PCIT Vs Bharat Copy Centre Pvt. Ltd. (Bombay High Court)
Summary: The Bombay High Court dismissed three appeals filed by the Revenue under Section 260A of the Income-tax Act, 1961, against the Income Tax Appellate Tribunal’s decision restricting the addition for alleged bogus purchases to 12.5% of their value. Bharat Copy Centre Pvt. Ltd., engaged in offset printing and photocopying work, had purchased paper, flex rolls, ink, toner, cardboard and other materials required for its business. Following information received from the Sales Tax Department that certain dealers were issuing accommodation bills without supplying goods, the Assessing Officer reopened assessments for Assessment Years 2009-10, 2010-11 and 2011-12 and disallowed the entire value of purchases from the identified suppliers.
For AY 2010-11, the disputed purchase addition amounted to Rs.84,01,498. The Assessing Officer observed that the assessee could produce purchase bills and payment details but lacked transport records, material receipt and consumption evidence, supplier confirmations and personal production of the suppliers. The CIT(A) partly allowed the assessee’s appeal, and the Tribunal subsequently modified the estimation method while sustaining an addition of 12.5% of the alleged bogus purchases. The Tribunal noted that the actual use of materials in the printing and photocopying business was not disputed and that neither the Assessing Officer nor the Sales Tax Department had asserted that the suppliers did not exist.
It considered the possibility that the assessee had obtained goods at discounted prices or saved VAT through purchases supported by questionable invoices. Accordingly, only the profit element embedded in such purchases was considered taxable rather than the entire expenditure. The High Court observed that numerous decisions had accepted restriction of additions to the gross-profit component in appropriate cases. Since the CIT(A) and ITAT had adopted a reasonable and possible view, the Court dismissed all three appeals. The decision highlights the distinction between unproved supplier documentation and transactions in which the acquisition and use of goods are not disputed.
Cases Discussed
1. N. K. Proteins Ltd. — Supreme Court proceedings referred to by the Revenue in its first proposed substantial question of law. The Revenue relied on the dismissal of the special leave petition concerning this case to argue that the entire amount of bogus purchases should be disallowed. The Bombay High Court did not separately analyse the precedent; it dismissed the appeals after finding the Tribunal’s profit-element approach reasonable on the facts. For a related discussion of when entire purchases may be disallowed, see Only Profit Element in Bogus Purchases Can Be Added to Income. This is a related discussion, not a dedicated judgment page for N. K. Proteins Ltd.
FULL TEXT OF THE ORDER OF BOMBAY HIGH COURT
1. Mr. Suresh Kumar states that Respondent has been served. Respondent, however, is absent.
2. The Appeal filed is under Section 260A of the Income Tax Act, 1961 (“the Act”). The following two questions of law are proposed in the Appeal :
i. Whether on the facts and circumstances of the case and in law, the ITAT has erred in partly allowing the appeal of the revenue against the order of Ld. CIT(A) by restricting the disallowance to 12.5% of unproven purchases without considering the position of law established by Hon’ble Apex Court in the case of N. K. Protiens Ltd. that 100% disallowance on bogus purchases is upheld ?
ii. Whether on the facts and circumstances of the case and in law, the ITAT was right in restricting the addition made by the A.O. to the extent of 12.5% of unproven purchases, without considering the fact that purchases remain unproven and even for the A.Y.’s, the ITAT has upheld disallowance on unproven purchases ?
3. Assessee, as stated in the statement of facts, is engaged in the business of undertaking labour works in offset printing and photo copying. Consequent to the information received from the Sales Tax Department that certain parties are engaged in the business of providing accommodation bills without actually supplying the materials and upon noticing that the assessee has purchased goods from some of such parties in the three years under consideration, the Assessing Officer (“AO”) reopened the assessments of those three years. Assessee filed its return of income on 14th October 2010 declaring total income of Rs. 65,25,600/-. AO completed the assessment on 29th November 2013 by determining the total income at Rs. 1,49,27,100/- after making certain additions/disallowances. AO disallowed the entire amount of purchases made from the suspicious dealers in all the three years by treating them as ‘bogus purchases’. For Assessment Year 2010-2011 it was Rs. 84,01,498/-. Assessee impugned the assessment order dated 29th November 2013 before the Commissioner of Income Tax (Appeals) (“CIT(A)”). The CIT(A) partly allowed the Appeal vide an order dated 18th November 2015. This was challenged by the Revenue before the Income Tax Appellate Tribunal (“ITAT”). The ITAT vide its order dated 22nd September 2017 partly allowed the Appeal of Revenue. This Appeal has been filed challenging the legality and validity of the impugned order passed by the ITAT to the extent it was against the Revenue.
4. AO had noticed that the assessee did not have evidence for transportation of materials, receipt and consumption of materials. Assessee could produce only bills and payment details. Assessee could not obtain confirmation letters from the suppliers to prove the genuineness of the purchases, nor could it produce those parties before AO. AO therefore concluded that assessee has failed to discharge the responsibility to prove the genuineness of purchases.
5. Admittedly, in this case the assessee had purchased goods like paper, flex roll, ink, toner, card board and various other materials required for printing, publishing and photo copying. The fact that assessee had used those goods has not been disputed. The ITAT agreed with the findings of CIT(A) that AO having relied on the details provided by the Sales Tax Department but neither AO, nor the Sales Tax Department took a stand that the suppliers do not exist. Therefore, the ITAT came to a conclusion on facts that there is a possibility that assessee might have saved VAT and also obtained some discount on purchase price and in this kind of situation, the principle of taxing the profit embedded in such purchases covered by the bogus bills, should only be disallowed instead of disallowing entire expenditure. The CIT(A) also took this view but adopted the net profit rate for sustaining the addition. The ITAT modified the order of CIT(A) to adopt the gross profit level, but retain the addition to the extent of 12.50% of the value of alleged bogus purchases.
6. The common impugned order of ITAT is for Assessment Years 2009-2010, 2010-2011 and 2011-2012.
7. There are innumerable judgments of this Court and other High Courts where the Courts have held that the ITAT was correct in restricting the addition limited to the extent of bringing the gross profit rate on purchases and not the entire amount paid.
8. Since both the authorities, i.e., the CIT(A) and the ITAT have held that it is not the entire sales consideration which is to be brought to tax, but only the profit attributable on the total sales consideration which alone can be subject to income-tax, the view taken by the authorities, in our view, is a reasonable and possible view. Therefore, Appeals dismissed.
