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Facts
The assessee filed its return of income for assessment year 2008-09. The assessment was reopened based on information received from the Investigation Wing, alleging bogus purchases. The Assessing Officer disallowed the entire amount of these purchases.
Held
The Tribunal noted that the purchases were made through banking channels and supported by documents. However, it was also noted that in a prior assessment year (2007-08) with identical issues and parties, the Tribunal had allowed a 3% addition for profit element. Following this precedent, the Tribunal directed the Assessing Officer to restrict the disallowance to 3% of the alleged bogus purchases.
Key Issues
Whether the entire disallowance of purchases was justified, and if not, what percentage of the purchases should be disallowed to account for profit element.
Sections Cited
147, 148, 143(1), 143(3), 68
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Income Tax Appellate Tribunal, MUMBAI BENCH “A” MUMBAI
Before: SHRI OM PRAKASH KANT & SHRI RAHUL CHAUDHARY
This appeal by the assessee is directed against order dated 30.07.2024 passed by the Ld. Commissioner of Income-tax (Appeals) – National Faceless Appeal Centre, Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2008-09, raising following grounds:
Reopening of Assessment Reopening of Assessment 1) The learned Commissioner of Income tax (A) 1) The learned Commissioner of Income tax (A) (CIT(A)) erred in (CIT(A)) erred in confirming the reopening of the assessment u/s. 147 and issuing confirming the reopening of the assessment u/s. 147 and issuing confirming the reopening of the assessment u/s. 147 and issuing notice u/s. 148 of the Income Tax Act, 1961 merely based on notice u/s. 148 of the Income Tax Act, 1961 merely based on notice u/s. 148 of the Income Tax Act, 1961 merely based on information received from DDIT(Investigation), without forming information received from DDIT(Investigation), without forming information received from DDIT(Investigation), without forming independent belief with regard to escapement of in independent belief with regard to escapement of income. 2) The learned CIT (A) erred in confirming the reopening of the 2) The learned CIT (A) erred in confirming the reopening of the 2) The learned CIT (A) erred in confirming the reopening of the assessment despite the fact that the supplier in his statement has assessment despite the fact that the supplier in his statement has assessment despite the fact that the supplier in his statement has confirmed genuineness of the transactions of sale. confirmed genuineness of the transactions of sale. Disallowance of bogus purchases Disallowance of bogus purchases 3) The learned CIT(A) erred The learned CIT(A) erred in confirming addition of Rs. 80,05,632 in confirming addition of Rs. 80,05,632 being 100% of the purchase cost from the following suppliers being 100% of the purchase cost from the following suppliers being 100% of the purchase cost from the following suppliers treating the same as bogus treating the same as bogus transaction of purchases on surmises transaction of purchases on surmises and conjunctures. and conjunctures. Supplier Name Supplier Name Purchase cost Hiren Gems Hiren Gems 28,65,074 Neelam Gems Neelam Gems 51,40,558 ------------ Total 80,05,632 4) The learned CIT(A) erred in confirming addition though the 4) The learned CIT(A) erred in confirming addition though the 4) The learned CIT(A) erred in confirming addition though the assesse had provide all the primary evidence being bills, ledger assesse had provide all the primary evidence being bills, ledger assesse had provide all the primary evidence being bills, ledger account, bank statement confirmation of parties export documents account, bank statement confirmation of parties export documents account, bank statement confirmation of parties export documents etc., thus merely on etc., thus merely on general statement addition cannot be general statement addition cannot be sustained Violation of principle of natural justice Violation of principle of natural justice 5) The learned CIT(A) erred in confirming addition though the 5) The learned CIT(A) erred in confirming addition though the 5) The learned CIT(A) erred in confirming addition though the learned ITO has not provide the copies of the following documents learned ITO has not provide the copies of the following documents learned ITO has not provide the copies of the following documents namely- i. the statement/document/information received from DDIT (Inv) statement/document/information received from DDIT (Inv) statement/document/information received from DDIT (Inv) and relied upon by him for making addition for rebuttal and and relied upon by him for making addition for rebuttal and and relied upon by him for making addition for rebuttal and ii. nor allowed cross examination of the supplier, whose ii. nor allowed cross examination of the supplier, whose ii. nor allowed cross examination of the supplier, whose statement, was relied upon for making addition. statement, was relied upon for making addition.
Briefly stated facts of t Briefly stated facts of the case are that the assessee filed its he case are that the assessee filed its return of income on 14.09.2008 declaring total income at return of income on 14.09.2008 declaring total income at return of income on 14.09.2008 declaring total income at processed u/s 143(1) of Rs.7,67,990/-. The return of income . The return of income was processed u/s 143(1) of the Income-tax Act, 1961 (in short ‘the Act’). Subsequently, in view tax Act, 1961 (in short ‘the Act’). Subsequently, in view tax Act, 1961 (in short ‘the Act’). Subsequently, in view the Investigation Wing, Surat, the of the information receive of the information received from the Investigation Wing, Surat, assessment was reopened by way of issue of notice u/s 148 of the assessment was reopened by way of issue of notice u/s 148 of the assessment was reopened by way of issue of notice u/s 148 of the Act dated 22.04.2014 Act dated 22.04.2014. The reassessment was completed on was completed on 10.03.2016, where the Assessing Officer he Assessing Officer disallowed whole amount disallowed whole amount of non-genuine purchases fro genuine purchases from bogus parties amounting to m bogus parties amounting to Rs.80,05,632/-.
On further appeal, the Ld. CIT(A) upheld the disallowance, 3. On further appeal, the Ld. CIT(A) upheld the disallowance On further appeal, the Ld. CIT(A) upheld the disallowance mainly rejecting the plea of assessee the plea of assessee that due to lack of due to lack of opportunity , the disallowance was not sustainable. The of cross-examination examination , the disallowance was not sustainable relevant finding of the Ld. CIT(A) is reproduced as under: ing of the Ld. CIT(A) is reproduced as under: ing of the Ld. CIT(A) is reproduced as under:
6.25 Therefore on the basis of facts and circumstances of 6.25 Therefore on the basis of facts and circumstances of 6.25 Therefore on the basis of facts and circumstances of the case and the case laws referred to above, I come to the the case and the case laws referred to above, I come to the the case and the case laws referred to above, I come to the conclusion that on the basis of documentary evidences, conclusion that on the basis of documentary evidences, conclusion that on the basis of documentary evidences, circumstantial circumstantial evidences, evidences, human human conduct cond uct and and preponderance of probabilities what appears to be preponderance of probabilities what appears to be preponderance of probabilities what appears to be apparent in this case is actually not real. I affirm the apparent in this case is actually not real. I affirm the apparent in this case is actually not real. I affirm the conclusion reached by the Assessing Officer in this regard conclusion reached by the Assessing Officer in this regard conclusion reached by the Assessing Officer in this regard that the financial transactions are actually sham and the that the financial transactions are actually sham and the that the financial transactions are actually sham and the entire edifice is only a entire edifice is only a colorable device meant to be a colorable device meant to be a smoke screen to defraud the revenue and evade taxes. smoke screen to defraud the revenue and evade taxes. smoke screen to defraud the revenue and evade taxes. The bogus purchases who was used in providing The bogus purchases who was used in providing The bogus purchases who was used in providing accommodation entry through a designed, preplanned, accommodation entry through a designed, preplanned, accommodation entry through a designed, preplanned, arranged manner in cahoots with operators, brokers and arranged manner in cahoots with operators, brokers and arranged manner in cahoots with operators, brokers and syndicate members syndicate members is fit to be disallowed. Therefore, the is fit to be disallowed. Therefore, the disallowance of bogus purchases made by the Assessing disallowance of bogus purchases made by the Assessing disallowance of bogus purchases made by the Assessing Officer is legally justified and does not call for any Officer is legally justified and does not call for any Officer is legally justified and does not call for any interference. Appellant's grounds No. 5,6,7, & 8 fails. interference. Appellant's grounds No. 5,6,7, & 8 fails.
Before us, the Ld. counsel for the assessee has filed a Paper 4. Before us, the Ld. counsel for the assessee has Before us, the Ld. counsel for the assessee has Book containing pages 1 to 115 and submitted that in immediately Book containing pages 1 to 115 and submitted that Book containing pages 1 to 115 and submitted that identical issue of preceding assessment year preceding assessment year i.e. AY 2007-08, identical issue of alleged bogus purchases from various parties was involved and the alleged bogus purchases from various parties was involved and the alleged bogus purchases from various parties was involved and the Co-ordinate Bench of the Tribunal ordinate Bench of the Tribunal in 6041/Mum/2016 has sustained 3% of the bogus purchases for addition u/s 68 of the Act. sustained 3% of the bogus purchases for addition u/s 68 of the Act. sustained 3% of the bogus purchases for addition u/s 68 of the Act. The relevant finding of the Tribunal The relevant finding of the Tribunal(supra) is reproduced as under: is reproduced as under:
“2. We have heard rival submissions, perused relevant “2. We have heard rival submissions, perused relevant “2. We have heard rival submissions, perused relevant material on record and applied our mind to judic material on record and applied our mind to judicial decisions ial decisions cited before us. cited before us. 3.1 The assessee, being resident firm, stated to be engaged 3.1 The assessee, being resident firm, stated to be engaged 3.1 The assessee, being resident firm, stated to be engaged in trading of diamonds was assessed for year under in trading of diamonds was assessed for year under in trading of diamonds was assessed for year under consideration u/s 143(3) r.w.s. 147 of the Income Tax Act, consideration u/s 143(3) r.w.s. 147 of the Income Tax Act, consideration u/s 143(3) r.w.s. 147 of the Income Tax Act, 1961 on 31/03/2015 wherein the income was determined at 1961 on 31/03/2015 wherein the income was determined at 1961 on 31/03/2015 wherein the income was determined at Rs.105.11 Lacs after sole addition of alleged bogus Rs.105.11 Lacs after sole addition of alleged bogus Rs.105.11 Lacs after sole addition of alleged bogus purchases for Rs.98.29 Lacs as against returned income of purchases for Rs.98.29 Lacs as against returned income of purchases for Rs.98.29 Lacs as against returned income of Rs.6.82 Lacs filed by the assessee on 02/10/2007. The Rs.6.82 Lacs filed by the assessee on 02/10/2007. The Rs.6.82 Lacs filed by the assessee on 02/10/2007. The original return of income was processed u/s 143(1). original return of income was processed u/s 143(1). 3.2 3.2 Pursuant Pursuant to to receipt receipt of of certain certain info information rmation from from investigation arm of the department, it transpired that the investigation arm of the department, it transpired that the investigation arm of the department, it transpired that the assessee made aggregate purchases of Rs.98.29 Lacs from 4 assessee made aggregate purchases of Rs.98.29 Lacs from 4 assessee made aggregate purchases of Rs.98.29 Lacs from 4 suspicious entities viz. Rutuja Gems, Hiren Gems, Neelam suspicious entities viz. Rutuja Gems, Hiren Gems, Neelam suspicious entities viz. Rutuja Gems, Hiren Gems, Neelam Gems and Gaurang Enterprises. Accordingly, the case was Gems and Gaurang Enterprises. Accordingly, the case was Gems and Gaurang Enterprises. Accordingly, the case was reopened as per due process of law vide issuance of notice per due process of law vide issuance of notice per due process of law vide issuance of notice u/s 148 on 31/03/2014 followed by statutory notices u/s u/s 148 on 31/03/2014 followed by statutory notices u/s u/s 148 on 31/03/2014 followed by statutory notices u/s 143(2) & 142(1) wherein the assessee was directed to 143(2) & 142(1) wherein the assessee was directed to 143(2) & 142(1) wherein the assessee was directed to substantiate the purchase transactions. substantiate the purchase transactions. 3.2 The investigation carried out by the investigation wing 3.2 The investigation carried out by the investigation wing 3.2 The investigation carried out by the investigation wing brought to light 19 Bank accounts which were reported as brought to light 19 Bank accounts which were reported as brought to light 19 Bank accounts which were reported as suspicious. The amounts were transferred from 6 (level suspicious. The amounts were transferred from 6 (level suspicious. The amounts were transferred from 6 (level-1) accounts to remaining 9 (level accounts to remaining 9 (level-2) accounts and cash was 2) accounts and cash was immediately withdrawn from level immediately withdrawn from level-2 accounts. Accordingly, 2 accounts. Accordingly, summons was issued to vario summons was issued to various persons holding these us persons holding these accounts to make further inquiries. Although these persons accounts to make further inquiries. Although these persons accounts to make further inquiries. Although these persons asserted that they were carrying out trading of diamonds, asserted that they were carrying out trading of diamonds, asserted that they were carrying out trading of diamonds, but failed to fully substantiate the same. but failed to fully substantiate the same. 3.3 In the above background, Ld. AO formed an opinion that 3.3 In the above background, Ld. AO formed an opinion that 3.3 In the above background, Ld. AO formed an opinion that these persons could not produce any verifiable evidence to s could not produce any verifiable evidence to s could not produce any verifiable evidence to prove that they have actually conducted any business. The prove that they have actually conducted any business. The prove that they have actually conducted any business. The suppliers from the whom the purchases were shown to have suppliers from the whom the purchases were shown to have suppliers from the whom the purchases were shown to have been made by the assessee could not identify the brokers been made by the assessee could not identify the brokers been made by the assessee could not identify the brokers through which the trades were carried through which the trades were carried out and also could not out and also could not produce evidence for transfer of diamonds to the assessee. produce evidence for transfer of diamonds to the assessee. produce evidence for transfer of diamonds to the assessee. Therefore, it was concluded that the purchase of Rs.98.29 Therefore, it was concluded that the purchase of Rs.98.29 Therefore, it was concluded that the purchase of Rs.98.29 Lacs made by the assessee were bogus bills entries in the Lacs made by the assessee were bogus bills entries in the Lacs made by the assessee were bogus bills entries in the nature of accommodation entries. No actual business was nature of accommodation entries. No actual business was nature of accommodation entries. No actual business was carried out by the assessee and therefore, the purchases arried out by the assessee and therefore, the purchases arried out by the assessee and therefore, the purchases were disallowed and added to the income of the assessee. were disallowed and added to the income of the assessee. were disallowed and added to the income of the assessee.
The Learned first appellate authority, inter 4. The Learned first appellate authority, inter-alia, relying alia, relying upon the decisions of Hon’ble Gujarat High Court in Vijay upon the decisions of Hon’ble Gujarat High Court in Vijay upon the decisions of Hon’ble Gujarat High Court in Vijay Proteins Ltd. V/s CIT ( Proteins Ltd. V/s CIT (58 Taxmann.com 44) and CIT V/s 58 Taxmann.com 44) and CIT V/s Simit P.Sheth (356 ITR 451) opined that profit embedded in Simit P.Sheth (356 ITR 451) opined that profit embedded in Simit P.Sheth (356 ITR 451) opined that profit embedded in such transactions was to be brought to tax. The estimation such transactions was to be brought to tax. The estimation such transactions was to be brought to tax. The estimation was done @30% and the balance additions were deleted. was done @30% and the balance additions were deleted. was done @30% and the balance additions were deleted. Aggrieved, the assessee is under appeal before us. Aggrieved, the assessee is under appeal before us.
5. Upon careful consideration, we are of the considered Upon careful consideration, we are of the considered Upon careful consideration, we are of the considered opinion that there could be no sale without actual purchase opinion that there could be no sale without actual purchase opinion that there could be no sale without actual purchase of material keeping in view the assessee’s nature of business of material keeping in view the assessee’s nature of business of material keeping in view the assessee’s nature of business i.e. trading. The assessee was in possession of primary i.e. trading. The assessee was in possession of primary i.e. trading. The assessee was in possession of primary purchase documents and t purchase documents and the payments to the suppliers was he payments to the suppliers was through banking channels. The ledger confirmation from the through banking channels. The ledger confirmation from the through banking channels. The ledger confirmation from the stated suppliers have been placed on record by the assessee. stated suppliers have been placed on record by the assessee. stated suppliers have been placed on record by the assessee. The quantitative details of trading items were also produced The quantitative details of trading items were also produced The quantitative details of trading items were also produced which is supported by information given in which is supported by information given in Tax Audit Report. Tax Audit Report.
Proceeding further, we find that the assessee has made 6. Proceeding further, we find that the assessee has made 6. Proceeding further, we find that the assessee has made total purchases of Rs.144.05 Lacs during the year under total purchases of Rs.144.05 Lacs during the year under total purchases of Rs.144.05 Lacs during the year under consideration out of which purchases of Rs.98.29 Lacs has consideration out of which purchases of Rs.98.29 Lacs has consideration out of which purchases of Rs.98.29 Lacs has been been been disallowed disallowed disallowed by by by learned learned learned AO AO AO which which which result result result into into into disallowance of m disallowance of more than 68% of total purchases. As ore than 68% of total purchases. As against this, the assessee has reflected sale of Rs.157.09 against this, the assessee has reflected sale of Rs.157.09 against this, the assessee has reflected sale of Rs.157.09 Lacs which has been accepted by VAT authorities and the Lacs which has been accepted by VAT authorities and the Lacs which has been accepted by VAT authorities and the said sale could not have been possible without actual said sale could not have been possible without actual said sale could not have been possible without actual purchase of material. If the purchases were held to purchase of material. If the purchases were held to be bogus be bogus then the corresponding sale must also have been treated as then the corresponding sale must also have been treated as then the corresponding sale must also have been treated as bogus and excluded from the financial results, which has not bogus and excluded from the financial results, which has not bogus and excluded from the financial results, which has not been done. The assessee reflected Gross profit Rate of 9.54% been done. The assessee reflected Gross profit Rate of 9.54% been done. The assessee reflected Gross profit Rate of 9.54% during year under consideration which was well in line with during year under consideration which was well in line with during year under consideration which was well in line with the GP rate reflected in previous as well as in subsequent P rate reflected in previous as well as in subsequent P rate reflected in previous as well as in subsequent years. The additions of 30% as sustained by learned first years. The additions of 30% as sustained by learned first years. The additions of 30% as sustained by learned first appellate authority would yield Gross Profit Rate of more appellate authority would yield Gross Profit Rate of more appellate authority would yield Gross Profit Rate of more than 28% which is highly probable in trading business than 28% which is highly probable in trading business than 28% which is highly probable in trading business keeping in view the fact that Gr keeping in view the fact that Gross Profit rate reflected in oss Profit rate reflected in other years is well below 10%. other years is well below 10%.
Therefore, on the stated facts and circumstances, in our 7. Therefore, on the stated facts and circumstances, in our 7. Therefore, on the stated facts and circumstances, in our opinion, the additions which could be sustained, would be to opinion, the additions which could be sustained, would be to opinion, the additions which could be sustained, would be to account for profit element embedded in these purchase account for profit element embedded in these purchase account for profit element embedded in these purchase transactions to facto transactions to factorize for profit earned by assessee rize for profit earned by assessee against possible purchase of material in the grey market and against possible purchase of material in the grey market and against possible purchase of material in the grey market and undue benefit of VAT against such bogus purchases, which undue benefit of VAT against such bogus purchases, which undue benefit of VAT against such bogus purchases, which learned first appellate authority has rightly done. However, learned first appellate authority has rightly done. However, learned first appellate authority has rightly done. However, we find the estimation of 30% to be on ver we find the estimation of 30% to be on very higher side. y higher side. Keeping in view the Gross Profit Rate of 9.54% already Keeping in view the Gross Profit Rate of 9.54% already Keeping in view the Gross Profit Rate of 9.54% already reflected by the assessee, we estimate the impugned reflected by the assessee, we estimate the impugned reflected by the assessee, we estimate the impugned additions @3% of alleged bogus purchases of Rs.98,29,910/ additions @3% of alleged bogus purchases of Rs.98,29,910/ additions @3% of alleged bogus purchases of Rs.98,29,910/- which comes to Rs.2,94,897/ which comes to Rs.2,94,897/-. The balance addition stands . The balance addition stands deleted. The impu deleted. The impugned order stand modified to that extent. gned order stand modified to that extent. The said estimation is in line with estimation approved by The said estimation is in line with estimation approved by The said estimation is in line with estimation approved by coordinate bench of this Tribunal in ITO V/s Dhaval Exim Pvt. coordinate bench of this Tribunal in ITO V/s Dhaval Exim Pvt. coordinate bench of this Tribunal in ITO V/s Dhaval Exim Pvt. Ltd. (ITA No. 6711/Mum/2016 dated 30/11/2018) which Ltd. (ITA No. 6711/Mum/2016 dated 30/11/2018) which Ltd. (ITA No. 6711/Mum/2016 dated 30/11/2018) which has been co- authored by one of us. authored by one of us. The other grounds raised in the appeal has not been urged ther grounds raised in the appeal has not been urged ther grounds raised in the appeal has not been urged during the hearing of the appeal.” during the hearing of the appeal.” 4.1 Since, in the year under consideration also asse in the year under consideration also asse in the year under consideration also assessee has shown to have purchased shown to have purchased from the common parties whic from the common parties which were held to be as bogus parties in to be as bogus parties in assessment year 2007 007-08, therefore respectfully following the finding of the Tribunal (supra), we set respectfully following the finding of the Tribunal (supra) respectfully following the finding of the Tribunal (supra) aside the finding of the Ld. CIT(A) on the merit of addition and aside the finding of the Ld. CIT(A) on the merit aside the finding of the Ld. CIT(A) on the merit direct the Assessing Officer to restrict the disallowance @ 3% of the direct the Assessing Officer to restrict the disallowance @ 3% of the direct the Assessing Officer to restrict the disallowance @ 3% of the purchases , which have have been treated to be in the nature of bogus to be in the nature of bogus accommodation entry. The ground No. 3 of the appeal of the accommodation entry. The ground No. 3 of the appeal of the accommodation entry. The ground No. 3 of the appeal of the assessee is accordingly allowed partly. assessee is accordingly allowed partly.
4.2 Before us, the Ld. counsel for the assessee submitted that if Before us, the Ld. counsel for the assessee submitted that if Before us, the Ld. counsel for the assessee submitted that if the assessee is allowed relief the assessee is allowed relief following the order of the Co the order of the Co-ordinate Bench of Tribunal for assessment year 2007 for assessment year 2007-08, then assessee may then assessee may not press for adjudication of ground No not press for adjudication of ground Nos. 1 and 2. Since, the . 1 and 2. Since, the ground No. 3 of the appeal has been allowed following the decision ground No. 3 of the appeal has been allowed following the decision ground No. 3 of the appeal has been allowed following the decision of the Co-ordinate Bench of the Tribunal in assessme ordinate Bench of the Tribunal in assessme ordinate Bench of the Tribunal in assessment year 2007- 08 in the case of the assessee 08 in the case of the assessee, therefore, accordingly the ground No. therefore, accordingly the ground No. 1 and 2 of the appeal of the assessee are not adjudicated at this 1 and 2 of the appeal of the assessee are not adjudicated at this 1 and 2 of the appeal of the assessee are not adjudicated at this stage and left open to be decided at appropriate stage if so required. stage and left open to be decided at appropriate stage if so required. stage and left open to be decided at appropriate stage if so required.
In the result, the appeal of the In the result, the appeal of the assessee is partly allowed. assessee is partly allowed.
Order pronounced in the open Court on nced in the open Court on 21/11 /11/2024.