2024 (2) TMI 1586 - HC - Income Tax

6% addition on bogus purchases upheld as fair method to estimate undisclosed income, supporting Revenue's approach

The HC upheld the approach of estimating income by adding 6% of alleged bogus purchases. Noting a coordinate-bench decision that partly allowed the ... Estimation of income - bogus purchases - Tribunal estimating the addition in respect of bogus purchases at the rate of 6% - HELD THAT:- Revenue has fairly pointed out the judgment of the coordinate Bench of this Court in case of Pankaj K. Choudhary [2023 (3) TMI 1402 - GUJARAT HIGH COURT] for partly allowing the appeal of the Revenue wherein it was held that in respect of bogus purchase, the addition at the rate of 6% of bogus purchases is fair and reasonable. ISSUES PRESENTED AND CONSIDERED 1. Whether the Tribunal was justified in estimating addition in respect of alleged bogus purchases at the rate of 6% of such purchases instead of upholding the Assessing Officer's 100% disallowance where purchases were alleged to be accommodation entries fabricated through sham paper concerns? 2. Whether reliance on a coordinate bench decision reducing/additing a percentage (6% or 5%) to disputed purchases is legally tenable where other authorities had taken different percentage approaches (notably 5% directed in another authority's order)? ISSUE-WISE DETAILED ANALYSIS Issue 1 - Appropriateness of estimating addition at 6% versus 100% disallowance Legal framework: The assessment and additions under the Income Tax Act are to be made on the basis of verifiable evidence; where Income Tax authorities treat purchases as bogus accommodation entries based on investigation reports, additions may be made but must be supported by independent inquiry and reasoned findings. Precedent treatment: The Tribunal and lower authorities have in various matters applied estimated percentages of disputed purchases (e.g., 5%, 6%, 12.5% in different cases) to represent the profit element or reasonable addition where full disallowance was not sustained by independent verification. A coordinate bench of this Court has earlier accepted 6% as fair in a comparable factual matrix. Interpretation and reasoning: The Tribunal found that the AO's 100% disallowance rested solely on the report of the Investigation Wing without independent investigation or specific findings on the documentary evidence produced by the assessee. The Tribunal noted undisputed sales and extremely low reported net profit (0.0051%), and concluded that some portion of disputed purchases could reasonably be treated as profit-element additions rather than complete rejection of purchases. Given the absence of AO's proper investigation and the mitigating facts (books not wholly rejected on distinct documentary bases, turnover and sales not disputed), the Tribunal modified the addition to 6% as a measured estimate of the profit embedded in the transactions. Ratio vs. Obiter: Ratio - Where the AO makes a blanket 100% disallowance based only on investigation reports without independent inquiry, the fact-finding forum (Tribunal/Court) may justifiably moderate the addition to a reasonable percentage reflecting embedded profit, provided the sale turnover and other evidentiary material do not justify total rejection. Obiter - Observations about policy recommendations (e.g., presumed profit @2% from an external report) are ancillary and do not form operative ratio. Conclusion: The Court held that the Tribunal acted within permissible limits in reducing the AO's 100% disallowance to 6% on the material before it, since the AO had not conducted independent verification and the factual matrix (turnover, undisputed sales, abnormally low declared profit) justified a moderated estimate. Issue 2 - Reliance on coordinate-bench decisions and the appropriate percentage (6% v. 5%) Legal framework: Appellate adjudication may rely on persuasive precedents and coordinate bench decisions in the same High Court; where a coordinate bench has applied a particular percentage as reasonable in analogous circumstances, that decision informs but does not mechanically bind different benches unless binding authority applies. Precedent treatment: The Tribunal relied on relevant Tribunal and High Court decisions that restricted additions to the profit element (variously measured). The Court took note of a coordinate-bench decision in which reduction to 6% was considered fair. The CIT(A) had earlier restricted addition to 5% relying on other authorities. Interpretation and reasoning: The Court observed that the substantial questions of law raised by Revenue were already answered by existing coordinate-bench jurisprudence that validated 6% as a fair estimate in comparable fact situations. The Court emphasized fact-sensitive assessment: percentages applied in prior orders (5% or 6%) derive from analysis of the facts before those forums; nothing in the present record showed an error of law or perversity in reaching 6% instead of 5%. Ratio vs. Obiter: Ratio - A coordinate-bench precedent supporting a 6% estimate in analogous factual circumstances is an appropriate basis for affirming the Tribunal's modification; divergence between 5% and 6% in different orders reflects fact-sensitive judicial estimation rather than an inflexible legal rule. Obiter - Remarks on a particular authority's exact percentage direction (e.g., 'direction to make addition @5% of turnover' in another case) are not binding where facts differ. Conclusion: The Court concluded that reliance on the coordinate-bench decision validating 6% was permissible and that no substantial question of law arose from the Tribunal's adoption of 6% instead of 5% given the factual parity with the antecedent decision. Ancillary reasoning on scope of AO reliance on investigation reports Legal framework: An AO may rely on investigation reports, but such reliance must be buttressed by independent inquiry, evaluation of documentary evidence, and specific findings. Total rejection of books or purchases on the sole basis of external investigation reports without independent fact-finding is impermissible. Interpretation and reasoning: The Tribunal faulted the AO for making 100% disallowance without conducting an independent probe or articulating why the assessee's documentary material was inadequate. Where sales turnover is not disputed and the assessee provides accounts, a proportional estimation of disallowance representing profit element is an appropriate remedy. Ratio vs. Obiter: Ratio - AO's unilateral total disallowance based solely on investigation reports, absent independent examination, can be set aside or moderated by the Tribunal/Court. Obiter - Specific recommended percentages in other non-identical cases remain persuasive but not prescriptive. Conclusion: The Court affirmed the principle that proper investigative procedure and reasoned findings are prerequisites for full disallowance; in their absence, a moderated addition (here 6%) is sustainable. Disposition The Court dismissed the Revenue's appeal, holding that the substantial questions of law raised were answered by existing coordinate-bench authority and that the Tribunal's reduction of the AO's 100% disallowance to 6% was justified on the material and reasoning in the record. No order as to costs.