DHARMESSH SHAH,AHMEDABAD vs. THE ITO, WARD-1, PATAN

The assessee preferred an appeal before the CIT(A) raising various grounds including challenging the reopening. The assessee submitted following documents and contentions in support of the genuineness of the purchases:

The assessee further submitted that the purchase value was in fact Rs.18,00,000/-, not Rs.20,14,258/- as adopted by the AO, and that the same stock was sold during the year generating a reported a gross profit of 13.31%. The assessee relied upon various judicial precedents including the decision of 4 the Hon'ble Gujarat High Court in the case of PCIT v. Jigisha Satishkumar Mehta [2023] 155 taxmann.com 279, wherein the Court held that if sales are not doubted, disallowance of entire purchases is unjustified.

The Ld. CIT(A) upheld the validity of the reassessment by relying upon Explanation 1(i) to Section 148, holding that flagged information under Risk Management Strategy constitutes valid "information" for reopening under the amended law w.e.f. 01.04.2021. On merits, the CIT(A) after considering the facts of the case and submissions of the appellant, recorded that the appellant had filed evidence in the form of purchase bills, bank payment details, and stock records to demonstrate that the purchase transaction had actually taken place. It was noted that the purchase bills were in the name of the appellant and pertained to loose diamonds, and that the corresponding sales had also been declared and accepted by the department. The appellant had shown gross profit on such sales. However, the CIT(A) observed that the supplier, M/s. Vishnu Gold, was found by the GST Department to be engaged in providing accommodation entries without actual movement of goods, and its GST registration was subsequently cancelled. The CIT(A) further observed that the appellant had not requested cross- examination of the said party. In view of these facts, the CIT(A) concluded that the possibility of inflation in the purchase price or the transaction being in the nature of accommodation entries could not be ruled out. Therefore, while holding that disallowance of the entire purchase amount was not warranted, 5 the CIT(A) held that an estimate of income embedded in the said purchases was required to be made. Accordingly, the CIT(A) sustained an addition at the rate of 10% of the purchase value to account for the possible inflation or accommodation nature of the transaction and directed the Assessing Officer to verify the actual purchase amount—whether it was Rs.18,00,000/- or Rs.20,14,258/- and compute the addition accordingly.

Aggrieved by the order of CIT(A) the assessee is in appeal before us raising following grounds:

The Ld. Departmental Representative (DR), on the other hand, supported the assessment order and relied upon the 7 detailed findings recorded by the Assessing Officer, particularly the reliance placed on information from the Insight Portal, the status of the vendor as an accommodation entry provider, and the case law of N.K. Industries Ltd. v. DCIT [2016] 72 taxmann.com 289 (Gujarat), affirmed by the Hon’ble Supreme Court.

We have carefully considered the rival contentions, perused the assessment order, the order of the Ld. CIT(A), the documents placed on record, and the judicial precedents relied upon by both parties. The appeal challenges two substantive issues: (i) the validity of the reassessment proceedings initiated under section 147 of the Act, and (ii) the addition of Rs.20,14,258/- made by the Assessing Officer under section 69C, which was subsequently restricted by the CIT(A) to 10% of the transaction value on an estimated basis.

As regards the first issue pertaining to reassessment, it is evident from the record that the case was reopened based on information flagged under the Risk Management Strategy of the CBDT through the Insight Portal, identifying purchases from M/s. Vishnu Gold as high-risk, allegedly involving bogus Input Tax Credit. The AO issued notice under section 148A(b), duly considered the assessee's response, and passed an order under section 148A(d), followed by issue of notice under section 148. The Ld. CIT(A) has upheld the validity of such reopening by relying on Explanation 1(i) to Section 148 of the Act, which was inserted by the Finance Act, 2021 and deems information flagged 8 under the prescribed strategy as "information" suggesting escapement of income. We are in agreement with the view of the CIT(A) in this regard. The procedure followed by the AO complies with the amended framework of law and, therefore, the ground challenging the validity of the reassessment is liable to be rejected. Accordingly, Ground No. 1 of the appeal is dismissed.

Turning to the merits of the addition, we have considered the rival contentions, examined the orders of the lower authorities, and carefully perused the material placed on record including the judicial precedents relied upon. The issue for adjudication is whether the addition of Rs.20,14,258/- made by the Assessing Officer under section 69C of the Act, which was later restricted by the CIT(A) to 10% of the purchase value, is sustainable in light of the facts and the law.

The assessee had declared total purchases of Rs.18,00,000/- from M/s. Vishnu Gold, supported by tax invoices (paper book No.58-59), ledger accounts, banking records reflecting payment through normal channels, GSTR-3B returns, and quantitative stock register. These purchases were reflected in the audited books of account, and the corresponding sales have been accepted by the department. The books have not been rejected under section 145(3), and the assessee has disclosed gross profit of Rs.19,26,317/- (as disclosed in clause 40 of the annexure to tax audit report in form 3CD at paper book page No.35) on turnover of Rs. 1.44 crore, resulting in a GP rate of 13.32% and net profit of Rs.3.04 lakh (NP rate 2.10%). The 9 Assessing Officer disallowed the entire purchase by treating it as unexplained expenditure u/s 69C solely on the basis that the vendor was flagged by GST authorities as a high-risk entity. The Ld. CIT(A), while accepting the genuineness of sales and the documentation submitted by the assessee, noted that the vendor’s GST registration was subsequently cancelled, and the assessee did not seek cross-examination.

On that basis, he observed that the possibility of accommodation entries or inflated purchases could not be ruled out and sustained an addition @10% of the purchase value to reflect embedded income.

We find that the facts of the case do not warrant full disallowance of the purchases under section 69C, particularly where books are not rejected, sales are accepted, and payments are made through banking channels. However, the nature of the vendor and the failure of the assessee to establish with certainty that the transaction was at arm’s length do justify a modest estimation of embedded profit, to account for the possibility of inflation or indirect benefit derived.

The AO’s reliance on N.K. Industries Ltd. v. DCIT [(2016) 72 taxmann.com 289 (Guj.)] to support full disallowance is misplaced. While the High Court did disapprove partial disallowance in that case, the decision was based on facts established through search, including seizure of blank cheque books and fictitious documents, and admission under section 132(4) that the purchases were sham. Even then, the High Court 10 in its concluding observations (para 8) held that where sales are accepted, tax cannot be levied on the same sale price, and it ultimately directed the revenue to tax only the profit element of Rs.20.98 lakhs, being 5.66% of sales, and not the entire purchases. Therefore, N.K. Industries Ltd. supports the principle that only the income component in such cases is to be brought to tax, not the full transaction value.

Further, in PCIT v. Jigisha Satishkumar Mehta [(2023) 155 taxmann.com 279 (Guj.)], the Hon’ble Gujarat High Court upheld the findings of both the CIT(A) and the Tribunal, which sustained an addition of 5% of the alleged bogus purchases in light of documentary evidence and the possibility of billing through non- genuine parties, even though there was no conclusive proof of bogus purchases.

We find that the facts of the present case are nearly identical. While the supplier may have been flagged as high risk, the assessee has produced primary evidence in support of the transaction, and no enquiry has been conducted by the AO to controvert the same. Further, in the assessee’s own case for A.Y. 2021–22, scrutiny was conducted for purchases from high-risk billers under the CBIC’s risk classification, and no adverse inference was drawn; the returned income was accepted.

Considering the totality of circumstances, the declared net profit rate of 2.10% appears inadequate in light of the flagged risk and warrants an estimation. At the same time, the 11 evidentiary record and pattern of conduct suggest that the transaction cannot be rejected outright.

In line with the principle laid down in Jigisha Satishkumar Mehta (supra), and the ultimate ratio of N.K. Industries Ltd. (supra), we consider it just and reasonable to restrict the disallowance to 5% of the purchase value, i.e., 5% of Rs.18,00,000/-, resulting in an addition of Rs.90,000/-. This estimation safeguards the interest of revenue while preventing double taxation and undue hardship to the assessee.

Accordingly, the addition of Rs.20,14,258/- made by the AO under section 69C is deleted. The addition sustained by the CIT(A) @10% is modified and restricted to Rs.90,000/-, being 5% of Rs.18,00,000/-. The AO is directed to give effect accordingly. Ground Nos. 2 and 3 of the appeal are partly allowed.

In the result the appeal of the assessee is partly allowed.