Partial Relief for IIECL: ITAT Holds Only Profit Margin Taxable, Restricts Addition on ₹92.20 Lakh Bogus Purchases to 5% [Read Order]

Indian Ion Exchange and Chemicals Limited,appellant-assessee, had filed its return of income for A.Y. 2014-15 on 29.11.2014, declaring total income of Rs. 25,93,822. The case was reopened based on information that it had obtained bogus purchase bills amounting to Rs. 92,20,100 from M/s. Siddh Syndicate, an accommodation entry provider.

A notice under Section 148 was issued on 22.03.2019, and during reassessment, the Assessing Officer (AO) treated the said purchases as non-genuine and added Rs. 92,20,100 to the income. The reassessment was completed under Section 143(3) read with Section 147 on 16.12.2019, determining total income at Rs. 1,18,31,330.

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The assessee challenged the addition before the Commissioner of Income Tax(Appeals) [CIT(A)], but the appeal was dismissed. It then filed a second appeal before the tribunal.

The first issue was about reopening the case under Section 148 of the Act. During the hearing, the authorised representative of the assessee did not press this issue, so it was dismissed.

The next issue concerned the addition of Rs. 92,20,100 for bogus purchases from M/s. Siddh Syndicate. The assessee counsel stated that the company was engaged in trading water treatment plants and that the case was reopened based on the statement of Shri Mahendra Shantilal Patel, who had admitted to providing accommodation entries. He argued that the statement was not shared and no opportunity for cross-examination was given.

The assessee had submitted purchase bills, ledger accounts, and bank statements to show that the purchases were genuine. It had also linked the purchases with sales and pointed out that the gross profit for the year (12.63%) was higher than the previous year (9.29%).

On the other hand, the departmental counsel stated that a search was conducted on Shri Mahendra Shantilal Patel, who was found to be running bogus firms and issuing fake bills. In his statement under Section 132(4), Shri Patel admitted that no goods were supplied. Since the appellant-assessee failed to produce delivery challans or transport details, the authorities held the purchases to be bogus. He supported the orders of the lower authorities.

The two member bench comprising Sanjay Garg (Judicial Member) and Narendra Prasadd Sinha (Accountant Member) examined the submissions of both sides and found that the department’s case rested entirely on the statement of Shri Mahendra Shantilal Patel, who had admitted to providing accommodation entries. It noted that the assessee had made purchases of Rs. 92,20,100 from M/s. Siddh Syndicate, a concern linked to Shri Patel.

It observed that while purchase bills and bank payments were available, they alone could not prove the genuineness of the transactions. The assessee had not furnished any proof of transportation, such as delivery challans or vehicle details.

The appellate tribunal also found that the AO had not verified the cash trail, even though Shri Patel had admitted that cash was returned against cheque or RTGS payments. The addition was thus made solely based on third-party information without any detailed verification or providing a copy of the statement to the assessee.

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The tribunal noted that the assessee had matched the purchases with sales and submitted a reconciliation statement, which the department had not disputed. Since the sales were accepted, the bench held that the purchases were genuine but might have been made from different parties instead of M/s. Siddh Syndicate.

It also took into account that the gross profit for the year was 12.63% compared to 9.2% in the preceding year, showing improved performance. Therefore, the entire addition could not be sustained. However, since no transport evidence was provided, the tribunal held that the profit from such transactions should be slightly higher than the declared rate.

Relying on Gujarat High Court rulings in Premkumar B. Rathi, Simit P. Sheth, Bholanath Poly Fab Pvt. Ltd., and Kesari Exports, the ITAT held that only the profit margin embedded in such purchases could be taxed. It directed the AO to compute the profit at 17.63%, i.e., 5% higher than the declared gross profit of 12.63%. Accordingly, the addition was restricted to 5% of Rs. 92,20,100, and the appeal was partly allowed.

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