In cases of bogus purchases where sales remain undisputed, it is legally settled that the entire purchase value cannot be disallowed; instead, the addition must be restricted to the profit element embedded in such transactions, typically by applying the assessee's declared Gross Profit rate.

ORDER

PER MANISH AGARWAL, AM:

This instant appeal is filed by the Revenue against the order of the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [CIT(A), in short] dated 09.09.2024 in Appeal No. NFAC/2021-22/10338562 arising out of order passed u/s 143(3) r.w.s 144B of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) dated 12.03.2024 for Assessment Year 2022-23 and the assessee has also filed the Cross Objections.

Brief facts of the case are that assesse is a company engaged in the business of manufacturing of PVC Pipe under the name and style of M/s Bhavya Pipe Industries and return of income in the year appeal was filed on 31.08.2022 declaring total income of Rs.12,61,340/-. The case of the assessee was selected for scrutiny for examination of the creditors and during the course of assessment proceedings, the AO issued notice u/s 136(6) to the 11 parties from whom purchases have been made and balance were outstanding at the year end. However, none of the party appeared except in case of the two parties, since, notices 136(6) could not be issued. The AO observed that out of total nine supplier, “six suppliers” never filed their ITR and two suppliers filed their last ITR in Assessment Year 2018-19. AO further observed that out of 9 suppliers to whom notices u/s 136(6) were issued and served a reference was made to the verification unit for making necessary verification of the claim of purchases. However, it was found that none of the parties was available at the given addresses. The AO further observed that except one party Manita Rani, in case of remaining suppliers, their GST No. were got cancelled by the respective authorities. Accordingly, the AO held that the total purchases of Rs.40,96,63,102/- made from these 11 parties are unverifiable and bogus purchases and addition of 25% of the total purchases from them was made u/s 69C of the Act as unexplained expenditure. For this AO placed reliance on the judgment of the Hon’ble Supreme Court in the case of N.K. Proteins Ltd. vs. Deputy Commissioner of Income Tax [2017] 84, 195 (SC).

Against the said order, the assessee preferred an appeal before the Ld. CIT(A) who vide impugned order dated 09.09.2024 though had confirmed the action of the AO in holding the purchases made from these 11 parties as unverifiable and bogus, however as against the addition of 25% made by the AO, the Ld. CIT(A) confirmed the addition of Rs.56,94,317/- by applying GP rate of 1.39% on such bogus purchases. Besides this disallowance of Rs.3,57,062/- out of carriage inward expenses was reduced to Rs.19,852/-.

Aggrieved the said order, the Revenue is in appeal by taking the following grounds of appeal:

“1. That the Ld. Commissioner of Income Tax (Appeals) has erred in law and facts of the case in restricting the addition made by the AO on account of disallowance of 25% of bogus purchase 1 shown by the assessee to 1.39% of bogus purchase, without appreciating the facts that the AO during the assessment proceedings had established that purchases made by assessee from 11 entities were bogus.

2. That the Ld. Commissioner of Income Tax (Appeals) has erred in law by not following the decision of Hon'ble Apex Court in the case of N. K. Proteins Ltd Vs. Deputy Commissioner of Income Tax [2017] 84, 195(SC) ([2017].

3. That the Ld. Commissioner of Income Tax (Appeals) has erred in law and on facts by restricting the addition made by the AO 3 on account of disallowance of 25% of carriage inward expenses to 1.39% of carriage inward expenses, without appreciating the facts mentioned by the AO in the assessment order.

4. That the order of Ld. CIT (Appeals) being erroneous in law and on facts deserves to be set aside/ cancelled and the order of the AO to be restored.

5. That the appellant craves leave to add, to alter, or amend any grounds of appeal raised above