Vinesh Arvindkumar Shah Vs ITO (ITAT Mumbai)
In a case addressing the treatment of alleged bogus purchases, the Income Tax Appellate Tribunal (ITAT), Mumbai Bench, has partly allowed an appeal filed by assessee Vinesh Arvindkumar Shah. The Tribunal directed the Assessing Officer (AO) to recompute the assessee’s income by adding only the estimated profit embedded in the bogus purchases, rather than the entire value of such purchases.
The case pertained to the Assessment Year 2011-12. The assessee, engaged in the ferrous metal business, came under scrutiny based on information received from the Sales Tax Department. This information indicated that the assessee had shown purchases amounting to Rs. 19,43,378/- from various parties that were allegedly not conducting genuine business but were merely providing accommodation bills (fake invoices without actual supply of goods).
The Assessing Officer provided the assessee with an opportunity to substantiate the genuineness of these purchases. However, the assessee reportedly failed to provide satisfactory evidence. Consequently, the AO, in an order passed under Section 144 read with Section 147 of the Income Tax Act, 1961, treated the entire amount of Rs. 19,43,378/- as bogus purchases/accommodation bills and added this sum to the assessee’s total income.
Aggrieved by this addition, the assessee appealed to the National Faceless Appeal Center (NFAC), functioning as the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) reviewed the case and upheld the AO’s addition. In the order, the CIT(A) noted that there was clear evidence of the assessee’s involvement in accommodation bills through the booking of bogus purchases, aimed at reducing taxable profit. The CIT(A) also observed that the assessee had not submitted any evidence such as purchase and sales registers, inventory registers, or other documents to prove the genuineness of the transactions. Interestingly, the CIT(A)’s order also recorded that “there are no evidences for bogus sales,” although this observation did not lead to a deviation from upholding the full purchase addition.
The assessee then took the matter to the ITAT, Mumbai. Before the Tribunal, the assessee’s counsel, Ms. Tisha Bagh, argued that the CIT(A)’s order was “cryptic” and did not consider the factual aspects of the case adequately. She highlighted the CIT(A)’s own observation about the lack of evidence for bogus sales, suggesting an inconsistency in the appellate order.
Crucially, the assessee’s counsel presented an alternate plea. Without prejudice to the argument that the addition itself was unwarranted, she submitted that if an addition were to be confirmed by the Tribunal, it should be limited to the estimated profit element embedded within the bogus purchases, rather than the entire purchase value. In support of this argument, the assessee’s counsel cited a judgment of the jurisdictional Bombay High Court in the case of Pr. CIT vs. M/s. Mohammad Haji Adam & Co. (in ITA No. 1004 of 2016 and others dated 11.02.2019). This judicial precedent supports the principle that in cases of bogus purchases where corresponding sales are not disputed, the addition should be restricted to the profit margin that would have been earned on those sales had the purchases been genuine.
The learned Departmental Representative (DR), representing the Revenue, countered the assessee’s submissions. The DR contended that the assessee had failed to substantiate the genuineness of the purchases before the lower authorities by producing proper documents. Therefore, according to the DR, the orders passed by the AO and the CIT(A) were justified and without infirmity.
The ITAT, after hearing both parties and perusing the case records, acknowledged that the assessee had indeed failed to produce sufficient documentation before the lower authorities to establish the genuineness of the disputed purchases. On this specific point, the Tribunal found no reason to interfere with the conclusion drawn by the AO and the CIT(A) that the purchases were bogus.
However, the ITAT then considered the alternate claim raised by the assessee, supported by the Bombay High Court judgment in the case of Pr. CIT vs. M/s. Mohammad Haji Adam & Co. The Tribunal concurred with the assessee’s alternate argument that only the profit element related to the bogus purchases should be subject to addition to income.
Following this principle, the ITAT directed the Assessing Officer to re-examine the assessee’s accounts. The AO was instructed to verify whether the bogus purchases of Rs. 19,43,378/- had already been shown by the assessee in their Profit & Loss Account. If this verification confirmed that these purchases were included in the accounts, the AO was directed to apply a Gross Profit (GP) rate of 5% on the value of these bogus purchases. This calculated amount representing the estimated profit was to be added to the assessee’s income, over and above any profit already declared by the assessee on the transactions related to these purchases. The AO was tasked with recomputing the income accordingly based on this direction.
In conclusion, the ITAT partly allowed the assessee’s appeal. While upholding the finding that the purchases were bogus due to lack of substantiation by the assessee before lower authorities, the Tribunal provided significant relief by directing the AO to restrict the addition to income to an estimated profit margin of 5% on the bogus purchase value, in line with the principle established by the Bombay High Court.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
