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Facts
The assessee, engaged in fabric and cloth trading, faced additions to income based on allegedly bogus purchases identified by the AO. These additions were partially sustained by the CIT(A), leading to the present appeal.
Held
The Tribunal held that in cases of bogus purchases, only the profit element embedded in such transactions is taxable. The additions were restricted to the gross profit at 4% of the alleged bogus purchases, and the matter was remanded for recalculation of GP.
Key Issues
Whether the entire amount of alleged bogus purchases is taxable, or only the profit element embedded therein, and whether principles of natural justice were violated by not providing the statement of a key witness.
Sections Cited
250, 143(3), 144B, 133(6), 69C, 115BBE
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Income Tax Appellate Tribunal, MUMBAI BENCH “E”, MUMBAI
O R D E R PER ANIKESH BANERJEE:
Instant appeal of the assessee was filed against the order of the National Faceless Appeal Centre (NFAC), Delhi *for brevity, ‘Ld.CIT(A)’) passed under section 250 of the Income-tax Act, 1961 (for brevity, ‘the Act’), date of order 29/04/2024 for A.Y. 2021-22. The impugned order was emanated from the order of the Assessment Unit, Income-tax Department, passed under section 143(3)read with section 144B of the Act, date of order 28/12/2022.
/Mum/2024 Hakimuddin Saleh Porbandarwala 2. The assessee has taken the following grounds of appeal: -
1. The Ld. Commissioner of Income Tax (Appeals) on the facts and circumstances of the case and law, has erred by disallowing 100% of the purchase of Rs.57,39,833/- from M/s. Jay Enterprises under section 69C of the Income Tax Act, 1961.
2. That the Ld. Commissioner of Income Tax (Appeals) has failed to appreciate the fact that the statement of Shri. Rajkumar, on whose statement reliance is placed for arriving at an adverse inference against the Assessee, has not been furnished to the Assessee during the Assessment Proceedings and hence there being gross violation of principles of natural justice.
The Ld. Commissioner of Income Tax (Appeals) on the facts and circumstances of the case and law, has erred by disallowing 25% of the purchases of Rs.20,73,105/-from M/s. The Meridian under section 69C of the Income Tax Act, 1961.
4. That the Appellant craves, leave to add, amend, alter, and delete any of the ground of appeal before the hearing.”
3. The assessee is engaged in the business of trading in fabric and cloth. During the impugned assessment year, the assessee continued its business operations. Based on information received from the Sales Tax Department of Maharashtra, the Ld. AO conducted an assessment, verified the purchases, and issued notices under Section 133(6) of the Act. Upon verification, the Ld. AO observed that purchases amounting to Rs.1,80,13,813/- were allegedly bogus. Additionally, purchases amounting to Rs.57,39,833/- were attributed to transactions with Shri Rajkumar, who denied any dealings with the assessee. Consequently, the Ld. AO added back 25% of the alleged bogus purchase amount of Rs.1,80,13,813/- (calculated as Rs.4,50,34,530/-) and the alleged purchase amount of Rs.57,39,833/- under Section 69C read with Section 115BBE of the Act.
Aggrieved by the assessment order, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A), after considering the submissions of the assessee, fully confirmed the addition related to purchases amounting to Rs.57,39,833/- attributed to Shri Rajkumar. Regarding the remaining addition, the assessee was able to submit confirmations amounting to Rs.39,85,177/- out of Rs.45,03,453/-. As a result, the Ld. CIT(A) restricted the addition to Rs.20,73,103/- and further reduced the addition to 25% of the confirmed amount, which totaled Rs.5,18,276/-. The balance addition of Rs.39,85,177/- was deleted. Accordingly, the appeal was partly allowed by the Ld. CIT(A). Being aggrieved by the appellate order, the assessee has preferred the present appeal before us.
During the appeal proceedings, the Ld.AR filed a written submission which is kept in the record. The Ld.AR submitted that the assessee has been maintaining books of account for the relevant purchases and the payments are duly booked in the books of account and in assessment proceedings and in appeal proceedings, the assessee submitted all the relevant documents including the confirmation from the alleged parties. Further, the total purchases were duly disallowed by the AO by considering the issuance of notice under section 133(6) which is amount to Rs.1,80,13,813/-. In the appeal, the assessee submitted the confirmation of the parties and the Ld.CIT(A) has restricted the addition amount to Rs.5,18,276/- in relation to the balance addition amount to Rs.20,73,105/-. For unverified payment related to purchase from M/s Rajkumar, who denied the sale amount to Rs.57,39,833/-. On the contrary, we can say, the purchases amount to Rs.57,39,833/- was denied by the party. The Ld.AR further argued that the entire transaction related to /Mum/2024 Hakimuddin Saleh Porbandarwala purchase bill, transport documents, bank account, all are submitted before the revenue authorities. But without giving a reasonable opportunity of cross verification, the addition was confirmed. The Ld.AR placed a detailed chart related to the year-wise calculation of gross profit of the said assessee, which is as under:- F.Y. OPENING PURCHASE CLOSING COST OF SALES (Rs.) GROSS GP RATIO STOCK (Rs.) (Rs.) STOCK (Rs.) GOODS SOLD PROFIT (Rs.) % (Rs.) 2016-17 0 5,50,56,946 18,94,079 5,31,62,867 5,72,69,089 4,106,222 7.17 2017-18 18,94, 079 15,06,93,888 32,70,987 14,93,16,980 15,86,20,236 93,03,256 5.87 2018-19 32,70,987 17,35,20,729 42,24,901 17,25,66,815 18,08,31,595 82,64,780 4.57 2019-20 42,24,,901 19,51,38,819 48,90,551 19,44,73,169 20,51,45,104 1,06,71,935 5.20 2020-21 48,90,551 13,25,,22,077 2,09,98,566 11,64,14,062 12,66,85,899 1,02,71,837 8.11
We have heard the rival submissions and carefully considered the documents on record. Regarding the alleged bogus purchases, it is noted that the assessee had already declared these transactions in the books of account, provided evidence of payment, and submitted transport documents and bills to the revenue authorities. However, upon verification, the Ld. AO found that certain sellers were bogus and denied having conducted transactions with the assessee. On the other hand, the assessee demonstrated that GST was duly paid on these purchases, and payments were made to the parties. Furthermore, the sales corresponding to these purchases were not disputed by the Ld. AO during the assessment proceedings. The issue is squarely covered by the judgment of the Hon’ble Bombay High Court in PCIT vs. Mohammad Haji Adam & Co. [2019] 102 taxmann.com 132 (Bombay), where it was held that in cases of bogus purchases, only the profit element embedded in such transactions is taxable, rather than the entire amount of the alleged bogus purchases.
/Mum/2024 Hakimuddin Saleh Porbandarwala Upon examining the gross profit (GP) margins, which ranged from 4.57% to 8.11% during Assessment Years 2017–18 to 2021–22, we find it appropriate to restrict the addition to the GP attributable to these alleged bogus purchases. Considering the submission of the Ld. AR, we restrict the GP to 4% of the alleged bogus purchases.The Ld. CIT(A) had already confirmed the bogus purchase amount of Rs.57,39,833/-. Therefore, the gross profit addition is restricted to Rs.2,29,593/- (calculated as 4% of Rs.57,39,833/-). Additionally, with respect to another alleged bogus purchase amounting to Rs.20,73,105/-, the Ld. CIT(A) confirmed an addition of 25%, amounting to Rs.5,18,276/-. However, upon review of the appellate order, it appears that the Ld. CIT(A) erroneously calculated the GP at 25% of an amount that was itself determined at 25% of the alleged bogus purchase, effectively resulting in a double computation. To address this error, we remand the matter to the file of the Ld. AO with instructions to recalculate the GP at 4% of the alleged bogus purchase amount, taking into account the purchase values allowed by the Ld. CIT(A) in the appellate order. The Ld. AO is directed to modify the addition to reflect the correct gross profit computation on this limited issue. Accordingly, we set aside the appellate order and allow the appeal of the assessee.