Real Expenditure on Goods Received Despite Fictitious Invoices: ITAT Restricts Bogus Purchases Disallowance to 25% [Read Order]

The Mumbai bench of Income Tax Appellate Tribunal ( ITAT ) restricted bogus purchase allowance to 25% on the ground that there was real expenditure on the goods received even though the invoices were fictitious.

The assessee Salem Steel Industries filed the return of income for AY 2008-09 declaring a total income of Rs. 9,88,520/-. The case was selected for scrutiny, and the statutory notices were duly served on the assessee. The AO had received information that the assessee is one of the beneficiaries for accommodation entries towards purchases provided by hawala parties.

The AO called on the assessee to furnish the details about the purchases made from two parties to the tune of Rs. 37,35,984/- in this regard. The AO recorded a detailed finding based on the report of the Investigation Wing with regard to the purchases made from these two parties who are paper companies floated by Shri Bhanwarlal Jain.

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Accordingly, the AO treated the entire purchase as non-genuine and made an addition. The AO also made an addition of Rs. 43,43,875/- towards non-genuine unsecured loans. Aggrieved, the assessee filed a further appeal before the CIT(A). Before the CIT(A) the assessee submitted that the purchases made by the assessee are genuine and the additions made by the AO should not be sustained.

The CIT(A) restricted the addition made towards bogus purchases to 25%. Regarding the addition made towards unsecured loans, the CIT(A) confirmed the addition. Aggrieved by this order of the CIT(A) the revenue filed an appeal before the Tribunal.

The Tribunal observed that the CIT(A) had restricted the addition to 25% based on the finding that the receipt of materials by the assessee was not disputed by the AO and that the sales had also not been rejected.

The Tribunal quoted the relevant findings of the CIT(A) in this regard : “Thus, the receipt of material in question is not in doubt but the material has been received from sources best known to the appellant and these goods in question have not been received from the said parties. The issue to be considered now is as to how much deduction should be allowed to the appellant in respect of cost of purchase of goods said to have been really received by him but the bills produced in support thereof were not genuine bills. The goods were not received from these parties from whom they were shown to have been purchased but such material was received from a different source which is exclusively within the knowledge of the appellant and none else.

Keeping all these factors in mind, the Hon’ble ITAT Ahemdabad in the case of Vijay Proteins Ltd. Vs. ACIT held that 25% of the purchase price accounted for in the books of accounts through such bogus purchases should be disallowed out of the amount of total bogus purchases. This judgment of the Hon’ble ITAT Ahmedabad was challenged before the Hon’ble Gujarat High Court by the assessee. The Hon’ble Gujarat High Court vide judgment reported in [2015] affirmed the view of the Hon’ble ITAT”

The Tribunal also noticed that though the AO has extracted the findings of the Investigation Wing in detail, he has not recorded any adverse findings with regard to the documentary evidence submitted by the assessee in connection with the impugned transactions. Also noticed that the AO has not questioned the sales of the assessee, and it is relevant to notice here that the accounts of the assessee are audited.

The two-member bench comprising Saktijit Dey (Vice President) and Padmavathy S (Accountant Member) held that there is no infirmity in the order of the CIT(A) in restricting the addition to 25% of the alleged bogus purchases.

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