The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has deleted an addition of ₹16.73 lakh arising from alleged bogus purchases, holding that an arbitrary profit rate of 12.5% could not be applied when the taxpayer had already disclosed a higher gross-profit margin on the disputed purchases than on genuine purchases.
The Bench comprising Beena Pillai (Judicial Member) and Makarand Vasant Mahadeokar (Accountant Member) observed that an additional estimation would amount to taxing hypothetical profits unsupported by the material on record.
The appeal concerned Assessment Year 2009-10. The taxpayer was engaged in the import, export and trading of fabrics and fabric pieces through a proprietary concern. The original return declared a total income of ₹2.87 lakh, while the scrutiny assessment determined the income at ₹3.25 lakh.
Subsequently, the Assessing Officer received information from the Income Tax Investigation Wing following search and seizure proceedings against the Pravin Kumar Jain group. The Investigation Wing reportedly alleged that concerns controlled by the group were providing accommodation entries relating to unsecured loans, advances and purchases without carrying out genuine trading activities.
Based on this information, the Assessing Officer alleged that the taxpayer had obtained purchase bills aggregating to ₹1.33 crore from four concerns identified as accommodation-entry providers. A reassessment notice under Section 148 of the Income Tax Act, 1961, was consequently issued.
During the reassessment proceedings, the taxpayer furnished purchase invoices, supplier ledger accounts and confirmations, bank statements, corresponding sale invoices, delivery challans, financial statements and documents explaining the subsequent sale of the purchased goods.
The taxpayer maintained that the purchases were genuine and that the goods had been sold during the regular course of business. It was contended that corresponding sales could not have taken place without the actual purchase and receipt of the goods.
The Assessing Officer, however, held that invoices, ledger accounts and payments made through account-payee cheques were not sufficient by themselves to establish the genuineness of the purchases. According to the officer, such documents were ordinarily maintained by both accommodation-entry providers and their beneficiaries.
At the same time, the Assessing Officer accepted that the receipt of the goods could not be doubted in view of the quantitative details and the corresponding sales recorded by the taxpayer. The officer consequently did not disallow the entire purchase amount.
Instead, the books of account were rejected under Section 145(3), and the profit allegedly embedded in the purchases of ₹1.33 crore was estimated at 12.5%. This resulted in an addition of ₹16,72,877 and the determination of total income at approximately ₹19.98 lakh.
The Commissioner of Income Tax (Appeals) upheld the reassessment as well as the addition. The appellate authority observed that the taxpayer had failed to establish the actual movement and receipt of goods and had not furnished transport receipts, freight details, a stock register or quantitative reconciliation. It further noted that the suppliers had not been produced for verification.
Before the ITAT, the taxpayer argued that these findings were factually incorrect. The assessment order itself acknowledged the production of supplier confirmations, purchase invoices, bank statements, corresponding sales documents and delivery challans.
The taxpayer also contended that no independent investigation had been conducted by the Assessing Officer. Neither notices under Section 133(6) nor summons under Section 131 were issued to the suppliers.
It was further argued that the statement attributed to Pravin Kumar Jain had not been supplied despite specific requests and no opportunity for cross-examination was granted. The taxpayer claimed that Jain was neither a proprietor, partner nor director of any of the four suppliers and had subsequently retracted his statement.
The Tribunal found that the CIT(A)’s material observations were inconsistent with the assessment record. It noted that the assessment order expressly recorded the submission of ledger accounts, supplier confirmations, purchase invoices, bank statements, corresponding sale bills and delivery challans.
More importantly, the Assessing Officer had categorically found that the receipt of the material was not in doubt having regard to the quantitative details furnished by the taxpayer. The corresponding sales had also been accepted.
The ITAT held that once the receipt of goods, quantitative details and corresponding sales were accepted, the absence of lorry numbers could not by itself justify an ad hoc profit estimation of 12.5%.
The taxpayer had explained that the goods were transported locally through hamali or handcarts by daily-wage workers and, therefore, lorry numbers were unavailable.
The Tribunal also noted that no independent enquiry was conducted from the four suppliers. Although the Assessing Officer blamed the taxpayer for allegedly furnishing information late in the proceedings, the record showed that the reasons for reopening were supplied only on February 9, 2016. The taxpayer started providing the requisite details from February 16, 2016.
The ITAT observed that an untested third-party statement could not substitute the determination of the actual profit, if any, embedded in the disputed purchases. However, since the controversy could be decided on admitted facts and the governing principle for computing profit, it did not record a conclusive finding on the evidentiary value of the statement attributed to Jain.
The Tribunal then examined the taxpayer’s comparative gross-profit figures. The taxpayer had disclosed a gross-profit rate of 3.22% on sales corresponding to the disputed purchases, whereas the gross-profit rate on sales arising from genuine purchases was only 0.87%.
Thus, the profit margin on the disputed purchases was approximately 2.35 percentage points higher than the margin earned on genuine purchases.
The taxpayer’s average gross-profit rate for five assessment years was stated to be 1.85%, which was also substantially lower than the 3.22% margin disclosed on the disputed transactions.
The Tribunal relied on the Bombay High Court’s decision in Principal Commissioner of Income Tax v. Mohommad Haji Adam & Co., which held that where an assessee is a trader and the corresponding sales are accepted, purchases cannot be rejected without disturbing the sales. In such cases, the addition is to be limited to bringing the gross-profit rate on disputed purchases in line with that earned on genuine purchases.
The ITAT explained that the taxable amount, if any, must be determined by comparing the actual profit rates on disputed and genuine purchases. Authorities cannot apply an arbitrary percentage disconnected from the taxpayer’s trading results merely because the named suppliers are suspected accommodation-entry providers.
It also referred to the coordinate Bench’s ruling in Shail International v. DCIT, where it was held that no further addition was warranted if the profit already disclosed on the transactions treated as bogus was higher than the profit on normal transactions.
In the present case, the Revenue did not furnish any contrary computation or identify any material showing that the taxpayer had earned an additional profit of 12.5% from the disputed transactions.
“Since the gross-profit rate of 3.22% disclosed on the disputed purchases is higher than the gross-profit rate of 0.87% earned on the genuine purchases, an additional estimation at 12.5% would result in taxation of a hypothetical profit unsupported by the material on record,” the Tribunal observed.
Accordingly, the ITAT directed the deletion of the ₹16,72,877 addition.
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