Bombay HC upholds Addition on Bogus Purchase u/s 69C of Income Tax Act in Absence of Explanation on Source [Read Order]

The Bombay High Court has upheld the addition on bogus purchase under Section 69 C of the Income Tax Act,1961 as the respondent-assessee failed to prove the genuineness of the purchases.

Kanak Impex, the respondent-assessee, is a business that deals in iron and steel trading.  When filing its income returns under Section 139 of the Income Tax Act, the respondent-assessee reported income of Rs. 2,84,700.  On December 13, 2011, the initial assessment was finished in accordance with Section 143(3) of the Income Tax Act, resulting in a total income of Rs. 3,86,250.

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According to Section 147 of the Income Tax Act, the respondent-assessee's case was reopened after the Director General of Income Tax (Inv.), Mumbai/Sales Tax Department informed them that the respondent-assessee had made fraudulent purchases totaling Rs. 20,06,80,150 from havala givers.

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Since the notification delivered by the postal authorities was returned as "unserved," the notice under Section 148 of the Income Tax Act was served via email at the email address listed on the income return.  The Ward Inspector also served the notification via affixture. Following several fruitless attempts by the appellant-revenue to serve a notice under sub-section (1) of Section 142 of the Act, the aforementioned notice was finally fastened to the front door of the office building.

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An order under Section 144 read with Section 147 of the Act was issued since none of the notices, whether given by email or by affixation, were followed. Since the authenticity of the transactions could not be confirmed, Rs. 20,06,80,150 was added to the aforementioned order as a result of fraudulent purchases.

In accordance with Section 133(6) of the Income Tax Act, the Assessing Officer (AO) sent letters to the address of the people from whom the respondent-assessee had bought the goods, but they were returned "unserved."  The Sales Tax Department provided information on these suppliers.  The AO made the additions of Rs. 20,06,80,150/-on account of fraudulent purchases since the respondent-assessee failed to demonstrate the authenticity of the purchases and the respondent-assessee did not appear before the AO during the reassessment procedures.

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By dismissing the respondent-assessee's argument that they were not served with any notice, the CIT(A) upheld the initiation of the reassessment procedures.

 Both the respondent-assessee and the appellant-department filed cross-appeals with the Tribunal after being dissatisfied with the CIT(A) ruling. These were heard on June 13, 2019, and the contested order was issued on June 26 of the same year. According to the revenue before the Tribunal, the CIT(A) erred by considering the GP at 12.5% on purportedly fraudulent purchases rather than adding 100% as the AO did.  The assessee contested the CIT(A)'s conclusions about the feasibility of adding 12.5%.

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The AO was instructed by the tribunal to restrict the additions to the point when the contested purchases' GP rate is equal to that of other legitimate buyers. In light of this, the appellant-revenue is appealing to this court. 

 The Appellate Authorities were not justified in estimating the profit rate and, consequently, implicitly granting a deduction of such unexplained expenditure, which is contrary to the express provision of Section 69C of the Income Tax Act. The division bench of Justices M. S. Sonak and Jitendra Jain has noted that the assessee has not provided an explanation of the source of the expenditure incurred on account of purchases of Rs. 20,06,80,150.

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The respondent-assessee, who willfully and purposefully chose not to participate in the investigation, cannot now argue that the appellant-revenue should have provided them with all the information prior to making the addition, the court ruled.  The court ruled that the respondent-assessee's actions were unacceptable.

  It was the respondent-assessee's responsibility to enter the re-assessment proceedings, fulfill the initial burden of demonstrating the purchases, and get any relevant facts.  The respondent-assessee's arguments on this matter are to be disregarded since they have not participated in the re-assessment proceedings.

To Read the full text of the Order CLICK HERE

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