Bogus Sales Profit Addition Rejected as Sales Suppression Not Proved: Gujarat HC

PCIT Vs Center Point Gems Pvt. Ltd. (Gujarat High Court)

The Gujarat High Court heard a batch of tax appeals filed by the Revenue under Section 260A of the Income-tax Act, 1961 for Assessment Year 2012-13, challenging a common order of the Income Tax Appellate Tribunal, Surat Bench. The common issue in all appeals was whether the Tribunal erred in not estimating profitability at 6% on sales booked from alleged bogus parties despite sustaining an addition at 6% of alleged bogus purchases from the same parties.

The respondent companies had originally filed returns of income, and assessments were completed under Section 143(3). Following investigations by the DDIT, Investigation Unit-2, Surat in the case of Shri Afroz Mohammed Hassan Fatta and Group, together with investigations by the Customs Department and Enforcement Directorate concerning foreign remittances against fake import documents, notices under Section 148 were issued for reopening the completed assessments. Thereafter, reassessment orders under Sections 143(3) read with 147 were passed, treating purchases made from certain entities connected with the group as bogus and making additions under Section 69 as unexplained investments.

The Commissioner of Income Tax (Appeals) partly allowed the assessees’ appeals. The Commissioner found that purchases from certain entities were not bogus as no such purchases were debited in the books, while purchases from Metro International and Franklin International amounting to ₹13,64,90,501 were treated as non-genuine. Referring to the Task Group Report for the Diamond Sector, which reported net profit ranges for diamond manufacturing and trading, the Commissioner concluded that sustaining the profit element at 2% of the alleged bogus purchases would meet the ends of justice and accordingly restricted the addition. Similar findings were recorded in the connected appeals by restricting additions to 2% of the alleged bogus purchases.

The Revenue appealed to the Tribunal, contending, among other grounds, that despite holding that sales of ₹29,26,32,236 from three concerns constituted bogus sales, the Commissioner (Appeals) had failed to take an adverse view while computing the profit from the alleged bogus purchases.

The Tribunal increased the disallowance on alleged bogus purchases from 2% to 6%, relying upon its earlier decision in ITO v. Pankaj K. Chaudhary. It noted that several coordinate bench decisions had sustained additions at 6% in similar circumstances and that the Revenue had not produced any material to distinguish those decisions. Accordingly, the Tribunal sustained an addition at 6% of the alleged bogus purchases.

On the Revenue’s contention regarding estimation of profit on alleged bogus sales, the Tribunal held that the sales had already been credited in the assessees’ books of account. It observed that an additional 6% addition on such sales was not permissible in the absence of evidence showing suppression of sales. Since the Revenue had not produced any evidence to establish suppression of sales, the Tribunal dismissed that ground.

Before the High Court, the Revenue argued that once bogus purchases had been established, the corresponding sales should also have been treated as bogus and profit at 6% on those sales should have been added as income. It was further submitted that the assessees had admittedly entered into transactions with bogus entities and therefore profit should have been estimated on the sales made to those parties.

The High Court observed that the entire sales were already credited in the books of account. It noted that the Tribunal had sustained a 6% addition on the alleged bogus purchases by following the decision in Pankaj K. Chaudhary. The Court further observed that the Tribunal had correctly held that, once the sales were recorded in the books, no further addition at 6% on those sales could be made in the absence of evidence of suppression of sales. The Revenue had not demonstrated that the sales recorded in the books had been suppressed. The Court also noted that the Commissioner (Appeals) had found that the Assessing Officer neither made any addition with reference to the sales nor recorded any finding that the sales were bogus.

Holding that the Assessing Officer, the Commissioner (Appeals) and the Tribunal had concurrently found that the sales recorded in the books of account were not bogus, the High Court agreed with the Tribunal’s reasons for rejecting the Revenue’s claim for estimating profit at 6% on the sales. It concluded that no further addition was warranted and dismissed all the appeals as devoid of merit, without any order as to costs.

FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT

1. Heard learned Senior Standing Counsel Mr. Karan Sanghani for the appellant.

2. These Tax Appeals are filed under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’ for short) by the revenue for the Assessment Year 2012-13 challenging the common judgment and order passed by the Income Tax Appellate Tribunal, Surat Bench, Surat (hereinafter referred to as ‘the Tribunal’ for short) in respective Tax Appeals filed by the revenue against the difference respondent assessee.

3. These Tax Appeals were heard analogously in view of the common issue regarding non-estimating profitability on sales booked from bogus parties by the Tribunal despite sustaining addition @6% of bogus purchases made with the same parties.

4. The following substantial question of law is proposed by the revenue in Tax Appeal No. 419 of 2026, which is treated as a lead matter:

(i) Whether the Appellate Tribunal has erred on facts and in law in not estimating profitability @6% on sales of Rs.29,26,32,236/- booked from bogus parties despite sustaining addition @6% of bogus purchases made with the same parties?

5. The remaining Tax Appeals are also having the same issue and, therefore, the above question of law will take care of the remaining Tax Appeals also and accordingly following common substantial question of law is framed for the remaining Tax Appeals as under:

“(i) Whether the Income Tax Appellate Tribunal has erred in facts and law in not estimating profitability @6% on sales booked from bogus parties despite sustaining addition @6% of bogus purchases made with the same parties?”

6. The brief facts of the case are that the respondents-assessees are Private Limited Companies who filed their Return of Income for A.Y. 2012-13. The case of the respondents-companies were selected for scrutiny and order under Section 143(3) of the Act was passed. Thereafter, pursuant to the investigation by DDIT, Investigation Unit-2, Surat in the year 2019 in case of one Shri Afroz Mohammed Hassan Fatta and Group cases and pursuant to the investigation by the Custom Department and Enforcement Directorate relating to foreign remittances against fake import documents and other information received by the Assessing Officer, a notice under Section 148 of the Act was issued for re-opening of the completed assessment of the year under consideration.

7. After considering the replies filed by the respondents-assessees Companies, the Assessing Officer passed assessment order under Section 143(3) r/w. Section 147 of the Act by making addition of the purchases made by the respondent-Companies from other group companies i.e. M/s. Rough Diamonds, M/s. Rhiday Gems Pvt. Ltd and M/s. Cosmos Infrastructures in relation to Afroz Hassan Satta. In case of Tax Appeal No. 419 of 2026 of M/s. Glorious Diamond Pvt. Ltd., the respondent assessee made following transactions from three different Companies, details of which are as under:

8. The Assessing Officer made addition of the entire purchases as bogus purchases under Section 69 of the Act as unexplained investment. Being aggrieved, the assessee Companies carried the matter before the Commissioner of Income Tax (Appeals) (hereinafter referred to as ‘CIT(A)’ for short), who partly allowed the appeal of the assessee by observing as under:

“7.14 The total purchases debited by means of accommodation bills is Rs. 13,64,90,501/- as specified in para 7.6 above. I have already given a finding as part of para 7.5 above that there were no bogus purchases from 4 concerns namely M/s MB Offshore Distributors Pvt Ltd., M/s RA Distributors Pvt. Ltd., M/s Ramshyam Exports Pvt. Ltd. and M/s Ridhi Exim Pvt. Ltd totalling to Rs.36,32,00,000/-and in para 7.6 above. I have also held that addition of Rs.1,67,517 cannot be made for the sale transaction incurred with M/s Rhiday Gems Pvt. Ltd, in para 7.8 above. Thus, out of bogus purchases brought to tax by the AO of Rs.49,98,58,018/-, the total amount from these 3 entities comes to Rs.36,33,67,517/- which is held to be not bogus purchase as no such purchases are debited by the appellant in its books. The bogus purchases are to the tune of Rs. 13,64,90,501/- from 2 entities namely M/s Metro International and M/s Franklin International. There was a Task Group for Diamond Sector which submitted a Report to the Department of Commerce in which it was reported that the net profit in diamond manufacturing is in the range of 1.5% to 4.5% and in trading in the range of 1% to 3%. The appellant’s business is of trading in rough and polished diamonds and the purchases debited are for rough and polished diamonds. Thus, in the facts and circumstances of the appellant’s case, if the profit element from the purchases treated as non-genuine @2% would meet the ends of justice. The 2% of the same works out to Rs.27,29,810/-, which is sustained and the appellant gets relief of Rs.49,71,28,208/-. Ground No.2 is treated to have been partly allowed.”

9. Similar findings were also rendered by CIT(A) by restricting the addition @ 2% of the total alleged bogus purchases from the related concern of Mr. Afroz Satta.

10. Being aggrieved, the revenue preferred an appeal before the Tribunal raising the following ground amongst others:

“(6) Without prejudice to the Ground No.1 & 2, despite holding at para 7.6 that total sales from 3 firm viz. Rs.29,26.32,236/- constitutes bogus sales. Ld.CIT(A) erred in not taking any adverse view of the same, even while working out net profit percentage from bogus purchases made by the assessee.”

11. The Tribunal, after considering the facts of the case and findings on record, increased the dissallowance @6% of the alleged bogus purchases.

12. The Tribunal enhanced the disallowance placing reliance upon the decision of Tribunal in case of ITO vs. Pankaj K. Chaudhary in ITA No. 1152/ AHD/2017 in Paragraph No. 9.4 and 9.5, which read as under:

“9.4 We find that there are several decisions of this Co­ordinate Bench of this Tribunal, wherein on the similar circumstances, the Tribunal has sustained addition @ 6% of the bogus purchase. Reference may be made to the case of Pankaj K. Chaudhary (supra). The Co-ordinate Bench of this Tribunal in the above case decided a bunch of 14 appeals consisting of appeals and COs by Revenue and different assessees. The lead case Pankaj K. Chaudhary (supra). After detailed discussion of the case and the legal position as well as precedents on the subject issue, the Tribunal sustained addition @ 6% of the bogus purchases. The facts of the present appeals are similar and hence it is squarely covered by the order of the Tribunal in the case of Pankaj K. Choudhary (supra) wherein it was held as follows:

“19. Ground No. 2 in assessee’s appeal and the grounds of appeal raised by the revenue are interconnected, which relates to restricting the disallowance of bogus purchases to the extent of 12.5%. The AO made of 100% of purchases shown from the hawala dealers/ entry provider namely Bhanwarlal Jain. We find that the AO while making additions of 100%, of disputed purchases solely relied on the report of the investigation wing Mumbai. No independent investigation was carried by the AO. The AO has not disputed the sale of the assessee. The AO made no comment on the evidences furnished by the assessee. We further find that ld CIT(A), while considering the submissions of the assessee accepted the lapses on the part of the AO and noted that no sale is possible in absence of purchases. The Books of the assessee was not rejected by the AO. The ld CIT(A) on further examination of the facts and various legal submissions find that Ahmedabad Tribunal in Bholanath Poly Fab Private Limited (supra) held that in the such cases the addition of bogus purchases was sustained to the extent of 12%, on the observation that the assessee may have made purchases from elsewhere and obtained the bills from impugned supplier to inflate Gross Profit Rate. The Id CIT(A) by considering the overall facts, concluded that the 100% disallowance of purchase is not justified. We also find that the ld.CIT(A) also considered the decision of jurisdictional High Court in Mayank Diamonds Pvt. Ltd. (supra) and compared the fact of the present case with the facts in Mayank Diamonds Pvt. Ltd. (supra) and compared the fact of the present case with the facts in Mayank Diamonds Pvt Ltd (supra) and noted that assessee in that case was also engaged in the trading of polished diamonds. The ld CIT(A) noted that in that case the AO made disallowance of entire bogus purchase and on first appeal before CIT(A) the disallowances were maintained. However, the Tribunal gave partial relief to the assessee directing to sustain the addition @12% of such bogus purchases. And on further appeal, the Hon’ble High Court sustained Gross Profit Rate @ 5% being average rate of profit in industry.

20. Now adverting to the facts of the present case, the Id .CIT(A) held that insome other similar cases; though he had sustain 5% of Gross Profit Rate, considering the fact that where Gross Profit shown by those assessee’s are more than 5%. However, in the present case, the assessee has merely shown Gross Profit Rate only at 0.78% of turnover, accordingly, the ld. CIT(A) was of the view that disallowance of 12.5% of impugned purchases/bogus purchases would be reasonable to meet the end of justice.

21. We have seen that 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 @.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 Id 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.

22. In the result the appeal of revenue is dismissed and the appeal of the assessee is partly allowed.”

9.5 Thus, it is clear that the issue is squarely covered by the decision of the Co-ordinate Bench in the case of Pankaj K. Chaudhary (supra) and there is no change in facts and law and since Revenue is unable to produce any material to controvert the aforesaid findings of the Co-ordinate Bench (supra), we find no reason to deviate from the findings in the above order of Co-ordinate Bench. Therefore, following the order of Co-ordinate Bench in the case of Pankaj K. Chaudhary (supra), we dismiss the appeal of Revenue and also CO of the assessee and sustain addition @ 6% of the bogus purchase of the appellant. appellant.”

13. The decision of the Tribunal in case of Pankaj K. Chaudhary (supra) is upheld by this Court in Tax Appeal No. 617 of 2022.

14. The Tribunal, thereafter, considering the ground No.6 raised by the revenue regarding CIT(A) having not taken adverse view of making addition on account of bogus sales with three concerns of Afroz Hasan Fatta Group and after considering the fact that the sales was already credited in assessee’s books of account and 6% addition had already been made by the Tribunal on the alleged bogus purchases, held that no further addition is permissible in absence of any finding that there is suppression of sale. The Tribunal, therefore, dismissed such ground raised by the revenue by observing as under:

“10. The Revenue has raised in ground No.6 that the Ld.CIT(A) should have added the profit percentage from the bogus sales with the three concerns of Afroz Hasan Fatta Group amounting to Rs.29,26,32,236/-. The assessee has already credited the sales in its books of account. Addition of 6% over and above the above sale is not permissible in absence of any evidence that there is suppression of sale. The Revenue has not brought any evidence on record to prove that appellant has suppressed its sale. Hence, the ground is dismissed.”

15. Learned Senior Standing Counsel Mr. Karan Sanghani for the appellant submitted that as CIT(A) and the Tribunal ought to have considered the fact of bogus purchases having been made by the assessee, the corresponding sales also ought to have been held bogus and also 6% of the bogus sale was required to be added as income of the assessee.

16. It was submitted that it is not disputed that respondents-assessees Companies have entered into transaction with bogus entities and, therefore, the Tribunal ought to have made addition by estimating profit @6% on the sales made to the bogus parties.

17. Having heard learned advocate for the revenue, it appears that the entire sales is credited in the books of accounts. The Tribunal has already made an addition @6% of the alleged bogus purchases relying upon the decision in case of Pankaj K. Chaudhary (supra) by arriving at the findings of fact that revenue was unable to produce any material to controvert the findings in case of Pankaj K. Chaudhary (supra). The Tribunal has further rightly held that once the assessee has credited sales in the books of accounts, addition of 6% over and above the sales, is not permissible in absence of any evidence that there is suppression of sales. The learned Senior Standing Counsel for the revenue has not been able to demonstrate that the sales recorded in the books of accounts is suppressed by the assessee and, therefore, in absence of any evidence produced on record to prove that the assessee has suppressed the sale, the Tribunal has rightly not made any addition. It is also pertinent to note that the CIT(A) has also taken into consideration that the Assessing Officer has not made addition with reference to the sales nor any finding is given by the Assessing Officer that the sales were bogus.

18. Thus, in view of the concurrent findings by the Assessing Officer, the CIT(A) as well as the Tribunal, that the sales recorded in the book of accounts is not bogus, no addition was warranted and, therefore, we are in complete agreement with the reasons assigned by the Tribunal for dismissing the ground No.6 in the appeal raised by the revenue for not estimating the profit @6% on the sales recorded in books of account of the assessee Companies.

19. The appeals are, therefore, devoid of merit and accordingly dismissed with no order as to costs.