IMPORTANT POINT
The court established that the Assessing Officer must substantiate claims of bogus purchases with specific evidence rather than general information.

JUDGMENT :

G.S. KULKARNI, J.

1. These are two appeals filed by the revenue assailing a common order dated 3 August 2017 passed by the Income Tax Appellate Tribunal (for short “the Tribunal”) whereby the appeals filed by the revenue stand partially allowed and the appeals filed by the assessee, were dismissed.

2. The revenue has raised the following questions of law:

“(A) Whether on the facts & in the circumstances of the case, and in view, the Hon’ble ITAT was justified in restricting the addition u/s. 69C of the I.T. Act to the extent of 12.5%, when the assessee had failed to prove the genuineness of purchase transaction in entirety?

(B) Whether on the facts & in the circumstances of the case and in law, the Hon’ble ITAT was justified in relying upon the decision of the Hon’ble Bombay High Court in the case of CIT vs. Hariram Bhambhani (ITXA No. 313 of 2013), when the issue of addition u/s. 69C as to the Bogus Sales was not involved in the present case?”

3. The assessment years in question are assessment years 2009-2010 and 2010-2011. Briefly, the facts are the assessee is stated to be engaged in the business of trading in resins and chemicals on wholesale basis. On information received from the DGIT (Investigation), Mumbai the Assessing Officer (AO) invoked Section 147 of the Income Tax Act, 1961 (for short “the Act”) to reopen the completed assessment by issuing notice under Section 148 dated 12 March 2013. In response thereto the assessee filed a revised return on 20 March 2013, as also sought the reasons as recorded by the A.O. The A.O. was of the opinion that the assessee had made purchases amounting to Rs.1,34,25,500/- from six parties who were declared by the Sales Tax Department as ingenuine dealers. It is not in dispute that during the assessment proceedings, the assessee filed ledger accounts, conformation of suppliers, purchase bills, delivery bank statements and other documentary evidences to justify the genuineness of the purchases. The AO nonetheless was of the opinion that the disputed purchases did not have nexus with the corresponding sales. Accordingly, he made an addition of the said amount under Section 69C of the Act on the ground of there being unexplained payments qua the disputed purchases.

4. Such order passed by the A.O. was challenged by the assessee in appeal before the Commissioner of Income Tax (Appeals) [for short, “CIT(A)”] wherein the assessee contended that the AO has not rejected the books of accounts by invoking the provisions of Section 145(3), hence, the A.O. was not justified in invoking the provisions of Section 69C. It was also assessee’s case that during the hearing in question as well as the preceding two years, the assessee had declared gross profit for the assessment year 2007-2008 at 4.23% and for the assessment year 2008-2009 at 4.28%. It was also contended that for the subsequent assessment year 2009-2010 a gross profit of 4.74 % was declared in respect of the disputed purchase the disclosed gross profit was 0.27% which was lower by 4.47% than the normal gross profit margin of 4.74% in respect of other accepted genuine transactions. It was also contended that if the disallowance is sustained, there will be an abnormal increase in the gross profit at 17.81% which was almost impossible in trading activity of chemicals and hence it was urged before the CIT(A) that an alternate to estimate the total income at 5% on the purchases needs to be accepted.

5. Considering the rival contentions, the CIT(A) estimated the profit at 12.5% on the purchases made by the assessee and more particularly, considering the decision of the Gujarat High Court in the case of CIT Vs. Smit P. Sheth, 356 ITR 451 as also in the case of Bholanath Polyfab Pvt. Ltd. 355 ITR 290. As the assessee had shown gross profit at 4.74% in the assessment year in question, the CIT(A) reduced the same from 12.5% and confirmed the addition to the extent of 7.76%.

6. Against the aforesaid orders passed by the CIT(A) the revenue had app