The Bench of the Income Tax Appellate Tribunal ( ITAT ) comprising observed that addition under section 68 of the Income Tax Act, 1961 should be restricted to extent of gross profit at same rate of genuine purchases.
On scrutiny of the assessee, Murtuza Abdul Gaffar Khan’s return, the Assessing Officer ( AO ) found that the assessee has purchased material of ₹1,15,86,557/- from two parties, which are stated to be hawala party by Maharashtra sales tax department and DGIT, Investigation, that these parties are bogus. The AO issued notice under section 133(6) to the hawala parties, which could not be served by the Postal Authorities, and returned with the remark ‘not known’. The AO was asked to produce the parties along with their books of accounts. The assessee expressed his inability.
The assessee submitted that all these purchases have gone into sale and the assessee has shown a gross profit on these purchases. Further, the transactions are through banking channels supported by proper bills. The AO held that the bogus purchases are required to be added to the total income of the assessee. The AO categorically recorded that as the purchases have been made by the assessee, which has gone into sale, 12.5% of the cost of disputed purchases should be added. However, as the assessee did not show from whom the goods were purchased in reality, he made a 100% addition of such purchases. Hence, the AO made an addition of non-genuine purchases of ₹1,15,86,557/- at the rate of 100%.
The CIT(A) confirmed the 100% addition made by the AO under section 68 of the Act. The Bench noted that the assessee had submitted the stock register before the Bench and also produced the details such as invoices, payment through banking channels, confirmation of accounts, and other details for the purchase of goods before the lower authorities.
A two member bench of Rahul Chaudhary (Judicial Member) and Prashant Maharishi (Accountant Member) observed that the assessee had given the quantitative sales corresponding to the quantitative purchase, which is from alleged bogus suppliers. The Bench found that the resultant gross profit from alleged bogus purchases and sales is 5.096%.
The Bench further observed that the gross profit ratio without alleged bogus purchases and corresponding sales is 5.407%, which will result in an addition of 0.3% of alleged bogus purchases of ₹1,15,86,557/-which would be minuscule. While allowing the appeal, the ITAT held that minuscule amount of addition to be retained.
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