ITAT Directs AO To Charge 6.5% Gross Profit Rate On Bogus Purchases

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has directed the AO to charge a 6.5% gross profit rate on bogus purchases.

The bench of Kuldip Singh (Judicial Member) and Gagan Goyal (Accountant Member) has observed that the entire addition has been made by the AO as well as CIT (A) on the basis of guesswork and estimation on the basis of some alleged information received from the Sales Tax Department of Maharashtra and from DGIT (Inv.), Mumbai.

The assessee is an individual running a proprietary concern in the name of M/s. Mayur Steel Industries is in the business of trading in ferrous and non-ferrous metals.

On the basis of information received from DGIT (Inv.), some businessmen have indulged in accepting bogus purchase bills from bogus hawala bill providers. The assessee is one such beneficiary of bogus purchase bills. The assessment was reopened by initiating proceedings under Sections 147 and 148 of the Income Tax Act, 1961. In response to the notice issued under Section 148, the assessee opted to treat the return already filed as a response to the notice under Section 148.

The notices under sections 142(1) and 143(2), along with questionnaires, were issued. As per information received from DGIT (Inv.), Mumbai, the assessee has accepted entries in respect of bogus purchases from seven entities.

On failure of the assessee to produce parties before the AO for verification and after declining the explanation filed by the assessee, the AO proceeded to make the addition of Rs. 46,34,928 to the total income of the assessee, which was 12.5% of Rs. 3,70,79,423/-, i.e., unproved purchases. The assessment under Section 143(3), read with Section 147, was framed.

The assessee brought the matter before the CIT (A) by way of filing an appeal, who confirmed the addition by dismissing the appeal.

The assessee contended that during the earlier years, the department had determined the profit element in the 6.5% bogus purchase and brought on record an order passed by the CIT (A) in the assessee’s own case for FY 2009-10.

The tribunal relied on the decision of the Bombay High Court in the case of Pr. CIT vs. JK Surface Coatings Pvt. Ltd., in which it was held that gross profit should be in the range of 5% to 12.5% as a reasonable estimation of the profit element embedded in the bogus purchases.

Case Title: M/s. Babulal Hajarimalji Jain Versus ITO

Case No.: ITA No.274/M/2023

Date: 28 .04.2023

Counsel For Appellant: Shashank Mehta

Counsel For Respondent: Chetan M. Kacha

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