Bogus purchases income estimation should use 3% gross profit rate as supported by assessee under sections 143(3) and 147

The ITAT Mumbai held that where an assessee was found to have made bogus purchases, the estimation of income should be based on a gross profit rate of 3% as pleaded by the assessee. The assessee supported this contention by providing an assessment order of a family member's firm for the same assessment year under sections 143(3) read with 147, which received similar treatment. The tribunal directed the AO to apply the 3% gross profit rate on the alleged bogus purchases to determine the assessee's income, ensuring consistent treatment across similar cases.

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Issues Involved:
1. Validity of assessment framed under section 143(3) read with section 147 of the Income Tax Act, 1961.
2. Addition of Rs. 66,30,039/- under section 69C of the Act as unexplained expenditure.
3. Confirmation of the addition by the National Faceless Appeal Centre (NFAC).

Issue-Wise Detailed Analysis:

1. Validity of Assessment under Section 143(3) read with Section 147:
The assessee challenged the assessment framed by the Income Tax Officer (ITO) under section 143(3) read with section 147 of the Income Tax Act, 1961. The reopening of the case was based on information obtained during a search and seizure operation conducted on Mr. Gautam Jain and others, which revealed that companies managed by Mr. Jain were providing bogus accommodation entries through various benami concerns. The assessee had shown purchases worth Rs. 66,30,039/- from M/s. Krishna Diam, a firm managed by Mr. Jain. The AO issued a notice under section 148 dated 28th March 2018, leading to the reopening of the case. The Tribunal found that the reopening of the case was substantive and not based on mere belief, as it was supported by detailed findings from the investigation.

2. Addition of Rs. 66,30,039/- under Section 69C as Unexplained Expenditure:
The AO made an addition of Rs. 66,30,039/- under section 69C of the Act, treating the purchases from M/s. Krishna Diam as non-genuine. The assessee argued that:
- There was no material evidence to show that the expenditure was incurred outside the books.
- The purchases were made in the regular course of business.
- Proper quantitative details were maintained.
- Confirmation from M/s. Krishna Diam and their income tax return were furnished.
- Payments were made through account payee cheques.
- The sales from the alleged non-genuine purchases were accepted by the AO.

However, the AO relied on the statements of Mr. Gautam Jain, who admitted that M/s. Krishna Diam was a paper-based company with no actual business activities. The AO detailed the modus operandi of issuing bogus sale bills and providing accommodation entries. The Tribunal noted that the findings from the investigation and the statements of Mr. Jain clearly established the bogus nature of the transactions.

3. Confirmation of the Addition by NFAC:
The NFAC confirmed the AO's action of adding Rs. 66,30,039/- under section 69C. The Tribunal referred to several judicial precedents, including:
- M/s Kachwala Gems vs. JCIT (2006) 206 CTR (SC)
- Principal Commissioner of Income-tax-17 v. Mohommad Haji Adam & Co. [2019] 103 taxmann.com 459 (Bombay)
- Principal Commissioner of Income-tax v. Batliboi Environmental Engineering Ltd. [2022] 141 taxmann.com 245 (Bombay)

These cases established that if the factum of sales is accepted by the department, the entire amount of bogus purchases should not necessarily be added to the income. Instead, a gross profit rate could be applied. The Tribunal noted that the assessee himself suggested applying a G.P. rate of 3%, similar to a related case (M/s. V. Gunvant & Co.).

Conclusion:
The Tribunal directed the AO to apply a G.P. rate of 3% on the alleged bogus purchases and work out the income of the assessee accordingly. The appeal of the assessee was partly allowed. The order was pronounced in the open court on 13th August 2024.

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