ITAT Dismisses Department’s Appeal, Upholds 5% Bogus Purchase Addition & Deletes Penalty [Read Order]

The Income Tax Appellate Tribunal (ITAT) Surat Bench has dismissed the Department’s appeals, confirming the restriction of bogus purchase addition to 5% and deletion of penalty under Section 271(1)(c) of the Income Tax Act, 1961.

The appellant, Borda Brothers, a firm engaged in the diamond trade, had filed its return of income for Assessment Year 2007-08 declaring total income of Rs.43,17,209. The case was reopened under Section 148 based on information from search operations conducted on the Rajendra Jain Group, which was found engaged in providing accommodation entries. The Assessing Officer concluded that Borda Brothers had made bogus purchases from entities linked to the Rajendra Jain Group and made an addition of Rs.9,64,13,991 under Section 69A. In appeal, the Commissioner of Income Tax (Appeals) restricted the addition to 5% of the bogus purchases based on the assessee’s business reality and the consistent approach adopted in earlier years.

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The Tribunal noted that the CIT(A) had correctly relied on the Tribunal’s earlier decisions in the assessee’s own case for Assessment Year 2008-09, wherein similar bogus purchases were also restricted to 5%. The ITAT held that the CIT(A) had adopted a consistent and reasonable view based on factual findings and evidence. The Tribunal distinguished the Department’s reliance on the Gujarat High Court’s judgment in N.K. Industries Ltd. v. DCIT, noting that the facts there involved unexplained investments without correlation to real business activities, unlike in the present case where sales were accepted and only purchases were disputed.

The Tribunal also considered the Department’s arguments based on PCIT v. Premlata Tekriwal but found that the facts were distinguishable. Since the business sales were accepted as genuine and only the purchases were routed through accommodation entries, only a part of the purchases needed adjustment to reflect possible inflation of expenses.

Further, in the Department’s penalty appeal, the Tribunal upheld the CIT(A)’s deletion of the penalty under Section 271(1)(c). It agreed with the CIT(A) that when additions are made on an estimated basis, penalty for concealment cannot be imposed. Reliance was placed on judicial precedents including CIT v. Sahu Construction (P.) Ltd. and CIT v. Aero Traders (P.) Ltd.

The ITAT Bench comprising Siddhartha Nautiyal, Judicial Member, and Bijayananda Pruseth (Accountant Member) dismissed both Department appeals, confirming relief to the assessee.

To Read the full text of the Order CLICK HERE

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