PCIT Vs S V Jiwani (Bombay High Court)
Bombay High Court recently dismissed an appeal filed by the Principal Commissioner of Income Tax (PCIT) against an order by the Income Tax Appellate Tribunal (ITAT), Mumbai. The appeal challenged the ITAT’s decision regarding the assessment year 2009-10, which had partly allowed relief to the assessee, S V Jiwani, concerning alleged bogus purchases.
The Revenue had raised several questions of law, primarily contending that the ITAT erred in not considering the Supreme Court’s ruling in the case of N K Protein Ltd., which dealt with a similar issue of bogus purchases. The Revenue argued that once the Assessing Officer (AO) conclusively determined that the suppliers were bogus, the entire amount of such purchases should be treated as income under Section 69C of the Income Tax Act, 1961. They further asserted that the ITAT overlooked findings by the Sales Tax Department, which indicated the assessee had obtained bills from non-existent entities without actual transactions. The Revenue also highlighted that the assessee had debited these purchases in their Profit & Loss account without providing supporting evidence. Consequently, they argued that the ITAT incorrectly upheld the Commissioner of Income Tax (Appeals) [CIT(A)]’s decision to limit the disallowance to 12.5% of the alleged bogus purchases without verifying the quantitative data of materials and their movement.
The case originated from an assessment reopening based on information received from the Sales Tax Department, suggesting that the assessee, a civil contractor primarily working for the Municipal Corporation of Greater Mumbai (MCGM), had made suspicious purchases amounting to ₹4,50,08,383. The AO, treating these as accommodation entries, added the entire amount to the assessee’s income.
However, the CIT(A) partly allowed the assessee’s appeal. The appellate authority noted that the payments were made through banking channels and there was no evidence of cash flow back to the assessee. Purchase invoices and ledger statements were also reportedly produced. The CIT(A) reasoned that only the real income embedded in such transactions could be taxed, not the entire amount, especially since the sale proceeds from the executed contracts were duly accounted for and taxed. To address potential revenue leakage, the CIT(A) deemed a disallowance of 12.5% of the alleged purchases as reasonable, thereby granting substantial relief to the assessee.
The ITAT subsequently dismissed the Revenue’s appeal against the CIT(A)’s order. The Tribunal emphasized that the assessee, being a contractor executing works for a government authority like MCGM, would have necessarily required materials and goods to fulfill their contractual obligations. The ITAT noted that the AO had not disputed the turnover declared by the assessee for the contract work. It concluded that it was improbable for the assessee to execute the work without procuring materials, even if not from the declared sources. Therefore, the Tribunal held that the entire purchase amount could not be added back as income, and only the profit element embedded therein could be considered as the assessee’s income.
The Bombay High Court, after reviewing the ITAT’s well-reasoned order and considering the relevant facts, found no grounds for interference. The Court stated that no substantial questions of law arose in the appeal and accordingly dismissed it. The counsel for the respondent also did not press the cross-objections filed.
This judgment underscores the principle that while unexplained or bogus purchases can lead to disallowances, the entire amount might not be treated as income, especially when the assessee has demonstrated business activity and accounted for the resulting sales. The focus shifts to estimating the potential profit embedded in such unverifiable transactions.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
