Entire Bogus Purchase Addition Unsustainable When Sales Are Undisputed: ITAT Restricts Disallowance to Profit Element [Read Order]

The Income Tax Appellate Tribunal (ITAT) Rajkot Bench has held that where the sales and consumption recorded by the assessee are not disputed the entire amount of alleged bogus purchases cannot be added under Section 69C of the Income Tax Act, 1961. The Tribunal upheld the restriction of addition to the profit element embedded in such purchases and dismissed the Revenue’s appeal.

The assessee Bhai Damjibhai Bhimani had filed the return of income for Assessment Year 2019-20 declaring total income of Rs. 9.98 lakh. Based on information received from the Investigation Wing through the RMS-High Risk CRIU/VRU system the Assessing Officer reopened the assessment under Section 147 alleging that the assessee had obtained bogus purchase bills amounting to Rs.13.84 lakh from entities engaged in providing accommodation entries.

During the reassessment proceedings the AO treated the entire purchases as bogus and made an addition of Rs.13.84 lakh under Section 69C along with commission expenditure of Rs.13,849 allegedly paid for obtaining accommodation entries.

On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] observed that the AO had not disputed the sales or consumption reflected by the assessee. Holding that the transactions merely indicated inflation of purchase prices to suppress profits, the CIT(A) restricted the addition to 13.7% of the alleged bogus purchases representing the gross profit element embedded in such transactions while confirming the commission addition.

Challenging the relief granted by the CIT(A), the Revenue approached the Bench contending that the entire bogus purchases ought to have been disallowed. The Department also argued that the case involved organized tax evasion and accommodation entries.

The Bench comprising Dr. Arjun Lal Saini (Accountant Member) and Dr. Dinesh Mohan Sinha (Judicial Member) relied on the decisions in PCIT v. S.V. Jiwani and Mohammad Haji Adam & Co., wherein it was held that only the profit element embedded in bogus purchases can be brought to tax when sales are accepted.

Accordingly, the Tribunal upheld the restriction of addition to the profit element and dismissed the Revenue appeal.

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