PCIT Vs Hitesh Mody (HUF) (Bombay High Court)
The Bombay High Court considered the Revenue’s appeal challenging the order dated 24.05.2017 of the Income Tax Appellate Tribunal (ITAT), which had allowed the assessee’s appeal in part and dismissed the Revenue’s appeal. The Revenue proposed substantial questions of law relating to the Tribunal’s affirmation of the Commissioner of Income Tax (Appeals) [CIT(A)] restricting the addition on alleged bogus purchases to 8% under Section 69C of the Income-tax Act, 1961.
The assessee was engaged in the business of trading chemicals. During assessment for Assessment Year 2011-12, the Assessing Officer concluded that the assessee had made bogus purchases amounting to ₹1.35 crore and treated the entire amount as unexplained expenditure under Section 69C of the Act.
The assessee appealed before the CIT(A). Relying upon Commissioner of Income Tax v. Simit P. Sheth, the CIT(A) held that the entire purchases could not be disallowed and that only the profit element embedded in such purchases could be brought to tax. Accordingly, the CIT(A) restricted the addition to 8% of the total purchases. Both the assessee and the Revenue challenged this order before the ITAT. The Tribunal dismissed both appeals and affirmed the findings of the CIT(A).
The High Court noted that the Assessing Officer had treated the purchases as bogus on the basis of information that the suppliers merely issued bills without effecting actual transactions. However, the CIT(A.) had recorded factual findings that the Assessing Officer had not disputed the genuineness of the payments made through banking channels, had not questioned the inventory which was subsequently sold, and had accepted the sales recorded by the assessee. On these facts, the CIT(A.) concluded that only a fair profit margin could be added and determined the same at 8% of the purchases. The ITAT accepted these factual findings.
The Revenue relied upon the Gujarat High Court decision in N.K. Industries Ltd. v. Deputy Commissioner of Income Tax, contending that once purchases were found to be bogus, the entire amount should have been added to the assessee’s income. It was also submitted that the Special Leave Petition against that judgment had been dismissed.
The High Court observed that its earlier decision in PCIT v. Mohammad Haji Adam & Co. had distinguished N.K. Industries on the basis of facts. It further noted that the Gujarat High Court itself, in PCIT v. Jigisha Satishkumar Mehta, had distinguished N.K. Industries, observing that the latter involved material discovered during a search exposing fictitious entries in the regular books of account. The Court held that the decision in N.K. Industries was not applicable to the present case because the assessee’s sales had not been doubted and corresponding purchases were necessary for effecting those sales.
The Court also referred to paragraph 8 of N.K. Industries, where the Gujarat High Court had recognised that when sales were accepted, the corresponding cost price had to be deducted and only the gross profit element could be brought to tax.
The High Court observed that it was not possible in appellate jurisdiction to determine the appropriate profit margin and noted that both the CIT(A) and the ITAT had concurrently found 8% to be a reasonable estimate on the facts of the case.
Finding no reason to interfere with the concurrent factual findings, the High Court dismissed the Revenue’s appeal.
Cases Discussed
- PCIT v. Jigisha Satishkumar Mehta (Gujarat High Court), (2023) 155 taxmann.com 279 (Guj)
- PCIT v. Mohammad Haji Adam & Co. (Bombay High Court), (2019) 103 taxmann.com 459 (Bom)
- N.K. Industries Ltd. v. Deputy Commissioner of Income Tax (Gujarat High Court), (2016) 72 taxmann.com 289 (Gujarat)
- Commissioner of Income Tax v. Simit P. Sheth (Gujarat High Court), (2013) 356 ITR 451 (Guj)
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. Appellant is impugning an order dated 24th May 2017 passed by the Income Tax Appellate Tribunal (ITAT) allowing assessee’s appeal and dismissing Revenue’s appeal.
2. The following substantial questions of law are proposed :
QUESTIONS OF LAW
I. Whether in law and on the facts and circumstances of the case, was the Tribunal order not perverse, wherein it was content to dismiss the Appeal, by merely excerpting a major part of the order of the CIT(A) without giving reasons for doing so?
II. Whether the Tribunal was right in upholding the orders of the CIT(A), that had held 8% of the purchases as non-genuine u/s 69C?
III. Whether in law, when purchases are not satisfactorily explained and added back u/s 69C, could the addition be limited to a certain percentage as held by the CIT(A) and upheld by the Tribunal in their perfunctory order?
3. Assessee was a trader in chemicals. During the assessment of his returns filed for the Assessment Year 2011-12, the Assessing Officer (A.O.) came to a conclusion that assessee had indulged in bogus purchases and disallowed the entire purchases worth Rs.1.35 Crores holding it to be unexplained expenditure under Section 69C of the Income Tax Act, 1961 (the Act). Aggrieved with the order, assessee filed an appeal to the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) held, relying on the Commissioner of Income Tax v. Simit P. Sheth1 that the entire purchases could not have been disallowed but only the profit element and proceeded to restrict the unexplained expenditure to only 8% of the total purchases made. Against the said order both assessee as well as the Revenue filed an appeal before the ITAT. The ITAT dismissed both the appeals by the order impugned dated 24th May 2017. After perusing records which we also go through with the assistance of the counsel, the ITAT found that the A.O. has added the entire amount of purchases in assessee’s income under Section 69C of the Act on the basis that assessee has purchased goods from bogus suppliers who only issued bills but do not effect any real transaction. On the other hand, the CIT(A) restricted the addition to the extent of 8% of the alleged purchases on arriving at a factual finding that the A.O. has not doubted the genuineness of the payments being shown by appellant through banking channels. The A.O. has also not questioned the inventory that was subsequently sold. The fact that payments were being made through cheque is also not something that was doubted. Therefore, the CIT(A) came to the conclusion that when the A.O. himself has not doubted the quantity of purchases which has been entered in the books of accounts of appellant but only proceeds based on the information received from Sales Tax authorities that the purchases were made through bogus parties. The CIT(A) relying on Simit P. Sheth (supra) came to a conclusion that when the total sale is accepted by the A.O., then the entire purchases cannot be added to the income of assessee and what should be added is only what can be termed a fair profit margin. On facts the CIT(A) came to a conclusion that 8% of the purchases of Rs.1,35,46,250/- would a be fair profit margin. This factual finding has been accepted by the ITAT. There are many orders and judgments which also have taken the same stand.
4. Ms.Gokhale relied upon a judgment of the Gujarat High Court in N.K. Industries Ltd. v. Deputy Commissioner of Income Tax2 to submit that when it was established that the purchases are bogus the entire amount should have been added to the income of the assessee. There is no question of granting any relief in the facts of the case. In the said judgment, the Court observed as under :
The Tribunal in the case of Vijay Proteins Ltd. Vs. CIT had observed that it would be just and proper to direct the Assessing Officer to restrict the addition in respect of the undisclosed income relating to the purchases to 25 % of the total purchases. The said decision was confirmed by this Court as well. On consideration of the matter, we find that the facts of the present case are identical to those of M/s Indian Woolen Carpet Factory (supra) or M/s Vijay Proteins Ltd. In the present case the Tribunal has categorically observed that the assessee had shown bogus purchases amounting to Rs.2,92,93,288/- and taxing only 25 % of these bogus claim goes against the principles of Sections 68 and 69C of the Income Tax Act. The entire purchases shown on the basis of fictitious invoices have been debited in the trading account since the transaction has been found to be bogus. The Tribunal having once come to a categorical finding that the amount of Rs.2,92,93,288/- represented alleged purchases from bogus suppliers it was not incumbent on it to restrict the disallowance to only Rs.73,23,322/-.
Ms.Gokhale submitted that one of the appeal that was disposed by the Gujarat High Court had been filed by one N.K. Proteins Ltd. whose SLP against the decision of the Gujarat High Court was dismissed by an order dated 16th January 2017.
5. This court in PCIT v. Mohammad Haji Adam & Co.3 has earlier distinguished K. Industries (supra) observing that the same cannot be applied without reference to the facts.
6. Also, the Hon’ble Gujarat High Court in PCIT v. Jigisha Satishkumar Mehta4 itself has distinguished K. Industries (supra) holding that therein the material was available during the course of search which exposed the falsity of entries made in regular books of accounts. The unexplained expenditure that is bogus purchases were on the basis of fictitious invoices debited in trading account.
Hence, the decision of the Hon’ble Gujarat High Court N. K. Industries (supra) has no application to the facts of the present case inasmuch as herein assessee could not have made sales (which are not doubted), without making corresponding purchases.
7. In fact paragraph 8 of K. Industries (supra) reads as under :
So far as the question regarding addition of Rs.3,70,78,125/-as gross profit on sales of Rs.37.08 Crores made by the Assessing Officer despite the fact that the said sales had admittedly been recorded in the regular books during Financial Year 1997-98 is concerned, we are of the view that the assessee cannot be punished since sale price is accepted by the revenue. Therefore, even if 6 % gross profit is taken into account, the corresponding cost price is required to be deducted and tax cannot be levied on the same price. We have to reduce the selling price accordingly as a result of which profit comes to 5.66 %. Therefore, considering 5.66 % of Rs.3,70,78,125/- which comes to Rs.20,98,621.88 we think it fit to direct the revenue to add Rs.20,98,621.88 as gross profit and make necessary deductions accordingly. Accordingly, the said question is answered partially in favour of the assessee and partially in favour of the revenue.
8. It is impossible in this appellate jurisdiction to investigate what the product was and what should have been the profit margin. Moreover, the CIT(A) and the ITAT have on facts come to a conclusion that 8% is the reasonable figure. Therefore, in our view, the judgment of K. Industries (supra) does not assist Ms.Gokhale’s case.
9. Therefore, we do not find any reason to interfere.
10. Appeal dismissed.
Notes:
1 (2013) 356 ITR 451 (Guj)
2 (2016) 72 com 289 (Gujarat)
3 (2019) 103 com 459 (Bom)
4 (2023) 155 com 279 (Guj)
