ACIT Vs R. N. Gems (ITAT Mumbai)
“Without purchases there cannot be sales” – Mumbai ITAT rejects 100% bogus purchase addition in diamond trade case
In a significant ruling, the Mumbai ITAT dismissed the Revenue’s appeal and upheld restriction of addition on alleged bogus purchases to only the profit element embedded therein, holding that once sales are accepted, the entire purchases cannot be disallowed.
The reassessment was triggered based on information received from the Investigation Wing alleging that the assessee had obtained accommodation entries from concerns linked to the Rajendra Jain Group through bogus purchase bills amounting to ₹57.51 lakh from M/s Kangan. The AO treated the entire purchases as non-genuine and made a 100% addition.
Before the CIT(A) and Tribunal, the assessee contended that the purchases were supported by tax invoices, bank payments, PAN/TIN details, and corresponding sales entries. It was also argued that the AO relied entirely on third-party statements and generalized investigation reports without conducting any independent inquiry or granting opportunity of cross-examination.
The CIT(A), relying on the Bombay High Court decision in PCIT v. Mohammed Haji Adam & Co., held that in cases where sales are not disputed, only the profit element embedded in alleged bogus purchases can be brought to tax and accordingly restricted the addition to 3% GP on the impugned purchases.
Affirming the CIT(A)’s order, the ITAT observed that the AO had merely relied upon Investigation Wing information and statements recorded during search proceedings, but had failed to establish through any independent verification that the purchases were entirely fictitious or that no goods were actually received.
The Tribunal emphatically held that once the sales are accepted, it necessarily follows that there must have been corresponding purchases, though possibly from the grey market. In such circumstances, making addition of the entire purchase amount would lead to the absurd situation of taxing gross receipts instead of real income.
The Revenue’s reliance on decisions such as N.K. Industries, N.K. Proteins, and Kanak Impex for sustaining 100% addition was rejected by the Tribunal on the ground that those cases involved materially different facts where transactions were found to be entirely bogus without corresponding sales or consumption.
Accordingly, the ITAT upheld the estimation of profit at 3% on alleged bogus purchases and dismissed the Revenue’s appeal, reiterating that the binding jurisdictional High Court ruling in Mohammed Haji Adam & Co. continues to govern such disputes
FULL TEXT OF THE ORDER OF ITAT MUMBAI
