Sales-linked purchases challenged as bogus due to accommodation invoices; only embedded profit taxable, addition limited to 5% extra GP
Where sales were not doubted, the Tribunal held that purchases could not be treated as entirely bogus merely because invoices were obtained from an accommodation entry provider, particularly when the assessee's GP (12.63%) exceeded the preceding year's GP (9.2%) and the Revenue produced no corroborative evidence beyond the operator's statement. However, since the assessee failed to substantiate transportation of goods, the Tribunal inferred that supplies were sourced from third parties and only the profit element embedded in such purchases was taxable under the settled jurisdictional HC approach. The addition was therefore restricted to 5% over the disclosed GP, directing estimation at 17.63% and sustaining addition only to that extent; the appeal was partly allowed.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether the challenge to reassessment reopening under section 148 required adjudication when it was not pressed at hearing.
(ii) Whether purchases recorded from an entity found to be an accommodation entry provider could be treated as wholly bogus and added in full, or whether only the profit element embedded in such purchases should be brought to tax, on the facts where sales were not disputed but transportation/delivery evidence was not produced and the assessment relied substantially on third-party material.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i): Reassessment reopening under section 148
Interpretation and reasoning: The Court recorded that the assessee did not press the ground challenging reopening during the hearing.
Conclusion: The ground relating to reopening was dismissed as not pressed, and no adjudication on merits was undertaken.
Issue (ii): Addition for alleged bogus purchases-full disallowance vs. profit element
Legal framework (as discussed): The Court proceeded on the settled approach that where sales are accepted but purchases are found to be from an accommodation entry provider, taxation should ordinarily be confined to the profit element embedded in such purchases rather than disallowing the entire purchase value.
Interpretation and reasoning: The Court found that the Revenue's case substantially rested on a third-party statement describing issuance of bogus bills without actual supply. The Court noted that mere purchase bills and banking payments are not conclusive in such cases because accommodation entries ordinarily maintain such documentation. The assessee failed to produce transportation/delivery evidence (such as delivery challans, vehicle numbers, etc.), supporting the inference that goods were not sourced from the billed party. However, the Court also noted material gaps in the Revenue's verification: no further scrutiny of the assessee's transaction was undertaken beyond third-party information, no inquiry was made to trace the alleged cash trail after cheque/RTGS payments, and the statement relied upon was not furnished to the assessee.
The Court accepted that purchases were correlated with corresponding sales through a reconciliation placed on record, and the Revenue neither disputed the sales nor contradicted the reconciliation. Since sales were not doubted, the Court concluded that the most reasonable inference was that the assessee procured goods from other parties in the grey market while obtaining bills from the accommodation entry provider. In such circumstances, disallowance of the entire purchases was held to be unwarranted. The Court also considered that the assessee's gross profit rate in the year was higher than the preceding year, reinforcing that complete disallowance of purchases-without rejecting sales-was excessive. At the same time, absence of transportation evidence justified an estimation of additional profit over and above the disclosed gross profit.
Conclusion: The Court restricted the addition to the incremental profit element by directing estimation of profit on the impugned purchases at a rate 5% higher than the gross profit disclosed for the year. Since the assessee had already disclosed gross profit at 12.63%, the Court directed that only the additional 5% of the purchase amount be added, and the balance of the full purchase disallowance was deleted. The appeal was partly allowed on this issue.
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AI Drafter ✕
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