S R Jewels Vs ITO (ITAT Mumbai)
Entire Bogus Purchase Cannot Be Added — ITAT Limits Taxation to Profit Element Only
The Mumbai SMC Bench of the Income Tax Appellate Tribunal partly allowed the assessee’s appeal for AY 2009-10 and held that the entire value of alleged bogus purchases cannot be brought to tax, even where purchases are held to be from accommodation entry providers.
The assessee, a diamond trader, was alleged to have obtained bogus purchase bills of ₹49.21 lakh from a concern of the Bhanwarlal Jain group. While the Assessing Officer treated the entire purchase amount as unexplained expenditure under section 69C, he himself recorded a categorical finding that the assessee had shown corresponding sales and that the purchases were actually made from the grey market, with bills obtained only to regularise accounts.
The Tribunal noted a clear contradiction in the AO’s approach:
having accepted that purchases existed and that only the supplier was doubtful, the AO could not tax the entire purchase value. In such cases, consistent judicial view—including the Bombay High Court ruling in Mohammad Haji Adam & Co.—is that only the profit element embedded in such purchases can be taxed.
The ITAT also found that the CIT(A) failed to examine what reasonable profit margin should be applied and mechanically upheld the full addition. Since the exact differential gross profit working was not available on record, the Tribunal restored the matter to the file of the Assessing Officer for limited verification, with a direction to tax only the differential profit margin, and not the entire purchase amount.
Accordingly, the appeal was partly allowed, reinforcing the settled principle that bogus billing does not justify taxation of the whole purchase value when sales are accepted.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
