ITAT Cuts Estimated 20% Profit Rate to 12.5% in Bogus Purchase Case Calling It Excessive, remanded for Recomputation [Read Order]

In a recent decision, the Income Tax Appellate Tribunal (ITAT) Delhi Bench, held that the estimated profit rate of 20% applied on account of unsubstantiated purchases was excessive. The tribunal reduced the rate to 12.5%, granting partial relief to the assessee, and remanded the matter for recomputation.

Complete Guide on Bogus Purchases Under the Income Tax Act - Click here

The assessee, Hardev Recycling Private Limited, was engaged in the business of manufacturing and trading PET flakes (recycled plastic chips). It filed its return of income for the Assessment Year (AY) 2021-22, declaring a total income of 15 lakh.

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The case was later picked up for scrutiny, as the assessee had reportedly made substantial purchases from suppliers who were either non-filers or had reflected very low turnovers.

During the assessment processes, the Assessing Officer (AO) issued notices to various suppliers under Section 133(6) of the Income Tax Act of 1961. These notices either went unanswered or led to denials from suppliers regarding any transactions with the assessee. The AO, thus, rejected the books of accounts and estimated income, imposing a 20% net profit (NP) rate on the entire turnover of ₹8.76 crore, resulting in an assessed income of ₹1.75 crore.

Aggrieved by the order of the Assessing Officer (AO) and dissatisfied with the Commissioner of Income Tax (Appeals) (CIT(A)) order, the assessee filed an appeal before the ITAT.

Amit Sikri and Megha David, counsels representing the assessee, argued that the AO’s addition was excessive and arbitrary.

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The counsel stated that the assessee provided all required documents, including purchase invoices, GSTR-2A records, payment proofs, and transport documents. They contended that the suppliers’ denials didn’t prove bogus purchases and that the principles of natural justice were also violated.

Meanwhile, Rajesh Kumar Dhanesta, counsel representing the Revenue, countered that several suppliers denied knowledge of the assessee or admitted to being salaried employees.

The counsel added that some notices were unserved, and others pointed to non-existent entities. He argued that the AO’s estimation using a 20% NP rate was reasonable under these circumstances.

After hearing both sides, the bench, led by Satbeer Singh Godara (Judicial Member) and Manish Agarwal (Accountant Member), examined the submissions made by the parties.

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The bench, after reviewing the facts, acknowledged that the assessee failed to prove the purchases, but the AO, after rejecting the books of accounts, accepted the sales declared by the assessee, which were related to the disputed purchases.

In light of these facts, the tribunal found that applying a 20% NP rate to be excessive and directed that a more reasonable NP rate of 12.5% be applied to the total sales of ₹8.7 crore.

As a result, the appeal was partly allowed by the tribunal, and the matter was remanded to the AO for recomputation based on the revised NP rate.

To Read the full text of the Order CLICK HERE

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