The Income Tax Appellate Tribunal (ITAT), Mumbai has held that the department cannot make 100% disallowance for bogus purchases in cases where the sales are not doubted.
The assessee, a Partnership Firm, engaged in the business of ‘import, manufacturing and trading of cut and polished diamonds filed return on 27-10-2007 declaring total income of Rs.15,93,584/-. The case was reopened u/s 147 of the Act, by issuing notice u/s 148 of the Act on 28-03-2014 on the ground that there were bogus purchases.
On second appeal, the Tribunal noticed that the assessee has provided the documentary evidence for the purchase. Adverse inference has been drawn by the A.O. on the investigation wing action on Gautam Jain group.
The Tribunal observed that no independent enquiry has been conducted by the A.O. himself.
“We find that in this case the sales have not been doubted. It is settled law that when sales are not doubted, 100% disallowance for bogus purchase cannot be done. The rationale being no sales is possible without actual purchases. This proposition is supported from the Hon’ble jurisdictional High Court decision in the case of Nikunj Eximp Enterprises (in writ petition no 2860, order dt. 18.6.2014). In this case, the Hon’ble High Court has upheld 100% allowance for the purchases said to be bogus when sales are not doubted. However, in that case all the supplies were to the government agency. In the present case, the facts of the case indicate that assessee has made purchase from the grey market. Making purchases through the grey market gives the assessee savings on account of non-payment of tax and others at the expense of the exchequer. In such situation, in our considered opinion, on the facts and circumstances of the case, 3% disallowance out of the bogus purchases meets the end of justice, as reasoned by the ld. CIT(A) above. The case law quoted by the Revenue in the grounds of appeal is a dismissal of SLP simplicitor by the Hon’ble Apex Court. It does not meagre the order of the Hon’ble Apex Court with that,” the Tribunal said.To Read the full text of the Order CLICK HERE