Top Stories Income Tax Case Digest: Addition on Bogus Purchases under Income Tax Act ( PART 2 ) By Saagarika Gopinath – On November 28, 2024 3:02 pm – 12 mins read This is the Second part of the Case Digest on ‘Addition on bogus purchases’ under Income Tax Act. Revision u/s 263 on Ground of Failure to Collect TCS Invalid during Pendency of First Appeal: ITAT [Read Order]  R.M. Tradelink vs Principal Commissioner of Incometax CITATION:   2022 TAXSCAN (ITAT) 1541 Allowing the appeal of the assessee, the Rajkot Bench of the Income Tax Appellate Tribunal (ITAT) has recently held that the revision by the Principal Commissioner of Income Tax (PCIT) when the first appeal is pending before the the Commissioner of Income Tax (Appeals) [CIT(A)]. The Tribunal Bench observed that “TCS has not been collected on certain purchases does not automatically imply that the said purchase is non-genuine/bogus” on the submission of sufficient evidence by the appellant counsel to prove the genuineness of transactions so conducted with the seller.

It was also observed that the issue whether the purchase is bogus or not is also the subject matter of the pending appeal before CIT(A). Absence of Materials in Support of Presumption, cannot be accepted: ITAT sets aside Income Tax Addition on Bogus Purchases [Read Order] Euro Diamonds Pvt. Ltd vs ITO CITATION:   2022 TAXSCAN (ITAT) 1430 The Income Tax Appellate Tribunal (ITAT), Mumbai Bench consisting of B.R. Baskaran, Accountant Member and Pavan Kumar Gadale, Judicial Member set aside addition on bogus purchases on the absence of material evidence. Allowing the appeal, the Tribunal added “We hold that the impugned addition made alleging bogus purchases could not be sustained. Accordingly, we set aside the order passed by CIT(A) and direct the AO to delete the addition relating to purchases made from M/s Mayur Exports.” Profit from Bogus Purchase through Alleged Hawala Dealers are subject to Income Tax: ITAT [Read Order] Dhanesh Mulji Gala Vs ITO, Ward- 19(1)(4) Mumbai. CITATION:   2022 TAXSCAN (ITAT) 1290 The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has held that the profit element from bogus purchases made through the hawala dealers are subject to income tax. After considering submissions, B.R. Baskaran (AM) held that the CIT(A) has confirmed the additions by following the decision rendered by Gujarat High Court in the case of Simit P Sheth  wherein it has been held that the profit element involved in the bogus purchases should be brought to tax. No Documents to substantiate TDS Deduction by Principal before Payment of Sale: ITAT extends disallowance to 6% [Read Order] Vimalchand Manikchand Jain vs I.T.O. CITATION:   2022 TAXSCAN (ITAT) 1177 In the absence of documents to substantiate the TDS deduction by the principal before the payment of sale, the Surat bench of the Income Tax Appellate Tribunal (ITAT) has extended the disallowance to 6%. Pawan Singh, judicial member and Dr Arjun Lal Saini, accountant member viewed that the disallowance restricted by CIT(A) was on the little lower side, to avoid the possibility of Revenue leakage, the Coram modified the order of CIT(A) by restricting the addition of impugned/bogus purchasesto the extent of 6%. Exception to CBDT Circular specifying Monetary Limit for filing Appeal not Applicable to Cases relating to Information received from Investigation Wing of Dept: ITAT [Read Order] M/s Elphinstone Paper Box Manufacturing Co vs Jurisdictional Income-tax Officer

CITATION:   2022 TAXSCAN (ITAT) 959 ITAT observed that the Investigation Wing of the Income Tax Department, based on the information from the Sales Tax Authorities conducted a search/survey on M/s Bigwin Paper Distributor Private Limited’ and ‘M/s Arun Paper and Iron Traders. During the action, it was found that they were engaged in providing entries of bogus sales to the assessee, and thereafter the Investigation Wing sent the information to the AO of the assessee that the assessee was engaged in receipt of bogus purchase bills. The Tribunal while dismissing the appeal has held that “in the case of the assessee source of information is not Sales Tax Department and information is received only from the Investigation Wing of the Department, which is an internal source and not external law enforcement agencies as specified in exception 10(e)”. ITAT quashes Reassessment Order based on invalid Re-Assessment Notice issued without Jurisdiction [Read Order] Garg Acrylics Ltd vs Addl. CIT CITATION:   2022 TAXSCAN (ITAT) 626 The Income Tax Appellate Tribunal (ITAT), Delhi bench consisting of Pradip Kumar Kedia, Accountant Member and Yogesh Kumar US, Judicial Member quashed reassessment order framed as result of invalid re-assessment notice. The CIT affirmed the action of the Assessing Officer on both counts, i.e., jurisdiction under Section 147/148 as well as merits of the addition towards bogus purchases. Aggrieved by the order of the CIT , the assessee preferred appeal before the Tribunal.

The assessee challenged (i) the jurisdiction to issue notice under Section 148 and frame reassessment (ii) the correctness of addition/disallowance towards bogus purchases on merits. Addition for Unexplained Expenditure cannot be made merely on Assumptions without Documents: ITAT [Read Order] Seven Jewels vs Asstt. Commissioner of Income TaxCircle–19(3)(3) CITATION:   2022 TAXSCAN (ITAT) 177 The Income Tax Appellate Tribunal (ITAT), Mumbai bench has held that the addition for unexplained expenditure under section 69C of the Income Tax Act, 1961 cannot be made merely on the assumptions without documents. The A.O. concluded that the assessee was indulged in reducing its taxable profit by inflating the quantum of purchases on the basis of bogus purchase bills and made addition under section 69C of the Income Tax Act, 1961. High Court’s Appellate Jurisdiction is limited to the fact that Tribunal is the Final Fact-Finding Authority: Delhi HC [Read Order] PR. COMMISSIONER OF INCOME TAX (CENTRAL)-3 vs M/S AGSON GLOBAL PVT. LTD CITATION: 2022 TAXSCAN (HC) 102 The Delhi High Court has dismissed the appeal against the deletion of income tax addition for share or bogus purchases or cash deposits and held that appeal under section 260A of Income Tax Act cannot be entertained by High Court except on the grounds of perversity or for the complete lack of evidence.

The division bench consisting of Justice Rajiv Shakdher and Justice Talwant Singh noted that the revenue has neither averred in the grounds nor in the questions of law that the findings of the Tribunal were “perverse”, which imposes a limitation on the court while entertaining an appeal under Section 260A of the Income Tax Act. ITAT invalidates Reopening of Income Tax Assessment as reasons, information referred was extremely Scanty, Sudden jump to conclusions [Read Order] ACIT, Circle, Rohtak vs Ravi Parkash Aggarwal CITATION:   2022 TAXSCAN (ITAT) 221 In this case, the AO mentions so as to reopen the case, it was established that BL Jain Group was providing accommodation entries of unsecured loan and bogus purchases. Then, he goes on to mention that it is established from the report that the assessee has taken accommodation entries and hence he has reasons to believe that the income has escaped assessment. ITAT held that the reasons recorded by the assessee are too sketchy and does not install any confidence with regard to the reasons recorded for reopening. It is not even clear whether the assessee has received entries pertaining to loans or purchases. The details of the report wherein it was alleged that the assessee has received bogus entries could not be made as a basis for reopening. ITAT directs AO to restrict Disallowance at 2% of Bogus Purchases [Read Order] R R Carwell Pvt. Ltd. vs The DCIT, Central Circle-4 CITATION:   2022 TAXSCAN (ITAT) 239 The Delhi Bench of Income Tax Appellate Tribunal (ITAT) has directed the Assessing Officer (AO) to restrict disallowance at 2% of the bogus purchases. The Coram of Judicial Member, Suchitra Kamble, and Accountant Member, R.K.Panda has directed the Assessing Officer to restrict the profit on such bogus purchases at 2% of the total purchases. Delhi HC dismisses appeal against deletion of Addition for Share Premium or Bogus Purchases or Cash deposits in Bank as no challenge was made to evidence [Read Judgment] PR. Commissioner of Income Tax ( Central)-3, New Delhi  v/s M/s Again Global Pvt Ltd The Delhi High Court has dismissed the appeal against deletion of addition for share premium or bogus purchases or Cash deposits in bank as no challenge was made to evidence.

The division bench of Justice Rajiv Shakdher and Justice Talwant Singh while dismissing a bunch of appeals against deletion of addition under Section 68 towards Share capital/ share premium, bogus purchases and deposit in bank account, the Delhi High Court vide judgement delivered on 19.01.2022 (yesterday) has held that where the ITAT decided the matter based on appreciation of evidences placed on record and the order of ITAT not being challenged on ground of perversity, no substantial question of law arises. Income Tax Once Addition towards alleged Bogus Purchases made, Additions of similar amounts can’t be made as it leads to Double Addition: ITAT [Read Order] M/s. BGR Energy Systems Ltd vs ACIT CITATION:   2021 TAXSCAN (ITAT) 347 The Income Tax Appellate Tribunal (ITAT), Chennai Bench ruled that once Addition towards alleged bogus purchases made, additions of similar amounts cannot be made as it leads to Double Addition. The coram of Judicial Member, Duvvuru RL Reddy and Accountant Member G. Manjunatha found that the AO has made additions towards alleged bogus purchases made from five parties in the hands of M/s. BGR Energy Systems Ltd. The AO has once again made a similar addition in the hands of the assessee without assigning any reasons.

The ITAT held that once addition was made towards alleged bogus purchases in the hands of M/s. BGR Energy Systems Ltd., no additions can be made to similar amounts in the hands of the assessee because it amounts to double addition. The CIT(A) after considering relevant facts has rightly deleted additions made by the AO and hence, the Tribunal upheld findings of the CIT(A) and rejected grounds taken by the Revenue for all Assessment years. ITAT directs AO to restrict additions limited to the extent of bringing the G.P. rate on disputed purchases at the same rate of other genuine purchases Shri Dilip Kumar Sumermal Kanungo vs ITO CITATION:  2021 TAXSCAN (ITAT) 573 The Income Tax Appellate Tribunal (ITAT), Mumbai Bench directed AO to restrict additions limited to the extent of bringing the G.P. rate on disputed purchases at the same rate of other genuine purchases. The AO completed the assessment determining the income at Rs.4,75,249/-. On receipt of information from the Sales Tax Department, Government of Maharashtra that the assessee had obtained bogus purchase bills amounting to Rs.1,24,10,733 from 8 parties, the AO issued notice under section 148 for reopening the assessment. Entire Purchases can’t be Disallowed as Bogus, If AO accepted Sales: Bombay HC [Read Judgment] Pr, Commissioner of Income Tax-13, Mumbai v/s Rishabdev Tachnocable Referring to the figure of 2% arrived by the CIT(A), Tribunal observed that assessee’s gross profit varied from 5% to 8.77%. Since the purchases were made from the grey market, the corresponding profit element would be a little higher. Therefore, Tribunal directed the Assessing Officer to make further addition of 3% on the bogus purchases and to estimate the income on such a basis.

The court consists of Justice Milind N. Jadhav and Justice Ujjal Bhuyan did not found any error or infirmity in the view taken by the Tribunal and held that though genuineness of the purchases and sales were not proved, yet it was noted that the Assessing Officer had accepted the sales and gross profit declared in the return of income. CIT(A) held that there can be no sales without purchases. When the sales were accepted, then the entire purchases could not be disallowed. Therefore, it was held that whether the purchases were bogus or whether the parties from whom such purchases were allegedly made were bogus was essentially a question of fact. Profit Element embedded in Purchases would be subjected to Tax, not the entire Amount: Bombay HC The Bombay High court held that the profit element embedded in purchases would be subjected to tax and not to the entire amount. The division bench comprising Justices Milind N Jadhav and Ujjal Bhuyan was considering an appeal filed by the department against the order of the Mumbai ITAT. The Court upheld the finding of the Tribunal and held that whether the purchases were bogus or whether the parties from whom such purchases were allegedly made were bogus was essentially a question of fact. When the Tribunal had concluded that the assessee did make the purchase, as a natural corollary, not the entire amount covered by such purchase but the profit element embedded therein would be subject to tax. Addition on Bogus Purchase should be made only to the extent of Lower GP declared: ITAT [Read Order] Omkar Metal &Alloys Corporation v/s ITO The ITAT noted that in case of bogus purchase where sales are accepted, quantitative details of purchases, sales and stock was filed with copy of delivery challans, the addition is required to be made only to the extent of lower G.P declared by the assessee on bogus purchases as compared to G.P. on normal purchases. While upholding the decision of the first appellate authority, the Tribunal said that “As per the G.P. statement chart placed on record we found that the GROSS PROFIT declared by the assessee in respect of alleged bogus purchases was more than the GROSS PROFIT declared in the normal purchases. Under these facts circumstances, applying the judicial pronouncement laid down by Hon’ble Jurisdictional High Court as discussed above, we do not find any merits for the addition so upheld by CIT(A).”

Entire Purchase can’t be Disallowed If some of them was found as Bogus: Bombay HC [Read Judgment] The Principal Commissioner of Income Tax v/s Pinaki D. Panani Justice M.S. Karnik and Justice Nitin Jamdar while dismissing the appeal held that even if the purchases made from the parties in question are to be treated as bogus, it does not necessarily mean that the entire amount should be disallowed and that no benefit should be given to the Respondent-Assessee. “Assuming that the purchasers from whom the purchases were made were bogus, in view of the finding of fact that the material was consumed, the question would be of extending the percentage of net profit on total turnover. This would be a matter of calculations by the concerned authority”, the Court also added. To Compound Tax Evasion Offences, Assessee should pay the Whole Tax Amount Evaded: Gujarat HC [Read Judgment] Mehta Laboratories v/s The Principal Chief Commissioner of Income Tax The Gujarat High Court held that 100% of tax sought to be evaded is to be paid for compounding of a tax evasion offences under Section 276C (1) of the Income Tax Act, 1961, and not 100% of the amount sought on offence pertains to willful attempt to evade tax. In the scrutiny assessment proceedings, an assessment order was passed for the period from A.Y. 1983­84 to A.Y.1985­86 by the Assessing Officer making addition on account of cash credit, bogus purchases etc. Notice issued for Reopening Assessment without Jurisdictional Requirements liable to be set-aside: Bombay HC [Read Judgment] Usha exports v/s Assistant Commissioner of Income Tax In this case, the AO  issued the notice under section 148 of the Act seeking to reopen the assessment for the assessment year 2012-13.

Reasons observed that all the purchases made by the assessee were bogus and not actually purchased by the assessee, and then all the expenditure belongs to the bogus purchase would have been disallowed. It has reason to believe that income chargeable to tax has escaped, so the case needs to be reopened and the assessment should be finalized u/s 143 (3) r.w.s. 147 of the I.T. Act. Purchases can’t be treated as Bogus If Dept has not discarded Sales: ITAT [Read Order] ACIT v/s Shri Akshay Rajesh Samdariya The Tribunal observed that the sales of the assessee have been accepted by the Department. “Without purchases, there cannot be sales. Thus, entire alleged bogus purchases cannot be added in the hands of the assessee,” the Tribunal said.  “Under such circumstances, the possibility of assessee purchasing the goods from grey market and procuring bills from the Hawala dealers cannot be ruled out. The CIT(A) after considering catena of judgments on various facets including the GP ratio to be applied in different set of industries estimated 3% of GP addition on account of bogus purchases in the hands of the assessee. We find the impugned order is reasoned and hence, requires no interference. Taking into consideration entirety of facts, the impugned order is upheld,” the Tribunal added. ‘Reason to Suspect’ can’t be a reason to Re-open Assessment: ITAT [Read Order] Shri Urvish B Mehta v/s ITO The Mumbai bench of the Income Tax Appellate Tribunal ( ITAT ) in Urvish B. Mehta versus I.T.O, quashed the reopening since the ‘reason to suspect’ cannot be a ground of reason to re-open assessment.

During the Assessment proceedings, the assessing officer concluded that assessee has received some bogus purchase entries from thirteen parties and not making any purchase of actual goods or service and the case was re-opened under section 147 of the Act pursuant to the notice under section 148. Assessee had contested the issue of notice and re-opening of assessment before assessing officer. Assessing officer stated that the said bogus purchase entries were downloaded from the sales tax department website. Finally, after considering the contentions of assessee, AO framed assessment and addition under section 69C. Right of Cross-Examination is not Absolute: ITAT [Read Order] soman Sun Citi v/s JT. CIT The Mumbai Bench of the Income Tax Appellate Tribunal ( ITAT ) in Soman Sun Citi vs. JT.CIT held that the right of cross-examination is not absolute when the assessee had failed to discharge its primary onus. The bench comprising of Judicial Member Saktijit Dey & Accountant Member Ramit Kochar found that the assessee had failed to provide any relevant information regarding the purchase of materials. They noted that the authorities had taken a plausible view of disallowing 100% of bogus purchases as the genuineness of the purchases as also consumption/utilization of material was not proved. ITAT Confirms Addition on Account of Purchases made from Grey Market since Assessee Failed to Produce Evidence on Transportation of Goods [Read Order] Haresh B Sanghvi v/s ITO The tribunal also stated that revenue authorities cannot accept the purchase as genuine one since all those bills are from non-existent /bogus parties.

The bench also pressed the decision of Gujarat High Court in the case of Apex Appeal No. 240 of 2003 in the case of N K Industries vs Dy CIT wherein hundred percent of the bogus purchases was held to be added in the hands of the assessee. Bogus Purchase cannot be Alleged on the basis of Mere Non-Appearance of the Supplier: ITAT Jaipur [Read Order] A division bench of the Jaipur ITAT in Beauty Tax v. DCIT, held that the allegation of bogus purchase cannot be confirmed on the basis of mere non-appearance of the supplier in absence of any other corroborate evidence. “Merely non-appearance of the supplier in absence of any other corroborate evidence cannot be a basis to justify the stand of the Revenue that the transaction of purchase is bogus. In the result the purchases made from M/s Mahaveer Textiles have not been proved to be bogus by the Revenue and the said additions cannot be sustained in the eye of law in absence of any conclusive evidence brought on record”, the Tribunal also added. Failure to Produce the dealers would not make the Entire Purchases ‘Bogus’ for the purpose of sec 69A: ITAT Mumbai [Read Order] Shri Rupesh Chinmala Savla v/s ITO In Rupesh Chimanlal savla v. ITO, held that a purchase cannot be treated as bogus only because the assessee failed to produce the dealers.

The bench observed that there is no material on record to conclusively prove that the purchases made by the Assessee are bogus purchases and nothing is brought on record to suggest that the information gathered by the Sales Tax department conclusively proves that the dealers are providing only the accommodation entries to the Assessee. Genuinity of Transaction cannot be suspected if it is supported by Documentary Proof: Delhi HC [Read Order] The Principal Commissioner of Income Tax v/s Jatin Investment Pvt Ltd In Pr. Commissioner Of Income Tax – 5 V. Jatin Investment Pvt. Ltd, the division bench of the Delhi High Court observed that a transaction cannot be treated as fraudulent if the assessee has furnished documentary proof and proved the identity of the purchasers and no discrepancy is found.  The bench observed that, in such a case, the AO has to exercise his powers under section 131 & 133(6) of the Income Tax Act to verify the genuineness of the claim and cannot proceed on surmises.