Basic and Recent development in relation to Bogus purchase / Nongenuine purchase
Recently, due to cancellation of GST number by GST department and passing of information by GST department to Income tax, the issue of bogus purchases is a arisen, there has not been a consistent approach of different courts, as facts are not found similar in such cases.
Currently, the Department is utilizing three different approaches regarding fraudulent purchases.
– In one scenario, where the authenticity of the assessee’s sales is not questioned and complete documentation is provided for the purchases, the purchases are identified as fraudulent purchase .
– In certain cases, it was discovered that the sales were fictitious and the documentation for the purchases was deemed unreliable. Consequently, it was determined that the entire amount of such purchases is be considered bogus and added to the total.
– In other cases, when the sales of the assessee were not doubted, the CIT(A), ITAT, and HCs instructed to tax only a specific percentage of the bogus purchases or apply a higher gross profit rate to these so-called fraudulent purchases.
We should take care about
1. The actions of the Department on the treatment of bogus purchases,
2. Investigation that may be carried out by the Department,
3. The consequent legal requirements after such investigation, and
4. Difference in treatment of bogus purchases on account of difference in facts
Now let’s explore the concept of bogus purchases:
– The term ‘bogus’ refers to something that is fake or not genuine. When applied to accounting records, it refers to entries made in the books that falsely indicate purchases, even though no actual purchases occurred and no goods were involved at the time of recording.
– Currently, the GST department provides information about cancelled numbers and sales details, which the income tax department uses to investigate parties who have purchased materials from them. In this process, the department combines the concept of bogus purchases with untested purchases. Untested purchases occur when the buyer actually acquires goods or services, but they are obtained from the grey market, with the invoice received from someone other than the actual seller.
– It is crucial to distinguish between bogus purchases and untested purchases and make decisions regarding additions based on this differentiation.
– Bogus purchases or untested purchases are employed to reduce gross profit by either inflating purchases and manufacturing expenses or manipulating purchases in two ways:
– By not actually making purchases but creating documentation to falsely represent them.
– By substituting purchases from the grey market, utilizing them in manufacturing or sales, but obtaining documentation of purchases at higher rates from bill providers.
Source of Information : –
There are various source from where the Assessing officer getting the details of these types of purchases
1. Search, survey action, scrutiny assessments conducted by the department on such accommodation entry providers or any of the beneficiaries.
2. GST or other Department by passing over of information
3. Wrong / mistmatch in inquiry conducted by notice issued u/s. 133(6) of the Act.
Department may develops suspicion about bogus/inflated purchases by examination of books of accounts and information gathered on investigation and found that
- turnover is very high and profit margin is comparatively very low which is not conducive to run business set up for such large turnover,
- where turnover is either constant from year to year but profit margin is on a reducing trend
- creditors for purchases are standing in the balance sheet for substantially long time,
- modes of payment for purchases are in cash,
- Examination of vouchers of purchases reveal scanty or doubtful details (like old phone numbers) about the seller,
- The sellers are not the regular dealers with the assessee,
- The purchase vouchers as such do not inspire confidence as emanating from the seller (like seller from South not mentioning any regional language on its vouchers),
- Mode of transportation not clear from the vouchers or the books,
- Bank details for payment through RTGS or through banking channels is not provided on the vouchers.
For confirmation of all above details : –
The AO may resort to following investigations-
| (i) | To find the identity and existence of the seller by verifying address, GST numbers, phone numbers, PAN, etc., through notice u/s. 133(6). | |
| (ii) | If dealer is local person, he may depute inspector for carrying out field inquiries and obtain report. | |
| (iii) | If the seller is in existence, may issue summons, or carry out operation u/s. 133A and record his statement and carry out other inquiries whether sales to the assessee have been made or not. | |
| (iv) | To enquire into the mode of payment, if pending for long, reasons thereof. | |
| (v) | Inquiry into mode of transportation and genuineness of such transportation (on occasions it has been found that the vehicle number mentioned is that of two wheelers but not of trucks. |
In all now days what view department is taking
The Assessing Officer, completes the assessment considering the whole purchase as bogus and making addition by treating the same as unexplained investment under section 69A of the Act or as unexplained expenditure u/s 69C of the Act
Or
In some cases, the Assessing Officer treat lump sum 20% to 30% of the purchases cost as unexplained investment or GP rate achieved by the assessee as per its regular books of account is enhanced for the quantum of bogus purchases to estimate income embedded in such transactions by following the only one decition of Vijay Protins Ltd. Given by Supreme Courte without considering the documents produced and in hurry to complete the assessment.
Where The income embedded in bogus purchase/untested purchase has been estimated by the judicial authorities as a percentage of such purchases in which AO has not made any independent inquiry and has made the addition on the basis of third party report for example GST department report, total addition has been deleted by the judicial authorities.
Various judgements where in entire additions where deleted on account of Bogus Purchase in the absence of independent inquiry made by the Assessing Officer or restricted to GP achieved by assessee in his regular books of accounts.
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Citation of Case-law |
Decision |
| Commissioner of Income-tax v. Nikunj Eximp Enterprises (P.) Ltd. [2013] 35 taxmann.com 384/216 Taxman 171 (Mag.)/[2015] 372 ITR 0619 (Bom) | – Entire Addition were deleted
– Details filled by assessee a. letter of confirmation of seven suppliers, b. copies of bank statement reflecting the entries of payment through account payee cheques to suppliers, c. copies of invoices for purchase and d. detail of stock inventory. – Sales was not doubted – Merely because the suppliers had not appeared before the Assessing Officer or CIT (Appeals), it could not be concluded that the purchases were not made |
| Principal Commissioner of Income-tax v. Vaman International (P.) Ltd. [2020] 422 ITR 0520 (Bom) | – Entire Addition were deleted
– The mere reliance by the Assessing Officer on the statement of two persons made before the sale tax department to cross examine whom opportunity was not provided to the assessee was not sufficient to make the addition. – The onus was on the revenue to prove that the income belongs to the assessee (Krishna Textiles v. CIT [2008] 174 Taxman 372/[2009] 310 ITR 227) |
| Commissioner of Income-tax Act v. Odeon Builders (P.) Ltd. [2019] 110 taxmann.com 64/418 ITR 315/266 Taxman 461 (SC) | – Entire Additions were deleted
– The disallowance made by the AO solely by relying on third party information gathered by Investigation Wing – AO has also not provided copy of such statement to the assessee was not justified. |
| Deputy Commissioner of Income-tax v. Rajeev G. Kalathil [2014] 51 taxmann.com 514/[2015] 67 SOT 0052 (Mumbai) | – Sales were accepted
– Held that only profit element embedded as per previous history of assessee i.e. 5% to 8% in the purchases could be added and not the entire purchase amount deleted the balance addition. – High Court in revenue’s appeal declined to interfere in the order of the ITAT and upheld the attribution of 5% profit on such alleged bogus purchase |
| Smt. Kiran Navin Doshi v. Income-tax Officer [IT Appeal No. 2601 (Mum) 2016, dated 18-1-2017] | – Tribunal upheld the CIT (Appeals) order wherein instead of disallowance of total purchase amount expenditure under section 69C of the Act,
– An estimation of profit @ 12.5% of such bogus purchase amount being the profit element embedded in such purchase was held justified. |
| PCIT Vs. Rishabhdev Tachnocable Ltd. [ITA No.1330 of 2017] – High Court of Bombay | – Sales genuine – only profit margin embedded to be added
– Profit margin to be computed by comparing the G.P. ratio of earlier years and then adding the difference
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| PCIT Vs. M/s Mohommad Haji Adam & Co. [ITA No. 1004 of 2016] – High Court of Bombay | – Factum of bogus purchase established
– Sales accepted, no reason to reject purchases – Purchase cannot be rejected without disturbing the sales – CIT(A) added 10% of purchase amount – ITAT – Tax only on the basis of difference in the GP rates – Assessee cannot be punished since sale price is accepted by the revenue Order of ITAT upheld. |
| PCIT Vs. Jagdish H Patel [ITA No. 410/412 of 2017] – High Court of Gujarat | – If entire purchases to be treated as bogus, then GP would be higher than the total turnover and would give completely distorted figure
– When additions are made on the basis of GP rate, limited amount of estimation and gross work is always inbuilt. |
| Pooja Paper Trading Co (P.) Ltd. [264 Taxman 260] – High Court of Bombay | – Assessee failed to produce evidence of genuineness of purchase
– Dis-allowance could only be of the income/profit attributable to the bogus purchases. – Progressive GP ratio accepted by AO-no defects in books-sales accepted – no addition of bogus purchase – ACIT Vs. Vijay Kumar Goel (670/Del/2013) (Delhi ITAT) |
| Surana Enterprises Vs. ITO [ITA No. 5414/D/2018] – ITAT Delhi | – Sale of goods shown or otherwise lying in the closing stock
– Resultant gross profit disclosed – Assessee submitted-goods not recorded in quantitative terms in the books estimation of profit only |
| CIT Vs. Hi-Lux Automative Pvt. Ltd. (183 Taxman 260) (Delhi HC) | – Reason for disallowance was – non compliance/appearance by suppliers
– Suppliers – small dealers/ job workers – Enquiry conducted after 6 years – it was not unusual for such small parties to have left in between – Assessee produced sufficient evidences No adverse inference – addition deleted |
| CIT Vs. Nikunj Eximp Enterprises Pvt. Ltd. (372 ITR 619) (Bombay High Court) | – Stock statement reconciled
– Books not rejected – Substantial sales made to government department – All documentary evidences furnished – Non appearance of suppliers cannot be a ground – Addition deleted |
| Geolife Organics Vs. ACIT [58 ITR(T) 297]-ITAT Mumbai | – Information received from sale tax department that assessee is beneficiary of bogus billing-AO added profit ratio embedded in purchases
– disallowance due to non-appearance of the suppliers – No efforts by AO to make further investigation to substantiate his allegation – Purchases supported by sufficient documentary evidences – Sales not doubted, quantitative tally available, payment through account payee cheque, – GP rate reasonable and satisfactory in comparison to the previous years – AD not brought on record any material – Information from sale tax or non production of party could not treat the purchases as bogus. |
| YFC Projects Pvt. Ltd. (37 SOT 130) (Delhi ITAT) | – AO was unable to point out a single defect in its books of account.
– Mere non filing of confirmations cannot be a ground |
| Cheil India (P.) Ltd Vs. ITO [172 TT) 302]-ITAT Delhi | – not bothered to examine the veracity of the documents filed by the assessee
– There may be several reasons for a party for non-appearance or non-compliance before the AO |
| CIT VS. Odean Builders Pvt. Ltd. (418 ITR 315)(Supreme Court) | – Addition on the basis of third party information
– Assessee produced all the documentary evidences-assessee discharged his burden – Cross examination not provided third party statement not subjected to further verification – addition deleted |
| PCIT Vs. Tejua Rohitkumar Kapadia – Supreme Court | – Third party statement against assessee- Sales confirmed by seller sales of assessee accepted by department – documentary evidences provided |
| CIT Vs. Sunrise Tooling System (P) Ltd. (361 ITR 206] – Delhi HC | – Cross examination not provided
– Books not rejected – Sales not doubted – Sales has been shown by the seller – Goods purchased have been utilized |
| PCIT Vs. Shapoorji Pallonji & Co. Ltd. [ 117 taxmann.com 625] – High Court of Bombay | – Addition on the basis of third party statement
– Cross examination not provided – Assessee furnished all the documentary evidences – bogus purchases forms a minor fraction of total volume of the assessee company |
| PCIT Vs. Ui Packs India – [108 taxmann.com 454] – High Court of Bombay | – Cross examination not provided
– Department accepted the sales – Not justified in invoking section 69C – If the trading account of the assessee is re-casted on the basis of disallowance of purchase, G.P. rate would be changed – without rejecting books and invoking the provisions of section 145, GP cannot be changed – Vardan Fashions Vs. JCIT (1143/Del/2013) (Delhi ITAT) |
| ITO VS. Deepak Khusaldas Mehta [83 taxmann.com 63]-ITAT Mumbai | – Opportunity of cross examination not given
– Assessee was never asked to provide whereabouts of parties – did not consider the quantitative reconciliation and the one to one identification of sale and purchase whereby the stock was reconciled – Books of accounts were not rejected-sales accepted – Only profit embedded can be added |
| Cannon Industries Pvt. Ltd. Vs. DCIT 167 TTJ 82] – ITAT Mumbai | – Sole basis is statement recorded in survey
– Cross examination not provided – Sales and quantitative tally not disputed – Purchase bills matched with the export sales – Addition deleted – Where books accepted trading results accepted no descripency in books no addition of BOGUS SALES – |
To sum-up all above judicial pronouncements, the addition for Bogus Purchases/Untested Purchases is required to be restricted to the amount of Income embedded in such purchases and must not be deemed to be unexplained investment u/s 69A or unexplained expenditure u/s 69C of the Act.
However, while drafting the reply one has to consider the before accepting the addition on account of estimation of income since there is GST Department also.
In case where an assessee is called upon to establish the genuineness of purchase transactions considering the various above pronouncements, The assessee can submit the below mentioned documentary evidences before the Assessing Officer to establish the factum of purchases:
– Purchase Invoices along with photo of goods purchased
– Inward register maintained at registered premises with Date, Name of Suppliers, GST number, Taxable Value, GST, Way bridge Receipt, inward time when goods taken in factory , signature of transporter , Vehicle Number and many more details ;
– Confirmation from the seller of goods stating that the goods are sold by him along with income tax return and statement of income
– Bank account statement duly reflecting the payment to the seller;
– Bilty/Goods Receipt Note of the transporter of goods;
– Detail of Stock Register reflecting the quantity of material purchased and subsequently sold
– For manufacturing concerns, the assessee may have to furnish requisite production record to justify the consumption of raw-material/consumables purchased for achieving the output/production.
– Tallying the Purchase Value and Purchase Quantity as per books of account with the GST returns as like GSTR 1 and GSTR 3B filed with the authority.
– In case GST number of seller is cancelled or suspended , Appeal filled by seller or action taken by seller to activate that GST number
– Try to establish movement of goods with sufficient proof.
Conclusion can be drawn by differentiating the Bogus and Untested purchase as below : –
|
Bogus Purchase |
Untested Purchase |
| – No purchases are actually made,
– Only bills are obtained from bill providers – Purchases are inflated to reduce the taxable profit – Payments are made but equivalent amount after reducing commission is taken back in cash by the assessee |
– Actual Purchases are there
– Purchases are s are generally made from grey market in cash – Bills and vouchers for purchases are obtained from bill providers – Quantitative details , movement of goods are proved |
| In this type of cases, purchases as well as suppliers are fictitious, the AO would be justified to make addition of entire bogus purchases as income | In this type of case, Reasonable estimation can be taken and GP on the basis of previous history of assessee or prevailing market should be considered. |
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