The Ahmedabad bench of the Income Tax Appellate Tribunal (ITAT) held that the profit from bogus purchases can be added to taxable income.
The assessee is a partnership firm engaged in the business of civil construction, filed its Return of Income declaring a total income of Rs.82,28,850/-. The return was processed under Section 143(1) of the Income Tax Act, 1961 and then taken for limited scrutiny.
The assessee was asked to furnish name, PAN, current communication address, and address as per invoices of some of the suppliers from which purchases were allegedly made for the year under consideration.
The assessee was also asked to provide a party-wise ledger of the suppliers in which a large amount remained due to be paid at the end of the year.
The Assessing Officer held that the claim of expenditure of Rs.4,17,13,702/- on account of these creditors was bogus expenditure and added the same as the assessee’s total income and demanded tax thereon.
The Departmental Representative submitted that when the Assessing Officer had made a spot enquiry and found the suppliers of materials were not existing.
The Commissioner of Income Tax (Appeal) [CIT(A)] is not correct in restricting the quantum of disallowance of bogus purchases to 10% and argued to restore the order passed by the Assessing Officer.
The counsel for the assessee submitted during this assessment year that the assessee was undergoing the construction of the project ‘Parmeshwar-5’ for which materials were purchased from six parties.
The assessee made payments to the six suppliers through account payee cheques/RTGS during the Financial Years 2015-16 & 2016-17, the above payments receipt with bank statements were very much filed before the Assessing Officer.
The Assessing Officer failed to verify that the building materials were supplied at the site namely “Parmeshwar-5” and without the consumption of the said material, it is not possible to construct the building of the residential building.
Thus, the assessee has discharged its onus cast upon it by giving the details about the six parties their address and payments made to them through banking channels.
In the case of Bholanath Poly Fab Pvt. Ltd 355 ITR 290 (Guj.) where the Court was dealing with the issue as regards the finding of ITAT that purchases have been made from bogus parties since notice issued by the Assessing Officer to these parties were allegedly received returned/unserved’ and the assessee was unable to produce any confirmation from these parties.
The Tribunal had held that though the purchases were made from bogus parties, nevertheless, the purchases themselves were not bogus as the entire quantity of opening stock, purchases, and sales were tallying, and hence, only the profit margin embedded in such amount would be subjected to tax.
The two-member bench comprising of Waseem Ahmed (Accountant member) and T.R. Senthil Kumar (Judicial member) confirmed the addition to the extent of 10% on account of the alleged bogus purchase.
Thus, the appeal filed by the Revenue and Cross Objection filed by the Assessee was dismissed.
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