AA Cannot Tax Entire Disputed Purchase Transactions as Bogus: Gujarat HC Limits Income Tax Addition to 6% [Read Order]

Gujarat HC Limits Income Tax Addition to 6%, Holds AA Cannot Tax Entire Disputed Bogus PurchaseIn a recent ruling, the Gujarat High Court held that the Assessing Authority (AA) cannot tax the entire amount of disputed purchase transactions even if they are considered bogus or accommodation entries. The court limited the addition to just 6% of such purchases.

Rajesh Suresh Chopra had filed his tax return for the Assessment Year 2012-2013, initially declaring an income of Rs. 1,76,510. The Assessing Officer (AO) reopened the case, determining his total income as Rs. 118,84,64,330.

This drastic revision was based on additions amounting to Rs. 116,49,88,059, treating the entire amount as bogus purchases from entities linked to the Bhanwarlal Jain Group. An additional sum of Rs. 2,32,99,761 was added, representing unaccounted commission payments at the rate of 2%.

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The assessee appealed against this assessment before the Commissioner of Income Tax (Appeals) who dismissed the appeal, upholding the AO’s decision. Aggrieved by this, Chopra approached the Income Tax Appellate Tribunal (ITAT), Surat, which partially allowed his appeal and reduced the disallowance from 100% to 6% of the contested purchases.

Dissatisfied with this partial relief to Chopra, the revenue appealed to the Gujarat High Court, arguing that the ITAT erred in substantially reducing the disallowance. The revenue argued that the entire purchases were fraudulent, relying upon previous judgments by the Gujarat High Court, Calcutta High Court, and Supreme Court, which justified a full addition for such bogus transactions.

The assessee’s counsel argued that the purchases were genuine and substantiated by supporting documents such as purchase bills, bank statements, and stock registers. They argued that a complete disallowance was unjustified, particularly since there was evidence supporting the transactions.

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The bench comprising Justices Bhargav D. Karia and Pranav Trivedi observed that the law on this matter was already settled by earlier decisions of the same court, specifically referring to a judgment involving similar facts where the Court limited additions to only 6% of such bogus transactions.

The court explained that taxing authorities should tax only the profit or benefit arising from such questionable transactions, rather than the entire transaction amount, as the objective was to prevent tax leakage rather than excessively penalizing taxpayers.

The court upheld the ITAT’s decision, limiting the addition to 6%. It found that no substantial question of law arose because the issue had already been conclusively decided in previous rulings. The appeal filed by the Revenue was dismissed without imposing any costs.