The Kolkata bench of the Income Tax Appellate Tribunal (ITAT) made a disallowance of 5% on account of the profit element due to the failure of the assessee to provide evidence/convincing reply about the goods received.
The Assessing Officer after receiving information from the Deputy Director of Income Tax DDIT (Inv.), Kolkata that Sri Sanjiw Kumar Singh is providing accommodation entries and the assessee is the beneficiary of the same. Therefore, the case of the assessee was reopened under Section 147 of the Income Tax Act, 1861 after issuing notice under Section 148 of the Income Tax Act.
The Assessing Officer observed on the basis of information furnished by the assessee that the assessee has made bogus purchases of Rs. 7,27,536/- from seven parties which were controlled by Sri Sanjiw Kumar Singh. Therefore, he added the entire purchases to the income of the assessee when the assessee failed to produce the stock registrar substantiating the fact that goods were in fact received by the assessee and used in the manufacturing of goods. The Commissioner of Income Tax (Appeal) [CIT(A)] confirmed the order of the Assessing Officer on the ground that the assessee has failed to prove the purchases with cogent evidence.
The Single-member bench comprising of Rajesh Kumar (Accountant member) held that in the case of bogus purchases the entire purchases cannot be added to the income and only the profit element embedded in the said purchases can be added. In similar type of cases, the various Coordinate Benches have held that where the assessee has obtained bogus bills of purchases and the purchases were in fact made from the other suppliers i.e grey market thereby making the savings in respect of Value Added Tax (VAT) and other additional expenses and therefore, the assessee earns more than the normal profits.
In the present case, the assessee has duly furnished bills and vouchers, and the material was consumed in the manufacturing process. However, since the assessee has failed to offer any cogent and convincing reply about the goods being received by the assessee with the necessary evidence, the bench made a reasonable disallowance of 5% on account of the profit element. Accordingly, the order of CIT(A) was modified and the Assessing Officer was directed to sustain the addition to the extent of 5% of the bogus purchases. Thus, the appeal filed by the assessee was partly allowed.
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