Bogus Purchases: Disallowance to be restricted to the profit element embedded in such purchases

The facts are that the assessee is a resident individual. Assessment in case of the assessee was re-opened under section 147 of the Act on the allegation that certain purchases claimed to have been made are non-genuine. In the course of assessment proceedings the Assessing Officer called upon the assessee to prove the genuineness of purchases made from M/s. Kriya Impex Pvt. Ltd., M/s. Karnvat Impex Pvt. Ltd. and M/s. Kangan Jewels Pvt. Ltd.

In response to the query raised, though, the assessee furnished some documentary evidences, however, the Assessing Officer remained un-convinced. Ultimately, he added back the entire purchases of Rs.41,83,821/- by invoking the provisions of section 69C of the Act.

Though, the assessee contested the aforesaid addition before learned CIT (Appeals) however, he was un-successful.

Thus against the order, assessee is before Income Tax Appellate Tribunal (ITAT).

ITAT Order:

Undisputedly, the Assessing Officer has treated the purchases from certain parties as non-genuine and added back the entire amount to the income of the assessee. However, it appears on record that before the Assessing Officer the assessee has furnished the details of sales quantitative tally of purchase and sales etc. Therefore, the fact that the assessee had purchased the goods from some source is established. In such a situation, the entire purchase cannot be disallowed but the disallowance can be restricted to the profit element embedded in such purchases. In fact, adopting this approach in some other assessment years the Assessing Officer in assessee’s own case has restricted the disallowance to 5% in respect of purchases made from very same parties. In my view, the same yard-stick can be applied in the impugned assessment year as well. Therefore, I direct the Assessing Officer to restrict the disallowance to 5% of the total purchases of Rs.41,83,821/-. These grounds are partly allowed.

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