Arham Star Vs ITO (ITAT Mumbai)
The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, in the case of Arham Star Vs ITO, partially allowed the assessee’s appeal, holding that the disallowance for alleged bogus purchases cannot be 100% of the purchase value when the corresponding sales are accepted and supported by documentary evidence. The Tribunal restricted the addition to the difference in Gross Profit (GP) margin, following the ratio established by the Bombay High Court.
Background and Alleged Bogus Purchases
The appeal challenged a reassessment order for Assessment Year 2010-11, completed ex parte under Section 144 read with Section 147 of the Income-tax Act, 1961. The assessee, a partnership firm engaged in the manufacturing and trading of cut and polished diamonds, had its case reopened based on information received from the Investigation Wing, following search action against the Bhawarlal Jain group.
The Revenue alleged that the assessee took accommodation entries for purchases totaling $\text{Rs. } 46,46,495/-$ from two entities: Mohit Enterprises and Nice Diamonds.
AO’s Disallowance
Despite the assessee’s submission of voluminous evidence during assessment proceedings, the Assessing Officer (AO) proceeded to disallow 100% of the disputed purchases. The AO’s primary contention was that the transactions were part of the Bhawarlal Jain syndicate’s modus operandi for providing accommodation entries. The AO rejected the documents provided by the assessee, characterizing them as “unilateral acts” and mere book entries that could not make “fictitious transactions real.”
