DEPUTY COMMISSIONER OF INCOME TAX 1(1), RAIPUR vs. TIRUPATI BALAJI FOODS PRIVATE LIMITED, RAIPUR

Being aggrieved, the assessee went on appeal before the Ld. CIT(Appeals)/NFAC who had partly allowed the appeal for statistical purposes by observing as follows:

However, we find that the decision in the case of Pr. CIT-17 Vs. Mohammad Haji Adam & Co. (supra) has been considered in the subsequent decision of the Hon’ble High Court of Bombay in the case of Pr. CIT-5, Mumbai Vs. Kanak Impex (India) Ltd., Income Tax Appeal No.791 of 2021, dated 03.03.2025 and distinguished by the Hon’ble High Court. It was held by the Hon’ble High Court that “in our view, both the Appellate Authorities ought to have appreciated that the issue before them was whether the respondent-assessee had proved the purchases of which the claim for deduction was made. The respondent-assessee, having failed to discharge its onus on this issue before all three authorities, in our view, the additions made in the assessment order by the AO was justified.” The Hon’ble High Court further held that “If the approach of the Appellate Authorities of estimating the profit on such purchases is to be accepted, then, in effect, the consequence would be that even if respondent-assessee has failed to prove its claim of deduction of purchases, still by estimating profit, impliedly deduction of purchases is given. For example, if the purchases by accommodation entries are Rs.100/- and a profit of 10% is estimated, then to the extent of Rs.90/- deduction on account of purchases is deemed to have been given by the Appellate Authorities. This approach would not be correct since it is nobody’s case that the respondent-assessee has made sales out of books by purchasing the goods out of books.” It was further held by the Hon’ble High Court that “If the approach of the Appellate Authorities is accepted, then the provision of Section 69C, which is an enabling provision, would become redundant. Section 69C provides that where an assessee has incurred any expenditure and offers no explanation about the source of expenditure or the explanation offered is not in the opinion of the AO satisfactory, then the amount of expenditure may be deemed to be the income of the assessee and such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income. In our view, if the approach of the CIT(A) and the Tribunal is accepted, then it would amount to endorsing outright conduct of illegality, contrary to the express provisions of Section 69C of the Act, which the Appellate Authorities have entirely ignored. In the above example, by estimating 10% and thereby impliedly giving a deduction of Rs.90/-, in the teeth of the provisions of Section 69C of the Act, which expressly bars the allowability of unexplained expenditure.”

The Hon’ble High Court further observed that “Mr. Suresh Kumar, learned counsel for the appellant revenue, is justified in relying upon the decision of the Gujarat High Court in the case of N.K. Industries Ltd. Vs. DCIT and its dismissal of SLP by the Hon’ble Supreme Court in N.K. Industries Ltd. Vs. DCIT (2019) 418 ITR 315 (SC). The Gujarat High Court observed that estimating a certain percentage of the bogus claim is against the principles of Sections 68 and 69C of the Act, and if the purchases are bogus, then it is not incumbent upon the Tribunal to restrict the disallowance only to confirm certain percentage of such purchases. In the instant case before us, the respondent-assessee has failed to prove the purchases including source of expenditure by not offering any explanation in the course of the re-assessment proceedings, thereby accepting the purchase have not been proved and in the absence of any explanation of the source of expenditure, provisions of Section 69C are clearly attracted and, therefore, the A.O was justified in making the addition of Rs.20,06,80,150/-.”

The Hon’ble High Court further observed that “Mr. Suresh Kumar learned counsel for the appellant-revenue is justified in relying upon the decision in the case of Pr. CIT Vs Mrs. Premlata Tekriwal (2022) 143 taxmann.com 173. In the said decision, a specific question was raised on the provisions of Section 69C of the Act as to whether the addition on account of bogus purchases should have been made of the entire expenses or only a certain percentage of the bogus expenses. The AO disallowed certain percentage of the bogus purchases in the assessment order. This order was revised by the PCIT under Section 263 of the Act and the PCIT held that the entire expenses has to be disallowed as bogus purchases. On an appeal against the order under Section 263 of the Act, the Tribunal stated that only 2% of the bogus purchases may be added to the total income. Being aggrieved by the Tribunal’s order, the revenue filed an appeal to the Calcutta High Court.”

“The Calcutta High Court observed that in spite of the AO having allowed the assessee to explain the transaction the assessee did not produce any document but stated that 2% of the bogus purchases may be added to the total income. Based on this, the High Court held that the purport of this admission would be that the assessee had accepted the allegation against them and precisely for that reason, they offered that 2% of the bogus purchases may be added to the total income. The High Court further observed if that was the factual position it was incumbent upon the AO to take the proceedings to their logical end and having not done so, the PCIT was fully justified in exercising jurisdiction under Section 263 of the Act by which the entire expenses was to be disallowed as bogus purchases……”

That therefore as per the aforesaid dictate of the Hon’ble High Court of Bombay (supra), it has been held that the primary onus always is on the assessee to establish the genuineness of the purchases made and in consequence there of it needs to explain the expenditure incurred for such purchases in terms with Section 69C of the Act. Suppose, if the addition is only restricted to certain percentage then irrespective of the fact that other part even though being non-genuine, the assessee would be getting wrongly such benefit and in effect, Section 69C would become redundant. Therefore, if the purchases worth Rs.100/- is not being able to be explained by the assessee before the A.O or the first appellate authority then the expenses incurred for such purchases remains unexplained therefore, Rs.100/- itself in entirety is to be added as bogus purchases in terms with Section 69C of the Act and there cannot be any relief given to the assessee merely on the basis of estimating a certain percentage.

That as brought out by the A.O in the present case, 25% of the entire bogus purchases have been added to the total income of the assessee. Therefore, if the assessee is not able to explain genuineness of the entire purchases amount then going by the decision of the Hon’ble High Court of Bombay in the case of Pr. CIT Vs. Kanak Impex (India) Ltd. (supra), the entire amount of bogus purchase is to be added and not only 25% of the entire bogus purchases. In this regard, Ld. CIT(Appeals)/NFAC has to consider the facts of the assessee’s case and specifically on the issue of bogus purchases and whether the assessee was able to explain such entire bogus purchases before the said authority needs to be examined. The Ld. CIT(Appeals)/NFAC shall pass order while considering the decision of the Hon’ble High Court of Bombay in the case of Pr. CIT Vs. Kanak Impex (India) Ltd. (supra) vis-a-vis the facts of the case of the assesse and pass a speaking order in terms with Section 250(4) & (6) of the Act. The order of the Ld. CIT(A)/NFAC is set-aside accordingly.

As per the above terms grounds of appeal raised by the revenue are allowed for statistical purposes.

In the result, appeal of the Revenue is allowed for statistical purposes.