2024 (2) TMI 1546 - HC - Income Tax

Tax Dispute Resolved: ITAT's 6% Estimation Upheld Over 100% Disallowance in Bogus Purchases Challenge

The Principal Commissioner of Income Tax 1, Surat Versus Ravjibhai B Dhameliya, Prop. M/s. Amrut Exports

The HC upheld the ITAT's decision to estimate tax addition at 6% for alleged bogus purchases instead of the AO's 100% disallowance. The court found the ... Estimation of income - bogus purchases - CIT(A) partly allowed the appeal by restricting the disallowance to the extent of 5% - ITAT while dismissing the appeal preferred by the assessee, partly allowed the appeal filed by the revenue by enhancing disallowance at the rate of 6% of the impugned purchases to meet with the possibility of revenue leakage HELD THAT:- When the Tribunal has thought it fit to reduce the disallowance at 6% the Tribunal had before it the facts which were duly analyzed by it. No interference is called for in the said conclusion and findings of the Tribunal in the present appeal by this court. See Pankaj K. Choudhary case [2023 (3) TMI 1402 - GUJARAT HIGH COURT]. No substantial questions of law. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court in this Tax Appeal under Section 260A of the Income Tax Act, 1961 were:Whether the learned Income Tax Appellate Tribunal (ITAT) was justified in estimating the addition in respect of alleged bogus purchases at the rate of 6% of such purchases, instead of accepting the Assessing Officer's (AO) disallowance of 100% of the purchases amounting to Rs. 25,24,67,233/-, given that these purchases were claimed to be sham transactions fabricated through bogus paper concerns known to provide accommodation entriesRs.Whether the ITAT was justified in relying on a precedent from the Gujarat High Court to enhance the disallowance to 6% of purchases, as opposed to adhering to the direction in that precedent which mandated addition at the rate of 5% of total turnoverRs.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Justification of ITAT's estimation of addition at 6% instead of AO's 100% disallowance of bogus purchasesRelevant legal framework and precedents: The Income Tax Act empowers the AO to disallow expenditures or purchases that are not genuine or are fabricated to evade tax. The concept of accommodation entries, which are fictitious transactions to inflate expenses or purchases, has been judicially scrutinized. The ITAT and High Courts have often adopted a pragmatic approach by estimating a reasonable percentage addition to income rather than accepting full disallowance where complete proof of fabrication is difficult.Court's interpretation and reasoning: The Court noted that the ITAT relied on a coordinate Bench decision in a similar case involving the same group of companies allegedly providing accommodation entries. The coordinate Bench had taken a view that a reasonable addition to income should be made at a certain percentage to account for revenue leakage, rather than disallowing the entire amount as non-genuine.Key evidence and findings: The AO's disallowance was based on information received during search proceedings and verification of books of accounts and vouchers which revealed lack of quality-wise and quantity-wise details of rough and finished goods. The AO concluded that purchases from the named groups were bogus. However, the ITAT considered the submissions and evidence and adopted a 6% addition rather than 100%, reflecting a calibrated approach.Application of law to facts: The Court found that the ITAT's approach was consistent with judicial prudence in cases of accommodation entries where absolute proof of fabrication is difficult. The 6% addition was viewed as a reasonable estimate to plug revenue leakage without wholly disallowing the purchases, which might be disproportionate.Treatment of competing arguments: The revenue contended that the entire amount should be disallowed as the purchases were sham transactions. The assessee challenged the disallowance altogether. The ITAT's intermediate approach was a compromise between these extremes. The Court upheld the ITAT's reasoning as sound and in line with precedent.Conclusions: The Court held that the ITAT was justified in estimating the addition at 6% and rejecting the AO's 100% disallowance, given the factual matrix and judicial precedents.Issue 2: Reliance on Gujarat High Court precedent and deviation from 5% addition to 6%Relevant legal framework and precedents: The ITAT relied on a Gujarat High Court decision in Mayank Diamonds Pvt. Ltd., which directed an addition at 5% of total turnover in a similar context. The question was whether the ITAT erred in enhancing the addition to 6%.Court's interpretation and reasoning: The Court observed that the ITAT's decision to enhance the addition to 6% was not arbitrary but intended to cover the possibility of revenue leakage more effectively. The ITAT's decision was also supported by a coordinate Bench decision in Pankaj K. Choudhary, which dealt with similar facts and the same group of companies involved in accommodation entries.Key evidence and findings: The coordinate Bench decisions and the factual similarity of the groups involved lent credence to the ITAT's approach. The Court noted that the ITAT had carefully considered the precedents and facts before enhancing the disallowance percentage.Application of law to facts: The Court found that the ITAT's reliance on the coordinate Bench's interpretation of the High Court precedent was appropriate. The slight enhancement from 5% to 6% was within the discretionary domain of the Tribunal to safeguard revenue interests.Treatment of competing arguments: The revenue argued for full disallowance, the assessee for minimal or no disallowance, and the ITAT struck a balance. The Court found no error in the ITAT's nuanced application of the precedent.Conclusions: The Court upheld the ITAT's reliance on the Gujarat High Court precedent and its decision to enhance the addition to 6% as justified and reasonable.3. SIGNIFICANT HOLDINGSThe Court's key determinations and principles established include:'No question of law much less any substantial question of law arise in the facts of the present case.'The ITAT's approach of estimating addition at a reasonable percentage (6%) rather than accepting the AO's full disallowance was justified and in line with judicial prudence in cases involving accommodation entries.The ITAT was correct in relying on coordinate Bench decisions interpreting the Gujarat High Court precedent and was entitled to enhance the addition from 5% to 6% to effectively address revenue leakage.The Court emphasized consistency with coordinate Bench rulings, stating: 'As the issue is squarely covered by the decision of the coordinate bench, and there is no change in facts and law and the lad. Counsel is unable to produce any material to controvert the aforesaid findings ... We find no reason to interfere.'The appeal was dismissed summarily as meritless, reinforcing the settled position that estimation of addition in accommodation entry cases is a matter of fact and discretion within the Tribunal's domain.