dated 04/05/2018.

Upon careful consideration, we found that 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, we note 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.

Accordingly, we 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.

In the result, this appeal filed by the assessee stands partly allowed.