No Interference with Trading Results and Gross Profits if Proof of Sales, Purchases, Quantity, Delivery, and Payment are Provided: ITAT [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) while adjudicating a issue pertaining to additions based on alleged bogus purchases ruled that the trading results and gross profits cannot be disturbed if an assessee provides adequate proof of sales, purchases, quantity, delivery, and payment.

Reassessment proceedings were initiated by the Assessing Officer (AO) against the Assessee Patodia Filaments Pvt. Ltd. (Patodia Filaments) based on information supplied by the Deputy Director of Income Tax (Investigation), Mumbai that the Director of SVG Style & Textile Company Pvt. Ltd., had admitted in a statement recorded under Section 131 that his companies were not conducting any real business but were instead issuing bogus purchase bills and accommodation entries to various beneficiaries including the Assessee.

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Relying on the information given by the Deputy Director, the AO concluded that Patodia Filaments had engaged in non-genuine transactions with SVG Style & Textile Company Pvt. Ltd. and Rathi Style & Textile Pvt. Ltd. resulting in purchases of ₹51.84 crore in A.Y. 2016-17 and ₹50.20 crore in A.Y. 2018-19. Subsequently, the AO made an addition by applying a gross profit (GP) rate of 12.5%, leading to an increase in taxable income of the Assessee by ₹6.48 crore for A.Y. 2016-17 and ₹6.58 crore for A.Y. 2018-19.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

The Assessee contested this assessment arguing that all the purchases were duly accounted for in its books of accounts, that corresponding sales were not disputed and that payments had been made through banking channels with requisite delivery challans available to substantiate the transactions.

An Appeal before the CIT(A) granted relief to the Assessee for A.Y. 2016-17 that the gross profit margin on the alleged non-genuine purchases stood at 1.10%, which was almost identical to the 1.11% margin on genuine purchases, but sustained a partial addition of ₹45.62 lakh, applying a differential GP rate of 0.88% on the alleged bogus purchases for A.Y. 2018-19.

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The two-member Bench comprising Judicial Member Amit Shukla and Accountant Member Girish Agrawal observed that Patodia Filaments had provided sufficient documentary evidence, including invoices, ledger accounts, bank statements reflecting payments, quantitative details of purchases and sales, and delivery challans proving receipt of goods.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

The Bench deleted the entire addition for both assessment years in light of the decision of the Bombay High Court in PCIT vs. Mohammad Haji Adam & Co. (2019), wherein it was held that in cases involving alleged bogus purchases, if sales are accepted, then the appropriate course of action is to apply the gross profit rate on such purchases rather than making an arbitrary addition.

Read More: ITAT directs AO to restrict additions limited to the extent of bringing the G.P. rate on disputed purchases at the same rate of other genuine purchases

Mani Jain appeared for the Assessee while the Revenue was represented by Senior Departmental Representative Mahesh Pamnani.

To Read the full text of the Order CLICK HERE

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