2021 (10) TMI 1049 - AT - Income Tax

Tribunal reduces bogus purchase addition, emphasizes income component in transactions

The Tribunal partially allowed the appeal, reducing the addition of Rs. 3,50,000 on account of Bogus Purchase to a token disallowance of Rs. 20,000. The ... Bogus purchase / accommodation entries - Addition under Section 69 (unexplained purchases) - Reliance on investigation report without independent inquiry - Token disallowance to tax taxable elementBogus purchase / accommodation entries - Reliance on investigation report without independent inquiry - Token disallowance to tax taxable element - Whether the addition of Rs. 3,50,000 on account of alleged bogus purchase from Nazar Impex Pvt. Ltd. should be sustained in full or reduced. - HELD THAT: - The Tribunal examined the material placed before the Assessing Officer and the Commissioner (Appeals), noting that the assessee had produced confirmations, invoices, bank statements, purchase and sale registers and stock records to substantiate the purchases. It was also an undisputed fact that Nazar Impex Pvt. Ltd. was managed by the Rajinder Jain group and that the investigation into that group showed use of paper concerns to provide accommodation entries. The AO however made a 100% disallowance relying primarily on the Investigation Wing's report without conducting an independent inquiry on the assessee's documentary evidence. The CIT(A) upheld the AO's conclusion based on circumstantial evidence. The Tribunal recognised that while the Investigation Wing's findings cast doubt on the genuineness of the entry provider, the assessee's turnover, declared gross and net profit margins and one-to-one correlation of the disputed purchases with exports indicated commercial activity consistent with the trade. Given that the disputed purchases formed less than 10% of the assessee's transactions and documentary evidence was not wholly discarded, the Tribunal held that a complete disallowance was excessive. Applying the principle that where the taxable element alone should be targeted, a token disallowance is appropriate to safeguard revenue without nullifying the assessee's declared business results, the Tribunal reduced the addition to a token amount. [Paras 8, 9]Addition of Rs. 3,50,000 sustained in part; reduced to a token disallowance of Rs. 20,000 and the appeal is partly allowed.Final Conclusion: The Tribunal set aside the 100% disallowance sustained by the lower authorities and substituted a token disallowance of Rs. 20,000, partly allowing the assessee's appeal for AY 2009-10. Issues:1. Addition of Rs. 3,50,000 on account of Bogus Purchase under Sec 69 of the Income Tax Act, 1961.Analysis:1. The appeal was against the order of the Commissioner of Income Tax (Appeals) confirming the addition of Rs. 3,50,000 on account of Bogus Purchase for the Assessment Year 2009-10. The case was reopened under section 147 of the Income Tax Act based on information received from the Investigation Wing regarding accommodation entries provided by a certain group. The Assessing Officer (AO) disallowed the entire purchases shown from a specific entity, considering them as accommodation entries.2. The assessee contended that the purchases were genuine, supported by confirmation invoices and bank statements. The assessee's turnover was Rs. 32 lakhs, and the disputed purchases were only Rs. 3.5 lakhs. The AO and the Commissioner of Income Tax (Appeals) relied on the Investigation Wing's report, concluding that the purchases were not genuine. The assessee argued for the deletion of the addition, emphasizing the reasonable profit shown in the diamond business.3. The Tribunal noted that the AO did not conduct an independent investigation and solely relied on the Investigation Wing's report. Considering the overall facts and circumstances, the Tribunal held that a 100% addition was not justified. Instead, to prevent revenue leakage, a token disallowance of Rs. 20,000 was deemed appropriate. The Tribunal found that the lower authorities did not reject the documentary evidence provided by the assessee, but based their decision on the Investigation Wing's report.4. The Tribunal's decision was based on the principle of taxing the income component in the transaction rather than disallowing the entire amount. The Tribunal considered the assessee's turnover, profit margins, and the proportion of disputed purchases to total transactions. The Tribunal concluded that a token disallowance of Rs. 20,000 would serve the interest of justice, partially allowing the assessee's appeal.5. Therefore, the Tribunal partially allowed the appeal, emphasizing the importance of considering all relevant factors before making additions in cases involving disputed purchases based on accommodation entries.