Only Profit Element Taxable as Sales and Manufacturing Activity is Not Disputed: ITAT upholds Restriction of Disallowance to 12.5% on Bogus Purchases [Read Order]

The assessee, Pravin Manilal Panchal, was engaged in the manufacturing of various types of brushes. For Assessment Year (AY) 2011–12, the Assessing Officer (AO) received information from the Investigation Wing of the Income Tax Department and the Sales Tax Department that the assessee had made purchases from H.R. Corporation and D.R. Trader, which were listed as hawala dealers, issued only accommodation bills without actual supply of goods.

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The AO issued notices under section 133(6) of the Income Tax Act, 1961, to the suppliers, which were returned unserved.

The assessee produced purchase bills, ledger accounts, bank statements showing payments through account payee cheques, and VAT registration details of the suppliers. However, as the suppliers did not respond, the AO concluded that the purchases were bogus and disallowed the entire amount of ₹23,81,706, adding it to the assessee’s income.

In appeal, the assessee contended that the purchases were genuine as the goods were consumed in the manufacturing process and the sales of such purchases were not disputed. It was argued that without making the purchases, the manufacturing activity could not have been carried out.

The CIT(A) considered the submissions, called for a remand report, and noted that in the remand proceedings, the assessee had furnished ledger accounts, bank statements, and VAT details. The AO, in his remand report, confirmed receipt of these documents.

The CIT(A) held that although the purchases were from suspicious dealers, it was not possible to produce manufacturing output without corresponding inputs and the CIT(A) restricted the disallowance to 12.5% of the alleged bogus purchases, which amounted to ₹2,97,713.

The Revenue carried the matter in appeal to the Tribunal.

The Single bench comprising Pawan Singh (Judicial Member), reiterated that in cases where the sales are accepted and the manufacturing activity is not in dispute, only the profit element embedded in the alleged bogus purchases can be brought to tax.

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Accordingly, the Tribunal dismissed the Revenue’s appeal and upheld the CIT(A)’s order restricting the disallowance to 12.5% of the purchases.

Krish Desai represented the assessee, while the Revenue was represented by Surendra Mohan.

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