Case Law Details
ITO Vs Khimchand Okchand Bhansali (ITAT Mumbai)
Summary: The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, has recently adjudicated on the extent of disallowance permissible in cases involving alleged bogus purchases, modifying an earlier order by the Commissioner of Income Tax (Appeals) [CIT(A)]. The case, involving the Income Tax Officer (ITO) and Khimchand Okchand Bhansali, centered on the disallowance of purchases deemed non-genuine by the Assessing Officer (AO) for the assessment years 2009-10, 2010-11, and 2011-12. Initially, the AO had disallowed 12.5% of the total purchases, citing information from the Sales Tax Department regarding accommodation entries and the assessee’s failure to produce certain documents like delivery challans. The AO’s stance was that merely proving payment through banking channels and submitting invoices was not conclusive evidence of genuineness. The CIT(A), however, partially accepted the assessee’s documentation and reduced the disallowance to 4%. Dissatisfied with this reduction, the Revenue Department appealed to the ITAT, strongly relying on a Bombay High Court judgment in the case of PCIT v. Kanak Impex, where a 100% disallowance of alleged bogus purchases was upheld. The department contended that the principle established in Kanak Impex should apply, leading to a higher disallowance, potentially restoring the AO’s 12.5% addition or even allowing 100%.
Before the Tribunal, the assessee countered the department’s arguments by asserting that the purchases in question were fully supported by comprehensive documentation, including invoices, bank statements reflecting payments, and quantitative records demonstrating the flow of goods leading to corresponding sales. The core of the assessee’s argument was that while the genuineness of the parties might have been questioned, the purchase transactions themselves were factual and verifiable through financial and stock records. The assessee’s counsel specifically argued that the Kanak Impex judgment was factually distinguishable. The ITAT concurred with the assessee’s distinction of the Kanak Impex case, noting that in Kanak Impex, the taxpayer had failed entirely to prove that the purchases were made or to explain the source of expenditure. In contrast, in the present case, the AO’s action of disallowing a percentage (12.5%) rather than the full 100% of purchases indicated that the AO had implicitly accepted the existence of the transactions, merely doubting the parties involved. The Tribunal referenced other coordinate bench decisions, including Mr. Manish P. Lathia, HUF and Mr. Vinesh Arvindkumar Shah, involving similar facts and the same line of business, where the addition was restricted to 5%. Applying the principle that when purchases and subsequent sales are established, only a component representing potential inflated pricing or profit suppression can be added back to income, the ITAT deemed it appropriate to restrict the disallowance. Consequently, the ITAT directed the Assessing Officer to compute the profit element at 5% of the purchases, modifying the CIT(A)’s order from 4% to 5%, and thereby partly allowing the Revenue’s appeal. The ruling underscores the critical importance of taxpayers maintaining and presenting robust documentation to substantiate the reality of their business transactions during assessment proceedings to mitigate potential adverse actions by the tax authorities.
Issue:
Disallowance of alleged bogus purchases – Whether percentage disallowance by the Assessing Officer (AO) is justified and to what extent.
Facts:
- The AO disallowed 12.5% of the assessee’s purchases alleging them to be non-genuine.
- The CIT(A) reduced this to 4%, acknowledging supporting documentation submitted by the assessee.
- The Department appealed before the Hon’ble Mumbai ITAT, relying on the Bombay High Court’s ruling in PCIT v. Kanak Impex [2023] 172 taxmann.com 283 (Bom.), where 100% of the purchases were disallowed.
Assessee’s Representation:
- Purchases were duly supported by invoices, banking transactions, quantitative records, and corresponding sales. Complete documentation was furnished during the assessment itself, demonstrating that the goods were actually purchased and sold.
- Only the genuineness of the parties was in question, not the purchase transaction itself.
- The decision of Kanak Impex was distinguishable on facts.
Tribunal’s Findings:
The Tribunal distinguished the Kanak Impex case, emphasizing:
1. In Kanak Impex, the assessee failed to prove purchases or their source at all before the AO.
2. The AO in that case added 100% of the purchases, doubting the very existence of the transactions.
3. In the present case, the AO accepted the existence of purchases, limiting the disallowance to 12.5% of purchases, which indicates that only the parties (and not the transactions themselves) were in doubt.
Ruling:
The Tribunal observed that when purchases are accepted as having been made (and sold), only a profit element embedded in potentially inflated or unverifiable purchases can be taxed to prevent revenue leakage.
Accordingly, the addition was restricted to 5% of the purchases.
Key Rationale:
Where the fact of purchases and corresponding sales is established, only a portion representing possible inflation or profit suppression can be added, not the entire purchase amount.
Takeaway:
It is crucial for the assessee to submit complete and credible documentation—including invoices, bank payments, stock records, nexus of purchase with sales etc. to the AO during assessment proceedings. A well-documented submission helps establish the genuineness of transactions and can significantly mitigate adverse inferences.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
These appeals have been preferred by the Revenue Department against the orders dated 16.10.2024, 14.10.2024 24.10.2024, impugned herein, passed by the National Faceless Appeal Center (NFAC)/ Ld. Commissioner of Income Tax (Appeals) (in short Ld. Commissioner) u/s 250 of the Income Tax Act, 1961 (in short ‘the Act’) for the A.Ys. 2009-10,2010-11,2011-12.
2. These 03 appeals are based on the identical facts, except variation in amounts, hence for the sake of the brevity, the same were heard together and are being disposed of, by this composite order and by taking into consideration facts and issue involved in ITA No.6546/M/2024 (AY: 2009-10) as a lead case.
3. The Assessee has claimed that it deals in ferrous and nonferrous metals and during the year under consideration, made the purchases of Rs. 1,12,13,732/- through banking channels and respective purchase invoices and has established the purchases made, by filing relevant purchase invoices, copy of bank statements evidencing payment made through proper banking channels, highlighting the relevant entries, chart showing the details of the purchases made from the parties and quantitative tally in respect of purchases made from the parties and the corresponding sales. The assessee further claimed before the assessing officer that there is one to one co-relationship between purchasers, sales are fully vouched, purchases from the said parties can be corroborated, as the Assessee has made the payments through account paying cheques only. The Assessee at last claimed that without purchases, no sale can be made.
4. Though the Assessing Officer considered the aforesaid claim of the Assessee, however rejected the same, mainly on the reasons that Sales Tax Department, has given information with regard to the bogus accommodation entries on account of bogus purchases/bills. Further, the assessee has failed to produce the delivery challans, transport and outro receipts etc. . The Assessing Officer also observed that mere filing of evidence qua purchases and making of payment through account cheque, cannot be conclusive in a case, where genuineness of the transaction, is in doubt. The Assessing Officer thus on the aforesaid reasons, ultimately estimated the profit element at the rate of 12.5% of the total purchase of Rs. 1,12,13,732/- and consequently made the addition of Rs. 14,01,716/-.
5. The Assessee being aggrieved, challenged the reopening of the proceedings u/s 147 of the Act, as well as the addition on merits by filling 1st appeal before the Ld. Commissioner. The Ld. Commissioner though affirmed the reopening proceedings u/s 147 of the Act, but restricted the addition from 12.5% to 4% of the bogus purchases by taking into consideration the judgment passed by the Hon’ble Tribunal in the case of Kamlesh Bhansali in ITA No. 1591/M/2020. In effect, the Ld. Commissioner deleted the addition of Rs. 9,41,167/-.
6. The revenue department being aggrieved is in appeal before this court and at outset has placed reliance on the judgment passed by the Hon’ble Jurisdictional High Court in the case of Principal Commissioner Of Income Tax-5 Vs. Kanak Impex (India) Ltd. in ITA No. 791/2021 decided on 03.03.2025, wherein the Hon’ble High Court restored the addition made by the assessing officer @100% of the bogus purchases, which was restricted to 12.5% by the Ld. Commissioner, and subsequently got affirmed by the Hon’ble Tribunal, restricting the disallowance qua profit margin, on unproven purchases.
7. Ld. Counsel Mr. Dhaval Shah, on the contrary has demonstrated that this case is factually dissimilar to the case dealt with the Hon’ble High Court, as the Hon’ble High Court considered the case, wherein the assessing officer has made the addition @100%, but in the instant case, the Assessing Officer himself has estimated the profit @12.5%.
8. This Court observe that the Hon’ble High Court, while deciding the issue, has also taken into consideration the relevant fact specific to the effects that the Assessee in that case failed to prove the purchases including source of expenditure, by not offering any explanation in the course of reassessment proceedings and therefore in the absence of any explanation qua source of expenditure, the AO had applied the provisions of section 69(c) of the Act and therefore, the Hon’ble High Court justified the action of the AO, in making the addition @100%. Whereas in the instant case, admittedly the Assessee has proved that the transactions have been carried out through banking channels and the assessing officer has not also not doubted the same and accepted specifically in the assessment order itself vide para 7(xii) for making the payment through banking channel.
9. The Ld. Counsel also submitted four judgments qua identical issue, by the Hon’ble Jurisdictional High Court, including in the case of Principal Commissioner of Income Tax-2 Vs Refrigerated Distribute Private Limited (ITA No. 1840/2018) decided on 05.03.2005, wherein the Assessing Officer estimated the gross profit @25%, which was confirmed by the then Ld. CIT(A). However, subsequently reduced by the tribunal to 10% and therefore, the Hon’ble High Court, by considering the peculiar fact that the issue involved relates to only estimation of profit; ultimately opined/decided that no substantial question of law can be said to have arisen in the instant case.
10. Thus this Court is in concurrence with the contention raised by Mr. Dhaval and the claim made by the Assessee that this case is factually dissimilar to the case dealt with by the Hon’ble High Court Principal Commissioner Of Income Tax-5 Vs. Kanak Impex (India) Ltd. in ITA No. 791/2021 decided on 03.03.2025. Hence the addition the addition @ 100% of the bogus purchases made by the AO and as claimed by the Ld. DR, cannot be restored.
11. This Court further observe that Tribunal in the cases of Mr. Manish P. Lathia, HUF Vs. ITO in ITA No. 2906/M/2024 decided on 12.12.2024 and Mr. Vinesh Arvindkumar Shah Vs. ITO in ITA 2121/M/2024 decided on 12.12.2024, has also dealt with identical issue as involved in this case, wherein the Assessee was also involved in the identical business such as ferrous or nonferrous metals. The Hon’ble Coordinate Bench of the Tribunal restricted the addition from 12.5% to 5%.
12. And therefore considering the peculiar fact and circumstances, for the just and proper decision of the case and substantial justice, this court deem it appropriate to restrict the addition @5% instead of 4% as restricted by the Ld. Commissioner.
13. Thus the Assessing Officer is directed to compute the profit element/margin/estimation %5% instead of 4%, as restricted by the Ld. Commissioner.
14. Resultantly, the appeal i.e. ITA No. 6546/M/2024 filed by the Revenue Department, stands partly allowed.
15. In view of judgment in ITA No. 6546/M/2024, all 03 appeals under consideration, are partly allowed in same terms.
Order pronounced in the open court on 03.04.2025.
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