Bogus purchases: Manner of computing profits in the case of bogus purchases by an assessee who is not a dealer in the goods but has consumed the goods in his business explained
The assessee is in hotel business and running hotel in the name of Hotel Marine Plaza. The AO found that assessee has made purchases from black listed parties and obtained accommodation bill. Such parties were entry provider as identified by the Sales Tax Department of Maharashtra. To find out genuineness of the purchases so made/expenses so incurred and paid to these parties, the AO asked for documentary evidence. The AO further observed that since the assessee has failed to furnish the relevant information and also failed to disclose true and fair affairs of its business, he called the director of the assessee company by issuing notice under section 131, while recording statement, the director of the company categorically accepted and offered to tax the gross profit on the quantum of above purchases/expenses. Thereafter, AO rejected books of account under section 145(3) of the IT Act and after taking average GP rate of 15%, made an addition of Rs.54,03,687/- computed on such bogus purchases/expenses.
As per our considered view, since the purchases so made were not sold by the assessee, the AO was not justified in estimating 15% profit on such bogus purchases. However, such bogus purchases/expenses were going to reduce the assessee’s profits by the equal amount of such expenses and not only by 15% as taken by the AO. It was not a case where purchases so made were actually sold by the assessee. Where assessee is found to have sold the goods out of the bogus purchases, under those circumstances it is reasonable to estimate profit out of such sales so as to make appropriate addition. However, in the instant case the assessee was engaged in the business of hotel wherein the expenditure alleged to be incurred on plumbing, electrical items, furniture, printing and stationary etc appears to have reduced directly the profit earned by assessee. Even in respect of alleged bogus payment made for purchase of furniture items no inquiry was made by the AO to find out whether furniture was actually acquired and installed. Genuineness of the various expenditure so incurred or purchases so made whose suppliers were not traceable, were also not inquired by the AO. Thus, we find that AO has not made any inquiry with regard to the expenses claimed in respect of accommodation bill obtained by assessee which reduced profit of assessee by 100% instead of 15% considered by AO. In the absence of making any inquiry as well as applying wrong proposition of treating the assessee as dealer and applying the GP rate on such accommodation bill which is actually in the nature of expenses, the CIT (A)was justified in setting aside the order and restoring the matter back to the file of the AO for deciding afresh.