Kamlesh Kumar Kesharwani Vs ACIT (ITAT Raipur)
Conclusion: Addition to the differential margin between the Gross Profit (GP) declared by the assessee and the benchmark rate of 10% adopted as the industry average for rice trading was restricted affirming that a full disallowance of such purchases was not justified when the corresponding sales were accepted by the Revenue authorities.
Held: Assessee was a trader engaged in the purchase and sale of rice and allied products under his proprietary concern M/s Kesharwani Rice Mills, Raipur, was subjected to assessment proceedings under Section 143(3) read with Section 147. AO based on findings from a survey conducted under Section 133A, observed that assessee had made purchases from certain parties that were later identified as non-genuine. For the relevant Assessment Years, AO determined that assessee had procured bogus purchase bills from 6 to 10 such parties, amounting to ₹14.41 crore, ₹15.99 crore, and ₹15.44 crore respectively. Treating these purchases as non-genuine, AO disallowed 25% of the total purchase value for each year and also made additional adjustments on account of unexplained investment, holding that assessee must have infused unaccounted cash to finance these transactions. Upon appeal, CIT (A) held that while the purchases were doubtful, the complete disallowance was unwarranted since the corresponding sales were accepted. CIT(A), accordingly estimated the Gross Profit at 10% being the industry average for rice trading alongside, restricted the addition to the differential margin between the declared GP of the assessee and the benchmark. Assessee argued that the purchases were genuine and supported by invoices and banking transactions. AO argued that the survey under Section 133A revealed a clear modus operandi of issuing bogus purchase bills without physical delivery of goods. It was submitted that statements from brokers and suppliers confirmed that payments received from assessee were immediately withdrawn in cash and returned, demonstrating a circular movement of funds. Assessee failed to substantiate the genuineness of the purchases through documentary evidence such as transport records, stock registers, and confirmations from suppliers, supporting the rejection of books under Section 145(3). Furthermore, it was submitted that such bogus transactions could not have been carried out without a base amount of unaccounted seed capital. It was held that although the purchases were found to be bogus, the sales made out of such purchases had been accepted, which implied that actual goods were traded, although through unverified channels. The Bench held that the rejection of books of account under Section 145(3) was justified in view of discrepancies and unverifiable entries. However, following the consistent judicial view that only the profit element embedded in such transactions could be brought to tax, the Tribunal confirmed the adoption of a 10% Gross Profit rate by the CIT(A) as fair and reasonable. Tribunal endorsed the CIT(A)’s finding that a seed capital was essential to sustain the rotation of funds involved in bogus billing. The Bench also noted that the average GP in the rice trading business typically varied between 3% and 10%, depending on market conditions. Consequently, Tribunal sustained the partial addition computed at the difference between the declared GP (1.53%) and the benchmark GP (10%), amounting to approximately ₹1.22 crore for Assessment Year 2013-14, while proportionate relief was granted in other years.
