PCIT 1 Vs Pankaj K Choudhary (Gujarat High Court)
Summary: The Gujarat High Court, in Principal Commissioner of Income Tax 1 Vs Pankaj K Choudhary, dismissed the Revenue’s appeal under Section 260A of the Income Tax Act, 1961, challenging the Income Tax Appellate Tribunal’s decision to restrict the addition on alleged bogus purchases to 6% of the disputed purchase value instead of the 100% disallowance made by the Assessing Officer. The dispute concerned Assessment Year 2007-08 and purchases amounting to Rs. 4,34,00,343 allegedly made from entities associated with the Bhanwarlal Jain Group, which the Income Tax Department regarded as accommodation-entry providers. The High Court held that the Tribunal had examined the evidence, profit margins and relevant circumstances before estimating the income component attributable to the disputed transactions. Since the Tribunal’s conclusion was based upon factual appreciation and similar questions had already been considered in an earlier decision of the coordinate Bench, no substantial question of law arose warranting interference.
The assessee was engaged in the business of import, export and trading of cut, polished and rough diamonds. The original assessment under Section 143(3) was completed on 10 March 2009, determining total income at Rs. 6,50,490. Subsequently, on receiving information from the Investigation Wing, Mumbai, the Assessing Officer reopened the assessment under Section 147. The reassessment resulted in total income being determined at Rs. 4,40,50,830 after making an addition of Rs. 4,34,00,343. The addition arose from alleged non-genuine purchases from Parvati Exports, Mahalaxmi Gems Pvt. Ltd. and Mayur Exports, which the Department alleged were concerns associated with the Bhanwarlal Jain Group and were not engaged in genuine business activities.
The Assessing Officer treated the entire amount of disputed purchases as non-genuine, notwithstanding that the assessee had furnished purchase confirmations, invoices, bank statements, stock registers and copies of income tax returns. According to the Assessing Officer, routing payments through banking channels did not, by itself, establish the genuineness of transactions. The Department relied upon the investigation findings concerning accommodation entries and the absence of stock during search proceedings involving the Bhanwarlal Jain Group. It also pointed to the assessee’s low gross-profit and net-profit margins as circumstances supporting the addition.
In the first appeal, the Commissioner of Income Tax (Appeals), by order dated 20 February 2017, accepted that the circumstances warranted an addition but concluded that disallowing the entire purchase amount was unjustified. The appellate authority considered that the assessee had obtained invoices from the disputed suppliers while making purchases from other sources. In such circumstances, the relevant taxable element was the benefit or profit derived from these transactions rather than the entire purchase value. Having regard to the financial results, including the low gross-profit rate, the CIT(A) restricted the addition to 12.5% of the disputed purchases, amounting to Rs. 54,25,040.
Both the Revenue and the assessee challenged the CIT(A)’s decision before the Income Tax Appellate Tribunal, Surat. The Revenue sought restoration of the full addition, while the assessee sought further relief. The Tribunal examined the assessee’s business results, including turnover of Rs. 66,09,62,458, the gross-profit rate of approximately 0.78% and the net-profit rate of 0.02%. It also considered the nature of the transactions and the evidence produced by the assessee. The Tribunal observed that the taxation of disputed purchase transactions should focus upon the income component embedded in them and that the entire transaction value should not automatically be treated as taxable income in the circumstances examined.
The Tribunal referred to Mayank Diamonds Pvt. Ltd., a decision of the Gujarat High Court concerning estimation of profit in disputed purchase transactions. It compared the factual circumstances and gross-profit figures of that decision with the present assessee’s business results. After examining the material, the Tribunal concluded that an addition calculated at 6% of the disputed purchases was sufficient to address possible revenue leakage. Accordingly, it partly allowed the assessee’s appeal and dismissed the Revenue’s grounds challenging the reduction.
Before the Gujarat High Court, the Revenue argued that the Tribunal should not have restricted the addition to 6%, because the transactions represented sham purchases through accommodation-entry concerns controlled by the Bhanwarlal Jain Group. It submitted that the entire disputed purchase amount of Rs. 4,34,00,343 should have been disallowed. The Revenue further questioned the Tribunal’s application of Mayank Diamonds Pvt. Ltd., particularly its interpretation of the 5% gross-profit estimation discussed in that decision.
The High Court examined the reasoning of the CIT(A) and the Tribunal. It noted that the first appellate authority had considered the assessee’s apparent purchases from other sources, the invoices obtained from disputed suppliers and the financial results. The Tribunal had subsequently undertaken its own assessment of the facts and figures before reducing the addition to 6%. The High Court found that the Tribunal’s conclusion was supported by the record and that no interference was called for merely because the Revenue preferred a higher percentage of disallowance.
The High Court also referred to its coordinate Bench decision in Principal Commissioner of Income Tax 1, Surat Vs M/s. Surya Impex, Tax Appeal No. 674 of 2022, decided on 16 January 2023. That case similarly concerned alleged accommodation entries involving the Bhanwarlal Jain Group. The coordinate Bench had decided comparable questions in favour of the assessee. The High Court considered this earlier ruling an additional reason for declining to interfere with the Tribunal’s order.
Accordingly, the Gujarat High Court held that the proposed questions of law had already been answered and that no substantial question of law arose from the Tribunal’s fact-based estimation of the addition at 6%. The Revenue’s appeal was summarily dismissed. The judgment reinforces the principle, in the factual context of the case, that where the disputed purchases are assessed by estimating the profit element and the Tribunal has considered the supporting evidence and business circumstances, the High Court will ordinarily not interfere under Section 260A merely because the Revenue seeks disallowance of the entire purchase value. A related discussion concerning the Gujarat High Court’s approach to estimating the income component of disputed purchases also examines this line of decisions.
Cases Discussed
1. Principal Commissioner of Income Tax 1, Surat Vs M/s. Surya Impex — Tax Appeal No. 674 of 2022; 16/01/2023 (Gujarat High Court). Followed. The coordinate Bench had considered comparable allegations involving accommodation entries provided by the Bhanwarlal Jain Group and decided the matter in favour of the assessee. The High Court relied upon this earlier ruling while holding that the Revenue’s proposed questions did not raise a substantial question of law.
2. Mayank Diamonds Pvt. Ltd. — Tax Appeal No. 200 of 2003; (2014) 11 TMI 812 (Gujarat High Court). Considered and applied by the Tribunal. The Tribunal examined the Gujarat High Court’s treatment of profit estimation in disputed purchase transactions and compared the gross-profit figures and other facts with those of the present assessee. The Revenue challenged the Tribunal’s application of this precedent. The High Court nevertheless declined to interfere with the Tribunal’s fact-based conclusion restricting the addition to 6% of the disputed purchases.
FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT
Heard learned advocate Mr. Nikunt Raval with learned advocate Ms. Kalpana Raval for the appellant.
2. The present Tax Appeal filed under section 260A of the Income Tax Act, 1961, arises out of order dated 27.9.2021 of the Income Tax Appellate Tribunal, Surat in Income Tax Appeal No. 1152 of 2017 in respect of Assessment Year 2007-2008.
3. The facts are that the assessee is engaged in the business of import and export and trading of cut of polished and ruff diamonds. The assessment under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act) was completed against the assessee on 10.3.2009. Total income was determined to be Rs. 6,50,490/-. The assessment was subsequently reopened on the basis of the information received from the investigation wing, Mumbai. In the assessment undertaken under section 143(3) read with section 147 of the Act, the income was determined to be Rs. 4,40,50,830/-, which was after making addition of Rs. 4,34,00,343/-
3.1 The addition was made on the ground that certain accommodation entries were made by the assesse. The accommodation entries were stated to have been provided by bogus companies of Bhanvarlala Jain group. The companies named Parvati Exports, Mahalaxmi Gems Pvt. Ltd. and Mayur Exports, from whom the alleged bogus purchases were made by the assessee, were according to the department non-genuine entities, not engaged in the actual business.
3.2 While the Assessing Officer made addition as above, in the appeal preferred by the assessee, the Commissioner of Income Tax (Appeals), passed order dated 20.2.2017 restricting the addition to 12.5% of the purchases amounting to Rs. 54,25,040/-.
3.3 It appears that cross appeals came to be preferred before the Income Tax Appellate Tribunal against the decision of the appellate Commissioner. The Income Tax Officer preferred Appeal No. 1152 of 2017, whereas the assessee preferred Appeal No. 1379 of 2017.
3.4 The Tribunal restricted the addition to 6% of the disputed purchases shown by the assessee.
3.5 Seeking to call in question the aforesaid decision of the Tribunal, the department proposed the following questions, claiming to be arising as substantial questions of law,
“(i) Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in estimating the addition in respect of bogus purchases at the rate of 6% of such purchases as against disallowance made by the AO at the rate of 100% of such purchases amounting to Rs. 4,34,00,343/- ignoring the fact that these purchases are sham transactions fabricated through bogus paper concerns of Bhanwarlal Jain Group companies which were engaged in providing accommodation entries?
(ii) Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in estimating the addition in respect of bogus purchases at the rate of 6% of such purchases by relying on the decision of Hon’ble Gujarat High Court in the case of Mayank Diamonds Pvt. Ltd. (2014) (11) TMI 812 as against the direction of the Hon’ble High Court in that case to make addition at the rate of 5% of the total turnover.
4. Learned advocate for the appellant submitted that the said Jain group was engaged in providing accommodation entries, bogus loan and purchases and such purchases were utilised by the assessee and bogus purchases were made through benami concerns. It was submitted that no stock was found at the search Bhanvarlal Jain group. The assessee had shown very meager profit of 0.78% of turnover and net profit at 0.02% of turnover. It was submitted that whatever nature of transactions were there, they were the transactions with the entities, which were controlled by the said Bhanvarlal Jain group.
5. The Assessing Officer noticed the contentions of the assessee that confirmation, purchase bills, bank statement, stock register, copy of ITR were already filed. The Assessing Officer was, however, of the view that transactions were bogus and merely that it routed through the banking channel, was not sufficient to conclude that they were the genuine transactions. The contention of the assessee that he had not dealt with the Bhanvarlal Jain group was also negatived. The appellate Commissioner took the view that disallowance was required to be sustained at 12.5% of the purchase. The Assessing Officer was directed accordingly to workout disallowance. In para 10.6, the Commissioner of Income Tax (Appeals), recorded thus,
“As held above, it is clear that the appellants have made purchases from elsewhere, but have obtained bills from the impugned suppliers. From the Trading & P & L account and Audit report it can be seen that the GP rate shown by appellant is 1.85% oil sales. In such circumstances the disallowance of 100% of purchases cannot be justified. Also as held above, the appellant would nave indulged in above practice in order to get some benefit. And it is this benefit derived by the appellant that need to be taxed. What would be the magnitude of benefit derived by the appellant is the mute question. In the appellant’s case, it is seen that GP rate shown is 0.78%”.
5.1 The final view was expressed in para 10.10,
“Following the above judicial pronouncements and views taken by Ld. CIT(A) & AOS in a few identical cases. In a couple of identical cases, where the GP shown by the appellants is more than 5%, I have confirmed the disallowance of the impugned purchases to the extent of 5% of the impugned purchases. However in the instant case the appellant is showing measly G.P. of only 0.78% on turnover. In view of this I am of the considered opinion that disallowance of 12.5% of the impugned purchases would be reasonable and would meet the ends of justice. Hence, the disallowance is restricted to 12.5% of the impugned purchases for the assessment year in appeal.”
5.2 The disallowance at 100% was made in the assessment order for the year under consideration to the tune of Rs. 4,34,00,343/-, which was reduced to 12.5% at Rs. 54,25,040/-. Thereafter, the issue was delat with by the appellate Tribunal. The appellate Tribunal endorsed to the view taken by the appellate Commissioner. It was observed that Assessing Officer failed to consider the evidence furnished by the assessee.
5.3 Considering the facts and relevant aspect, the Income Tax Appellate Tribunal partially allowed the appeal of the assessee to further reduce the disallowance at 6%. In so concluding, the Tribunal observed in paragraph No.21 as under,
“…….during the financial year under consideration the assessee has shown total turnover of Rs. 66,09,62,458/-. The assessee has shown Gross Profit @ 78% and net Profit @ 0.02% (page 11 of paper Book). The assessee while filing the return of income has declared taxable income of Rs. 1,81,840/- only. We are conscious of the facts that dispute before us is only with regard of the disputed purchases of Rs. 4.34 Crore, which was shown to have purchased from the entity managed by Bhanwarlal Jain Group. During the search action on Bhanwarlal Jain no stock of goods/material was found to the investigation party. Bhanwarlal Jain while filing return of income has offered commission income (entry provider). Before us, the Ld. CIT-DR for the revenue vehemently submitted that the ratio of decision of Hon’ble Gujarat High Court in Mayank Diamond Private Limited (supra) is directly applicable on the facts of the present case. We find that in Mayank Diamonds the Hon’ble High Court restricted the additions to 5% of GP. We have seen that in Mayank Diamonds P Ltd (supra), the assessee had declared GP @ 1.03% on turnover of Rs 1.86 Crore. The disputed transaction in the said case was Rs. 1.68 Crore. However, in the present case the assessee has declared the GP @ 0.78%. It is settled law that under Income-tax, the tax authorities are not entitled to tax the entire transaction, but only the income component of the disputed transaction, to prevent the possibility of revenue leakage. Therefore, considering overall facts and circumstances of the present case, we are of the view that disallowances @ 6% of impugned purchases / disputed purchases would be sufficient to meet the possibility of revenue leakage. In the result the ground No. 2 of appeal raised by the assessee is partly allowed and the grounds of appeal raised by revenue are dismissed.”
6. The view taken and the conclusion arrived at by the appellant Tribunal are based on material before it and after analysing the facts and figure available before it. When the Tribunal has thought it fit to reduce the disallowance at 6% from 12.5%, the Tribunal had before it the facts which were duly analysed by it. No interference is called for in the said conclusion and findings of the Tribunal in the present appeal by this court.
6.1 The another weighing aspect is that the Tax Appeal No. 674 of 2022 in Principal Commissioner of Income Tax 1, Surat vs. M/s. Surya Impex which came to be decided by the co-ordinate Bench on 16.1.2023 dealt with the very issue of accommodation entries provided by Bhanwarlal Jain Group. The group involved in the said case is the same group who is saddled with allegations of providing accommodation entry to the assesse. In M/s. Surya Impex (supra) the court held in favour of the assessee. The questions of law involved in the said case were of the same nature and were in the context of similar facts involving the same group.
7. For all the above reasons, substantial questions of law proposed by the appellant in this appeal stands already answered. No question of law much less any substantial questions of law arise in the facts of the present case. No other substantial question of law arises. The appeal is meritless. It is summarily dismissed.
