DCIT11(1)(1), MUMBAI vs. RENAISSANCE JEWELLERY LTD, MUMBAI

These are appeals by the Revenue wherein the Revenue is aggrieved that the learned CIT-A has erred in sustaining 3% disallowance on account of bogus purchases, vide respective orders pertaining to A.Ys. 2011-12 & 2013- 14. 2. Brief facts of the case are that assessee is engaged in the business of manufacturing and exporting of diamond jewellery.

The assessment in this case was reopened upon receipt of information from the Investigation Wing of the Department that the assessee has made bogus purchases. The assessee submitted the purchase vouchers and the payments were made through banking channel. However, the suppliers were not produced before the Assessing Officer sales in this case were not doubted nor the exports are doubted.

The Income Tax officer in this case has made 100% addition on account of bogus purchase resulting in disallowances as under :-

Upon assessee’s appeals learned CIT(A) restricted the same to 3% of bogus purchases.

Against above order Revenue is in appeal before the ITAT. We have heard both the counsel and perused the records.

Upon careful consideration, we find that assessee has provided the documentary evidence for the purchases. Adverse inference has been drawn due to the inability of the assessee to produce the suppliers. We find that in this case the sales have not been doubted. It is settled law that when sales are not doubted, hundred percent disallowance for bogus purchase cannot be done. The rationale being no sales is possible without actual purchases. This proposition is supported from honourable jurisdictional High Court decision in the case of Nikunj Eximp enterprises (in writ petition no 2860, order dt. 18.6.2014). In this case the honourable High Court has upheld hundred percent allowance for the purchases said to be bogus when sales are not doubted. However this was a case of trader and in that case all the supplies were to government agency. In the present case the facts of the case indicate that assessee has made purchase from the grey market. Making purchases through the grey market gives the assessee savings on account of non- payment of tax and others at the expense of the exchequer. As regards the quantification of the profit element embedded in making of such bogus/unsubstantiated purchases by the assessee. We find that as held by honourable High Court of Bombay in its recent judgement in the case of Principle Commissioner of income tax versus M Haji Adam & Co (ITA number 1004 of 2016 dated 11/2/2019 in paragraph 8 there off) /the addition in 3 M/s. Renaissance Jewellery Ltd.

We note that in the present case learned CIT(A) has restricted the disallowance to 3% of the bogus purchase. We also note that these are appeals by the Revenue. In these circumstances we remit this issue to the file of the Assessing Officer. The Assessing Officer shall examine the difference of gross profit between the genuine purchase and the bogus purchase. If the difference is less than 3% the order of learned CIT(A) shall prevail. If the difference in the gross profit rate between genuine purchase and bogus purchase is more than 3% the disallowance shall be made to the extent of the said difference. With these directions, the matter is set aside to the file of the Assessing Officer. Needless to add the assessee should be granted adequate opportunity of being heard

In the result, Revenue’s appeals are partly allowed. Order has been pronounced in the Court on 11.9.2019.