The Bombay High Court has held that only the profit element of a bogus purchase can be added to taxable income under the Income Tax Act, 1961 when the assessee reconciled the stock.
The appellant revenue craves leave to amend or alter any ground or add a new ground which may be necessary. It was alleged that Purtiprasad Purtiprasadparab, the respondent was carrying on sole proprietary business in the name and style of M/s. Shoe Box Inc.
Respondent had a retail store selling footwear, bags, belts, wallets etc. Respondent filed his return of income on 29th September 2009 for Assessment Year 2009-10 declaring a total income of Rs.6,64,570/-. The regular assessment was completed under Section 143(3) of the Income Tax Act, 1961 (the Act) on 12th December 2011 accepting the returned income.
The assessment was re-opened under Section 148 of the Act and addition on account of alleged accommodation entries taken by respondent from Hawala dealers were added to his income. The Assessing Officer (A.O.) had received information from the Sales Tax Authority, Government of Maharashtra.
The A.O. concluded that the entities from whom the respondent is alleged to have purchased were only indulging in bogus accommodation entries without the supply of any goods. Since none of the parties to whom notice under Section 133(6) of the Act was issued had responded, the A.O. treated the purchase amounting to Rs.90,33,191/- as bogus and added the same to the returned income for Assessment Year 2009-10.
On appeal, the CIT[A] partly allowed the appeal and observed that the A.O. did not doubt the sale and himself has held that purchases were made from parties other than the bogus bill provider. The CIT[A] relied on the decision in Commissioner of Income Tax vs Simit Sheth wherein it was held that estimated the profit element at 12.5% on such purchase, i.e., 12.5% of Rs.9,43,858/- after holding that only profit element embedded in such purchases could be added to the assessee’s income.
The Tribunal has observed that the A.O. has not doubted the sales made by the assessee against the purchases and the assessee has reconciled the quantitative details of stock as per sale invoices. The A.O. has observed that the respondent has purchased material from someone else while bogus bills were organized by these Hawala Traders.
The ITAT accepted the explanation of the respondent that only the profit element in these accommodation entries are to be added to the income. The CIT(A) has restricted the addition by estimating the gross profit at 12.5%.
A division bench comprising Justice K R Shriram & Justice Firdosh P Pooniwalla upheld the decision of the Tribunal.
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