Case Law Details
PCIT Vs Prathana Gems (Gujarat High Court)
In , the Gujarat High Court dismissed the Revenue’s tax appeal filed under Section 260A of the Income Tax Act against the order of the Income Tax Appellate Tribunal (ITAT), Surat, for Assessment Year 2014-15. The dispute related to additions made on account of alleged bogus purchases from entities linked to the Bhanwarlal Jain Group, which was alleged to be engaged in providing accommodation entries and non-genuine purchase bills.
The assessee had filed its return declaring nil income. Based on information received from the Investigation Wing, Mumbai, the Assessing Officer found that the assessee had obtained non-genuine purchase bills amounting to Rs.1.31 crore from concerns connected with the Bhanwarlal Jain Group. Accordingly, an assessment under Section 143(3) was completed by making 100% addition of the alleged bogus purchases.
The assessee’s appeal before the CIT(A) was dismissed, and the addition of the entire purchase amount was confirmed. Subsequently, the assessee approached the Tribunal. The Tribunal partly allowed the appeal and restricted the disallowance to 6% of the disputed purchases instead of sustaining the entire addition. The Tribunal relied upon its earlier decision in Pankaj J. Chaudhary v. ITO.
The Revenue challenged the Tribunal’s order before the High Court, contending that the purchases were sham transactions routed through bogus paper concerns of the Bhanwarlal Jain Group and that the entire amount ought to have been added as unexplained expenditure. The Revenue relied on decisions including N.K. Industries Ltd., N.K. Proteins Ltd., and Premlata Tekriwal to argue that 100% of bogus purchases should be added where the assessee failed to establish genuineness.
The High Court noted that similar issues involving transactions with the Bhanwarlal Jain Group had already been considered in several earlier matters. The Court referred to its own judgment in PCIT v. Keshri Exports, where disallowance restricted to 6% of bogus purchases had been upheld after considering the earlier decision in Pr. CIT v. Pankaj J. Chaudhary.
The Court reproduced portions of the Keshri Exports judgment, where it had been observed that although the transactions were not genuine, the assessee had actually made purchases from other sources and obtained accommodation bills from the impugned suppliers. The appellate authorities had considered the gross profit rates and held that taxing the entire purchases would not be justified. It was further noted that only the income component embedded in the disputed purchases should be brought to tax in order to prevent revenue leakage.
The High Court also referred to the Tribunal’s observations in Keshri Exports that the assessee had shown low gross profit and net profit rates and that the disputed purchases were linked to concerns managed by the Bhanwarlal Jain Group. The Tribunal in that case had concluded that a 6% disallowance would sufficiently address possible revenue leakage. The High Court observed that the Tribunal’s conclusions were based on analysis of facts, figures, and material available on record.
The Court further referred to its earlier decision in PCIT v. Surya Impex, which involved accommodation entries provided by the same Bhanwarlal Jain Group. In that case also, the Court had ruled in favour of the assessee on similar questions.
After considering these precedents, the High Court held that the substantial questions of law raised by the Revenue already stood answered by earlier judgments. It observed that the Tribunal’s decision to restrict disallowance to 6% was based on appreciation of evidence and factual analysis, and therefore no interference was warranted.
The High Court concluded that no substantial question of law arose in the appeal and dismissed the Revenue’s tax appeal as meritless.
FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT
1. Heard learned Senior Standing Counsel Mr. Karan Sanghani for the appellant.
2. This Tax Appeal is filed under Section 260A of the Income Tax Act, 1961 (For short “the Act”) against the order dated 06.06.2024 passed by the Income Tax Appellate Tribunal, Surat (For Short “the Tribunal”) in ITA No. 1/SRT/2024 for the Assessment Year 2014-15 raising the following substantial questions of law :-
“(A) Whether on the facts and circumstances of the case and in law, the Hon’ble ITAT is justified in partly allowing the appeal of the assessee and restricting addition @ 6% of the bogus purchases against the decision of the Ld. CIT (Appeals) in confirming the addition made by the Assessing Officer at the rate of 100% of bogus purchases amounting to Rs.1,31,21,120/-, ignoring the fact that these purchases are sham transactions fabricated through bogus paper concerns of Bhanwarlal Jain group, which was engaged in providing accommodation entries ?
(b) Whether, on the facts and in the circumstances of the case and in law, the Hon’ble ITAT was justified in partly allowing the appeal of the assessee relying upon the decision of the co-ordinate Bench of ITAT, Surat, in the case of Pankaj J. Chaudhary v. ITO in ITA No. 1152/AHD/2017 dated 27.09.2021?
(c) Whether, on the facts and in the circumstances of the case and in law, the Hon’ble ITAT is correct in not considering that the amount claimed as payment to hawala dealers was, in effect, suppression of profits by obtaining bogus purchase bills, which was liable to be added to the income of the Assessee?
(d) Whether on the facts and circumstances of the case and in law, the Hon’ble ITAT has erred in not considering –
* the judgment of Gujarat High Court in the case of N.K. Industries Ltd. v. DCIT in TA No. 240 to 242 of 2003 which has been upheld by the Hon’ble Apex Court in Special Leave to Appeal No. 769 of 2017 dated 16.01.2017, wherein the Hon’ble High Court decided that 100% purchases from bogus parties was liable to be added in the hands of the assessee, reversing the order passed by the Hon’ble ITAT that restricted addition to 25%, holding that such restriction goes against the principles of Section 68 and 69C of Income Tax Act ?
* the judgment of Calcutta High Court in the case of PCIT v. Premlata Tekriwal (143 taxmann.com 173) involving similar issue of purchase of bogus concern to suppress profits wherein the court held that “since it was established that expenditure was unexplained/bogus, entire amount of bogus expenditure was to be added to income of assessee?
* the ratio of judgment of Hon’ble Apex Court on the issue of unexplained expenditure (bogus purchase) in the case of N.K. Proteins v. Dy. CIT [2017] 84 taxmann.com 195/250 Taxman 22 (SC) wherein, the SLP filed by the assessee has been dismissed by the Hon’ble Apex Court?
(e) Whether on the facts and circumstances of the case and in law, the Hon’ble ITAT is justified in partly allowing the appeal of the assessee wherein the AO has made 100% addition of bogus purchases amounting to Rs.1,31,21,120/-made by the assessee with the entry provider not appreciating the non-genuineness of the expenditure booked was established by the information received from DIT (Inv)-II, Mumbai and the assessee was not able to discharge its onus to establish the genuineness of transaction before the AO as well as the learned CIT (A)?
3. Brief facts of the case are that :-
3.1. The respondent assessee filed its return of income for Assessment Year 2014-15 on 24.09.2014, declaring the total income of Rs.Nil/-.
3.2. On the basis of the information received from the Investigation Wing, Mumbai in case of Shri Bhanwarlal Jain Group, it was found that the said group was engaged in the business of issuing non-genuine and purchase accommodation bills, unsecured entries to loans various parties and the assessee was found to have obtained non-genuine purchase bills from the said group amounting to Rs.1,31,21,120/-. The Assessment Order under Section 143(3) of the Act was passed on 15.12.2016 assessing total income at Rs.1,31,21,120/- after making an addition on account of bogus purchases.
3.3. Being aggrieved, the assessee preferred an appeal before the CIT (Appeals). The CIT (Appeals) vide order dated 24.11.2023 dismissed the appeal and confirmed the addition made by the Assessing Officer of 100% of the bogus purchases.
3.4. Being aggrieved, the assessee preferred an appeal before the Tribunal. The Tribunal by impugned order dated 06.06.2024 dismissed the appeal of the assessee and restricted the addition of 6% of the bogus purchases against the addition made by the Assessing Officer of 100% of the bogus purchases. The Tribunal has relied on its decision rendered in the case of Pankaj K. Chaudhary in ITA 1379/Ahd/2017.
4. This Court finds that in several matters arising out of transactions with the said Bhanwarlal Jain Group, the Tax Appeals of the Department have been dismissed where the learned ITAT has assessed the disallowance at 6%, as has been done in the present case. This Court in the case of PCIT v. Keshri Exports [2024] 168 Taxmann.com 528 (Gujarat) after considering the decision inf the case of Pr. CIT v. Pankaj J. Chaudhary [R/Tax Appeal No. 617 of 2022 dated 07.03.2023] has upheld the disallowance of 6% of bogus purchases.
5. The relevant extracts from the judgment in the case of Keshri Exports (supra) is as under :-
“5. The Assessing Officer noticed the contentions of the assessee that confirmation, purchase bills, bank statement, stock register, copy of ITR were already filed. The Assessing Officer was, however, of the view that transactions were bogus and merely that it routed through the banking channel, was not sufficient to conclude that they were the genuine transactions. The contention of the assessee that he had not dealt with the Bhanvarlal Jain group was also negatived. The appellate Commissioner took the view that disallowance was required to be sustained at 12.5% of the purchase. The Assessing Officer was directed accordingly to workout disallowance. In para 10.6, the Commissioner of Income Tax (Appeals), recorded thus,
“As held above, it is clear that the appellants have made purchases from elsewhere, but have obtained bills from the impugned suppliers. From the Trading & P & L account and Audit report it can be seen that the GP rate shown by appellant is 1.85% oil sales. In such circumstances the disallowance of 100% of purchases cannot be justified. Also as held above, the appellant would nave indulged in above practice in order to get some benefit. And it is this benefit derived by the appellant that need to be taxed. What would be the magnitude of benefit derived by the appellant is the mute question. In the appellant’s case, it is seen that GP rate shown is 0.78%”.
5.1 The final view was expressed in para 10.10,
“Following the above judicial pronouncements and views taken by Ld. CIT(A) & AOS in a few identical cases. In a couple of identical cases, where the GP shown by the appellants is more than 5%, I have confirmed the disallowance of the impugned purchases to the extent of 5% of the impugned purchases. However in the instant case the appellant is showing measly G.P. of only 0.78% on turnover. In view of this I am of the considered opinion that disallowance of 12.5% of the impugned purchases would be reasonable and would meet the ends of justice. Hence, the disallowance is restricted to 12.5% of the impugned purchases for the assessment year in appeal.
5.2 The disallowance at 100% was made in the assessment order for the year under consideration to the tune of Rs. 4,34,00,343/-, which was reduced to 12.5% at Rs. 54,25,040/-. Thereafter, the issue was dealt with by the appellate Tribunal. The appellate Tribunal endorsed to the view taken by the appellate Commissioner. It was observed that Assessing Officer failed to consider the evidence furnished by the assessee.
5.3 Considering the facts and relevant aspect, the Income Tax Appellate Tribunal partially allowed the appeal of the assessee to further reduce the disallowance at 6%. In so concluding, the Tribunal observed in paragraph No.21 as under,
“…………………. during the financial year under consideration the assessee has shown total turnover of Rs. 66,09,62,458/-. The assessee has shown Gross Profit @ 78% and net Profit @ 0.02% (page 11 of paper Book). The assessee while filing the return of income has declared taxable income of Rs. 1,81,840/- only. We are conscious of the facts that dispute before us is only with regard of the disputed purchases of Rs. 4.34 Crore, which was shown to have purchased from the entity managed by Bhanwarlal Jain Group. During the search action on Bhanwarlal Jain no stock of goods/material was found to the investigation party. Bhanwarlal Jain while filing return of income has offered commission income (entry provider). Before us, the Ld. CIT-DR for the revenue vehemently submitted that the ratio of decision of Hon’ble Gujarat High Court in Mayank Diamond Private Limited (supra) is directly applicable on the facts of the present case.
We find that in Mayank Diamonds the Hon’ble High Court restricted the additions to 5% of GP. We have seen that in Mayank Diamonds P Ltd (supra), the assessee had declared GP @ 1.03% on turnover of Rs 1.86 Crore. The disputed transaction in the said case was Rs. 1.68 Crore. However, in the present case the assessee has declared the GP @ 0.78%. It is settled law that under Income-tax, the tax authorities are not entitled to tax the entire transaction, but only the income component of the disputed transaction, to prevent the possibility of revenue leakage. Therefore, considering overall facts and circumstances of the present case, we are of the view that disallowances @ 6% of impugned purchases / disputed purchases would be sufficient to meet the possibility of revenue leakage. In the result the ground No. 2 of appeal raised by the assessee is partly allowed and the grounds of appeal raised by revenue are dismissed.”
6. In so concluding, the Tribunal observed in paragraph No.21 as under,
“…….. during the financial year under consideration the assessee has shown total turnover of Rs. 66,09,62,458/-. The assessee has shown Gross Profit @ 78% and net Profit @ 0.02% (page 11 of paper Book). The assessee while filing the return of income has declared taxable income of Rs. 1,81,840/- only. We are conscious of the facts that dispute before us is only with regard of the disputed purchases of Rs. 4.34 Crore, which was shown to have purchased from the entity managed by Bhanwarlal Jain Group. During the search action on Bhanwarlal Jain no stock of goods/material was found to the investigation party. Bhanwarlal Jain while filing return of income has offered commission income (entry provider). Before us, the Ld. CIT-DR for the revenue vehemently submitted that the ratio of decision of Hon’ble Gujarat High Court in Mayank Diamond Private Limited (supra) is directly applicable on the facts of the present case. We find that in Mayank Diamonds the Hon’ble High Court restricted the additions to 5% of GP. We have seen that in Mayank Diamonds P Ltd (supra), the assessee had declared GP @ 1.03% on turnover of Rs 1.86 Crore. The disputed transaction in the said case was Rs. 1.68 Crore. However, in the present case the assessee has declared the GP @ 0.78%. It is settled law that under Income-tax, the tax authorities are not entitled to tax the entire transaction, but only the income component of the disputed transaction, to prevent the possibility of revenue leakage. Therefore, considering overall facts and circumstances of the present case, we are of the view that disallowances @ 6% of impugned purchases / disputed purchases would be sufficient to meet the possibility of revenue leakage. In the result the ground No. 2 of appeal raised by the assessee is partly allowed and the grounds of appeal raised by revenue are dismissed.”
6. The view taken and the conclusion arrived at by the appellant Tribunal are based on material before it and after analysing the facts and figure available before it. When the Tribunal has thought it fit to reduce the disallowance at 6% from 12.5%, the Tribunal had before it the facts which were duly analysed by it. No interference is called for in the said conclusion and findings of the Tribunal in the present appeal by this court.
6.1 The another weighing aspect is that the Tax Appeal No. 674 of 2022 in Principal Commissioner of Income Tax 1, Surat vs. M/s.Surya Impex which came to be decided by the co-ordinate Bench on 16.1.2023 dealt with the very issue of accommodation entries provided by Bhanwarlal Jain Group. The group involved in the said case is the same group who is saddled with allegations of providing accommodation entry to the assesse. In M/s. Surya Impex (supra) the court held in favour of the assessee. The questions of law involved in the said case were of the same nature and were in the context of similar facts involving the same group.
7. For all the above reasons, substantial questions of law proposed by the appellant in this appeal stands already answered. No question of law much less any substantial questions of law arise in the facts of the present case. No other substantial question of law arises. The appeal is meritless. It is summarily dismissed.”
6. In view of the above, the substantial questions of law proposed by the appellant in the appeal stands already answered and therefore, no question of law much less any substantial questions of law, can be said to have arisen in the facts of the present case.
7. The Tax Appeal is accordingly dismissed. No order as to costs.
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