Case Law Details
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
This appeal has been preferred by the Assessee against the order dated 06.03.2024, impugned herein, passed by the National Faceless Appeal Center (NFAC)/Ld. Commissioner of Income Tax (Appeals) (in short Ld. Commissioner) under section 250 of the Income Tax Act, 1961 (in short ‘the Act’) for the A.Y. 2011-12.
2. In the instant case, the Assessee is engaged in ferrous metal and as per the information received from Sales Tax Department, the Assessee has shown purchases of Rs.19,43,378/- from various parties as mentioned in para no.2 of the assessment order and the said concerns were not doing genuine business of purchases and sales and merely indulged in providing accommodation bills. Considering the aforesaid facts the Assessing Officer (AO) afforded opportunity an opportunity to the Assessee to substantiate his claim, but the Assessee failed to establish the same and therefore the AO treated the purchases to the tune of Rs.19,43,378/- from the parties referred to above, as bogus purchases/accommodation bills and added the said amount of Rs. 19,43,378/- in the income of the Assessee, while passing the assessment order dated 28.11.2016 u/s 144 r.w.s. 147 of the Act.
3. The Assessee, being aggrieved, challenged the said addition before the Ld. Commissioner, but could not succeed as the Ld. Commissioner by considering the conclusion drawn by the AO in making the addition, as well as claim/reply of the Assessee, ultimately affirmed the aforesaid addition, by observing and holding as under:
“Grounds 1 to 6: In these grounds of appeal the appellant has stated that the AO erred in adding purchases made as bogus as communicated by Sales Tax Department. On perusal of the above documents, it is noted that there is clear evidence that appellant has indulged in accommodation bills through booking bogus purchases thereby reducing profit and thus evaded taxes. There are no evidences for bogus sales. Appellant also not submitted any evidence like Purchase and Sales register, Inventory register or any other evidences to prove his claims of bogus sales.
In view of the above, order of AO is upheld and the grounds are noted as dismissed.”
5. The Assessee, being aggrieved, is in appeal before this Court. At the outset, the Ld. Counsel Ms. Tisha Bagh has demonstrated that impugned order is a cryptic order and the Ld. Commissioner has not considered the factual aspects in its right perspective. Even otherwise, from the conclusion drawn, it appears that the Ld. Commissioner has recorded that there are no evidences for bogus sales and therefore according to the Ld. Counsel the impugned order is liable to be set aside. The Ld. Counsel further stated that without prejudice to the rights of the Assessee, if addition is to be affirmed then 100% cannot be made, as the profit element embedded in the bogus purchases can only be added in view of the judgment passed by the Hon’ble Jurisdictional 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).
6. On the contrary, the Ld. D.R. refuted the claim of the Assessee by contending that the Assessee before the authorities below has failed to substantiate his claim specifically before the AO as no material was produced by the Assessee for establishing the genuineness of the purchases and therefore there is no infirmity in the orders passed by the authorities below.
7. Heard the parties and perused the material available on record. Admittedly, the Assessee before the AO as well as before the Ld. Commissioner except filing the reply has not produced proper documents to establish genuineness of the purchases made, and therefore the same has been considered as bogus by the authorities below and thus on this aspect no interference is warranted. However, coming to the second/alternate claim raised by the Ld. Counsel on behalf of the Assessee, this Court is in concurrence with the alternate claim of the Ld. AR and not refuted by the Ld. DR that profit element only can be subjected to addition and hence, the AO is directed to verify whether the bogus purchases have already been shown by the Assessee in its profit & loss account and on finding answer “affirmative” then to apply GP rate @5% of the bogus purchases over and above the GP/profit already shown on the same, if any by the Assessee, and recompute the income accordingly.
8. In the result, the appeal filed by the Assessee stands partly allowed.
Order pronounced in the open court on 12.12.2024.
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