2025 (3) TMI 1477 - HC - Income Tax

Assessing Officer's 100% addition for bogus purchases reduced to 6% following established precedent

THE PRINCIPAL COMMISSIONER OF INCOME TAX 1 Versus LATE RAJESH MALAMSINH JAIN, THROUGH LHS LAKSHITA RAJESH JAIN

Gujarat HC upheld ITAT's decision restricting addition for bogus purchases to 6% of total bogus purchases instead of AO's 100% addition. The court ... Estimation of income - bogus purchases - ITAT restricting the addition to 6% of the total bogus purchases against the addition made by the AO at the rate of 100% - HELD THAT:- As disallowance restricted to the extent of 0.50% is increased to 6% of the impugned purchases by ITAT. As in Surya Impex [2023 (1) TMI 835 - GUJARAT HIGH COURT] the Hon'ble Jurisdictional High Court affirms the decisions of this Tribunal on similar facts. Therefore, taking consistent view, the order of Id CIT(A) is modified and the assessing officer is directed to restrict the disallowance of purchases from there three parties be restricted to 6%. No substantial questions of law. 1. ISSUES PRESENTED and CONSIDEREDThe Court considered the following core legal questions arising from the assessment and appellate proceedings under the Income Tax Act, 1961:Whether the Income Tax Appellate Tribunal (ITAT) was justified in partially allowing the assessee's appeal and restricting the addition to 6% of the total bogus purchases, instead of the Assessing Officer's (AO) addition of 100% of bogus purchases amounting to Rs. 2,01,61,565/-, despite the purchases being sham transactions fabricated through bogus paper concerns engaged in providing accommodation entries.Whether the ITAT erred in not holding that payments claimed to hawala dealers were in effect suppression of profits by obtaining bogus purchase bills and thus liable to be fully added to the income of the assessee.Whether the ITAT failed to consider binding precedents, including the Gujarat High Court and Supreme Court judgments, which held that 100% of purchases from bogus parties should be added back to income under Sections 68 and 69C of the Income Tax Act.Whether the ITAT was justified in restricting the addition to 6% despite the AO's 100% addition and the non-genuineness of expenditure being established from information received from the Directorate of Income Tax (Investigation), Mumbai, and the assessee failing to discharge the onus to prove genuineness of transactions.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Justification of ITAT's restriction of addition to 6% of bogus purchasesRelevant legal framework and precedents: The Income Tax Act, 1961, particularly Sections 68 (unexplained cash credits) and 69C (unexplained expenditure), empower the AO to add back amounts to income where transactions are found to be bogus or fabricated. Judicial precedents from the Gujarat High Court and Supreme Court have consistently held that 100% of bogus purchases should be added back to income where evidence establishes sham transactions. The case law cited includes N.K. Industries Ltd. vs. DCIT and PCIT vs. Premata Tekriwal, which emphasize full addition of bogus expenditures.Court's interpretation and reasoning: The ITAT acknowledged the AO's findings that the purchases from entities linked to Gautam Jain group were bogus and involved accommodation entries. However, it considered the assessee's plea of being a commission agent and the absence of direct evidence such as TDS on commission or agency agreements. The Tribunal noted that the CIT(A) had restricted addition to 0.5% as estimated commission income but found this figure unsupported by material evidence. The Tribunal, taking a consistent view from similar cases involving the same entry providers, increased the addition to 6% of the impugned purchases, considering it a fair and reasonable estimate of suppressed income.Key evidence and findings: Information from the Investigation Wing, Mumbai, search proceedings on the Gautam Jain group, and the assessee's failure to produce substantive evidence to prove genuineness of transactions were critical. The AO's reopening of assessment under Section 147 and addition of Rs. 2.01 crores as bogus purchases was based on this material.Application of law to facts: While the AO applied the principle of full addition based on the established non-genuineness of transactions, the ITAT applied judicial discretion to quantify the addition at 6%, relying on precedents where similar additions were accepted as reasonable estimates of suppressed income.Treatment of competing arguments: The assessee's argument of being a commission agent was rejected due to lack of corroborative evidence. The Revenue's argument for 100% addition was moderated by the Tribunal in light of judicial precedents advocating proportional addition where exact quantification is difficult.Conclusions: The ITAT's restriction to 6% addition was upheld as a consistent and reasonable approach, balancing the need to tax unexplained income without imposing arbitrary full additions absent precise evidence.Issue 2: Treatment of payments to hawala dealers and suppression of profitsRelevant legal framework and precedents: Payments to hawala dealers, if disguised as purchases, fall under unexplained expenditure and are liable to be added back to income under Sections 68 and 69C. The Supreme Court and High Courts have held that such bogus expenditures are to be fully disallowed.Court's interpretation and reasoning: The ITAT did not explicitly elaborate on the payments to hawala dealers as suppression of profits but treated the entire set of bogus purchases collectively. The Tribunal's approach to restrict addition to 6% implicitly addressed the issue by proportionally taxing the unexplained expenditure.Key evidence and findings: The investigation revealed that the purchases were from entities engaged in providing accommodation entries, indicative of hawala transactions. However, the assessee failed to produce evidence to substantiate the genuineness of these payments.Application of law to facts: The Tribunal applied the law on unexplained expenditure but moderated the addition to a reasonable percentage rather than full addition.Treatment of competing arguments: The Revenue sought full addition; the assessee claimed commission agent status. The Tribunal rejected the latter and partially accepted the former by quantifying addition at 6%.Conclusions: The Tribunal's partial addition reflects a pragmatic application of law recognizing the difficulty of exact quantification but ensuring that suppression of profits is addressed.Issue 3: Consideration of binding precedents on addition of 100% of bogus purchasesRelevant legal framework and precedents: The Gujarat High Court judgment in N.K. Industries Ltd. vs. DCIT, upheld by the Supreme Court, mandates 100% addition of purchases from bogus parties. Similarly, PCIT vs. Premata Tekriwal and N.K. Proteins v. Dy. CIT reinforce this principle.Court's interpretation and reasoning: The Tribunal acknowledged these precedents but relied on a coordinate bench decision of the same High Court in Principal Commissioner of Income Tax vs. Pankaj K. Choudhary, which held that 6% addition is fair and reasonable for bogus purchases. The Tribunal followed this consistent view in similar cases involving the same entry providers.Key evidence and findings: The Tribunal's reliance on consistent decisions in cases involving the Gautam Jain group and others was pivotal.Application of law to facts: The Tribunal balanced the binding precedents with the practical difficulties in quantifying suppressed income and the need for consistency in tax administration.Treatment of competing arguments: The Revenue urged strict adherence to 100% addition; the Tribunal adopted a middle path based on judicial precedents allowing partial addition.Conclusions: The Tribunal's approach was deemed appropriate and consistent with recent judicial trends, thus not warranting interference.Issue 4: Validity of reopening and onus on assessee to prove genuinenessRelevant legal framework and precedents: Section 147 allows reopening of assessment if there is reason to believe income has escaped assessment. The onus lies on the assessee to prove genuineness of transactions once the AO establishes prima facie evidence of bogus nature.Court's interpretation and reasoning: The reopening was based on credible information from the Investigation Wing regarding accommodation entries. The assessee failed to discharge the onus by not providing corroborative evidence such as agency agreements or TDS details.Key evidence and findings: Search proceedings and information regarding the Gautam Jain group's modus operandi established the non-genuineness of purchases.Application of law to facts: The reopening was valid; the assessee's failure to prove genuineness justified addition.Treatment of competing arguments: The assessee challenged reopening and genuineness; the Tribunal upheld reopening and addition, only moderating the quantum.Conclusions: The reopening was valid and the assessee failed to discharge the onus, supporting the AO's addition and the Tribunal's partial confirmation thereof.3. SIGNIFICANT HOLDINGSThe Court held that the substantial questions of law raised by the appellant Revenue were already answered by the Tribunal's consistent application of judicial precedents and principles. The Court dismissed the appeal, affirming the Tribunal's order partly allowing the Revenue's appeal and restricting the addition to 6% of the total bogus purchases.Key principle established includes that in cases of bogus purchases established through credible information and investigation, the addition to income can be reasonably quantified at 6% of the impugned purchases as a proxy for suppressed income, especially where the assessee fails to provide evidence of genuineness or commission agency agreements.Verbatim from the Tribunal's order encapsulates the reasoning: 'Taking a consistent view, the order of Id. CIT(A) is modified and the disallowance restricted to the extent of 0.50% is increased to 6% of the impugned purchases... the assessing officer is directed to restrict the disallowance of purchases from these three parties be restricted to 6% of aggregate of purchase of Rs. 2.01 Crore.'Thus, the Court affirmed the principle that while full addition of bogus purchases is legally permissible, the quantum of addition may be moderated to a reasonable percentage consistent with judicial precedents and facts of the case.