What did the Tribunal hold?

The Tribunal held that since the sales were not doubted, a 100% disallowance for bogus purchases would be incorrect. However, acknowledging purchases from the grey market, the disallowance was modified to be restricted to 12.5% of the bogus purchases, reduced by the gross profit rate already declared by the assessee.

The assessee, a trader in gift items, faced a disallowance of 12.5% on account of alleged bogus purchases. This disallowance was sustained by the CIT(A) despite the assessee providing documentary evidence, with the adverse inference drawn from the inability to produce suppliers.

What were the issues?

Whether disallowance for bogus purchases is justified when sales are not doubted, and how to calculate the disallowance in such cases.

Pankaj Ramanlal Shah vs ITO | ITAT Mumbai 2019

Income Tax Appellate Tribunal, “SMC” Bench, Mumbai

Before: Shri Shamim Yahya (AM)

For Appellant: Shri Uday P. Shah

For Respondent: Shri Chaitanya Anjaria

Hearing: 11.6.2019Pronounced: 13.6.2019

This is an appeal by the assessee wherein the assessee is aggrieved that the learned CIT-A has erred in sustaining 12.5% disallowance on account of bogus purchases resulting Rs. 20,37,259/- disallowance.

The assessing officer in this case has made 12.5% addition on account of bogus purchase.

Upon assessee’s appeal Id CIT(A) confirmed the same. Against above order assessee is in appeal before the ITAT.

I have heard both the counsel and perused the records. Brief facts of the case are that the assessee is trading in gift items. Pursuant to information from the Sales Tax Department that the assessee was making bogus purchases, assessment was reopened and disallowance of 12.5% of bogus purchases was done.

Upon careful consideration, I find that assessee has provided the documentary evidence for the purchase. Adverse inference has been drawn

2 Mr. Pankaj Ramanlal Shah due to the inability of the assessee to produce the suppliers. I 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 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. In such situation in my considered opinion on the facts and circumstances of the case the 12.5 % disallowance out of the bogus purchases meets the end of justice. However in this regard learned counsel of the assessee has prayed that when only the profits earned by the assessee on these bogus purchase transaction is to be taxed the gross profit already shown by the assessee and offered to tax should be reduced from the standard 12.5% being directed to be disallowed on account of bogus purchase.

Up on careful consideration I find considerable cogency in the submission of the learned counsel of the assessee, as otherwise it will be double jeopardy to the assessee. Accordingly I modify the order of learned CIT(A) and direct that the disallowance in this case be restricted to 12.5 % of the bogus purchases as reduced by the gross profit rate already declared by the assessee on these transactions. Ld counsel of the assessee fairly accepted this proposition.

3 Mr. Pankaj Ramanlal Shah

In the result this appeal filed by the assessee stands partly allowed.

Order has been pronounced in the Court on 13.6.2019.

PANKAJ RAMANLAL SHAH,MUMBAI vs. ITO 27(2)(5), MUMBAI

What did the Tribunal hold?

What were the facts?

What were the issues?

Which sections of the Income-tax Act were involved?

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