Only Profit Element Taxable in Bogus Purchase Cases : ITAT Reduces Gross Profit Addition to 11% [Read Order]

The Income Tax Appellate Tribunal (ITAT) Bench at New Delhi has held that in cases involving alleged bogus purchases obtained through accommodation entries, only the profit element can be brought to tax, and not the entire purchase value. The Tribunal directed the AO to apply a gross profit rate of 11%, from the 12.5% sustained by the Commissioner (Appeals).

The appeals arose out of search assessments under section 153A read with section 143(3) of the Income Tax Act, 1961 for assessment years 2018-19 to 2020-21. The Assessing Officer had treated certain purchases as bogus on the ground that they were through entities allegedly controlled by an accommodation entry provider. The additions were allegedly over ₹1.86 crore.

In appeal, the Commissioner (Appeals) accepted that the assessee was a beneficiary of accommodation entries in respect of certain purchases, but directed the Assessing Officer to tax only the profit element at the rate of 12.5%. Relief was also granted in respect of additions made solely on the basis of low income declared by vendors and non-service of notices under section 133(6).

The assessee argued that the profit rate applied was excessive, particularly since the declared gross profit was 8.71%, and the value of alleged bogus purchases included GST which had already been adjusted through input tax credit. It was contended that applying a 12.5% rate without excluding GST inflated the taxable income beyond reasonable limits.

The Revenue, on the other hand, contended that once the purchases were held to be bogus, the entire expenditure was liable to be disallowed. Further, the Commissioner (Appeals) erred in restricting the addition to the profit element.

The Tribunal, comprising Satbeer Singh Godara (Judicial Member) and Manish Agarwal (Accountant Member), observed that the application of a 12.5% gross profit rate resulted in an overall GP exceeding 20%, which was not justified. It was further held that the value of bogus purchases should be computed inclusive of GST, including amounts adjusted through input tax credit.

Accordingly, the Tribunal directed the Assessing Officer to apply a gross profit rate of 11% on the net value of such purchases after excluding GST. The Tribunal also upheld the deletion of additions made on the basis of low income disclosed by suppliers and on account of notices issued at incorrect addresses.

In conclusion, the appeals were partly allowed.