ITAT Reduces Bogus Purchase Addition to 10% for Civil Contractor, Recognises Lower Industry Margins:

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has granted partial relief to Anubhav Engineering Co. by reducing the addition made on alleged bogus purchases from 12.5% to 10%, holding that profit margins in the civil construction business are significantly lower than those in trading activities.

The assessee, a partnership firm engaged in civil construction, had filed its return for AY 2010-11 declaring an income of Rs 55.72 lakh. The assessment was later reopened after the Investigation Wing received information that the assessee had allegedly obtained accommodation purchase bills from a supplier identified by the Maharashtra Sales Tax Department as a hawala dealer.

During the reassessment proceedings, the Assessing Officer treated purchases from M/s K.K. Enterprises as non-genuine and made an addition of Rs.1.51 lakh. The AO also disallowed Rs.3.19 lakh, being 15% of certain indirect expenses including conveyance, staff welfare, telephone and other office expenses. On appeal, the Commissioner (Appeals) restricted the bogus purchase addition to 12.5% of the disputed purchases, amounting to Rs.18,933, but upheld the disallowance of indirect expenses.

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Before the Tribunal, the assessee argued that civil construction is a low-margin business where profits generally range between 2% and 3%. It was submitted that applying a 12.5% profit rate to alleged non-genuine purchases was excessive and failed to reflect the realities of the construction industry.

The Tribunal observed that in cases involving alleged bogus purchases, only the profit element embedded in such purchases can be brought to tax and not the entire purchase value. It further held that the nature of the assessee's business is an important factor while estimating such profit.

Considering that the assessee was engaged in civil construction, where margins are comparatively low, the Tribunal found the 12.5% rate adopted by the Commissioner (Appeals) to be on the higher side. To arrive at a fair and equitable estimate, it restricted the addition to 10% of the alleged non-genuine purchases and directed the Assessing Officer to recompute the income accordingly.

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