ITAT Mumbai: 6.5% Gross Profit Charged on Fake Purchases

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

The two-judge panel, comprised of Kuldip Singh (Judicial Member) and Gagan Goyal (Accountant Member), has noted that the AO and CIT (A) made the entire inclusion based on guesswork and estimation using some purported details received from the Maharashtra Sales Tax Department and the DGIT (Inv.), Mumbai.

An assessee conducts a proprietary business under the name M/s. Mayur Steel Industries, it trades in ferrous and non-ferrous metal.

According to information from DGIT (Inv. ), some business people have accepted bogus purchase invoices from bogus hawala bill suppliers. The assessee benefits from such bogus purchase bills. By taking legal action under Sections 147 and 148 of the Income Tax Act of 1961, the assessment was reopened. The assessee decided to consider the returns already filed as a response to the notice given under Section 148.

There were notices issued under sections 142(1) and 143(2), as well as questionnaires. The assessee accepted entries for bogus purchases from seven entities, according to information from DGIT (Inv. ), Mumbai.

The AO made the addition of Rs. 46,34,928—or 12.5% of Rs. 3,70,79,423/-—to the assessee’s total income after the assessee failed to present the parties before the AO for verification and after the AO disapproved the explanation filed by the assessee. This amount represented unproven purchases. The assessment was made under Section 143(3) read with Section 147.

By filing an appeal, the assessee brought the matter before the CIT (A), who confirmed the addition by the disapproval of the appeal.

The assessee argued that the department had previously determined the profit element in the 6.5% bogus purchase and provided documentation of an order made by the CIT (A) in the assessee’s own case for FY 2009–2010.

The tribunal relies on the ruling of the Bombay High Court in the matter of Pr. CIT vs. JK Surface Coatings Pvt. Ltd., in which it was decided that a realistic estimate of the profit element lodged in the bogus purchases would place gross profit in the range of 5% to 12.5%.