2025 (4) TMI 325 - AT - Income Tax

ITAT upholds bogus purchase findings but limits disallowance to 12.5% of unverified purchases representing estimated tax savings

Vayam Technologies Limited Versus DCIT, Circle-25 (1), New Delhi

The ITAT Delhi upheld the AO's findings on bogus purchases after the appellant failed to produce sellers for examination despite opportunities. The AO ... Bogus purchases - Whether the appellant was denied the opportunity for cross-examination of the parties involved ? - addition of entire bogus purchase amount or only the profit element embedded - HELD THAT:- AO has also made independent inquiries and has arrived at conclusion that the parties are non-existent/ non-genuine. A.O, has also pointed out some defects in the purchase bill submitted by the appellant i.e. delivery note, suppliers reference, buyers order, dispatch documents, term of delivery etc. A.O. has also mentioned that appellant was not able to produce the above party/seller for examination and that M/s Macro IT Systems Pvt. Ltd. is controlled by Shri Naresh Kumar Jain involved in providing the accommodation entries. The same have been confronted to the appellant too. In response, the appellant has failed to produce the parties for examination. Hence, the onus remained un-discharged on part of the appellant. Hence, there is no failure on part of the AO in terms of adherence to the principles of natural justice. Appellant has given papers and documents like bank statement, VAT/ST challans etc. However, the shell companies are paper-based companies and all documents/papers are generated. Also it is trite law that transactions through banking channel are not sacrosanct. Hence, the arguments of the assessee for complete genuineness are not acceptable. However, keeping in view the assessment order wherein AO has not questioned the genuineness of the sales Hence, there must be purchases made by the appellant from grey market in respect of the sales.The appellant would have saved taxes like VAT, which were payable on genuine purchases. The grey market purchases also evade indirect taxes. A fair estimation of the disallowance of 12.5% of unverified alleged bogus purchase will meet the end of justice. The grounds of appeal in absence of any other supporting material evidence are not tenable. Therefore, the grounds of appeal are dismissed. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment include:Whether the addition of Rs. 1,78,25,000/- made by the Assessing Officer (AO) on account of alleged bogus purchases from Macro IT Systems Pvt. Ltd. was justified.Whether the appellant was denied the opportunity for cross-examination of the parties involved, thereby violating principles of natural justice.Whether the entire purchase amount should be added to the appellant's income or only the profit element embedded in such purchases.Whether the initiation of penalty proceedings under Section 271(1)(c) for furnishing inaccurate particulars and concealing income was justified.ISSUE-WISE DETAILED ANALYSIS1. Addition of Rs. 1,78,25,000/- for Alleged Bogus PurchasesRelevant Legal Framework and Precedents: The assessment was reopened under Section 148 of the Income-Tax Act, based on information from the Directorate of Investigation regarding accommodation entries from shell companies controlled by Jain Brothers. The legal framework involves Sections 143(3), 147, and 148 of the Income-Tax Act.Court's Interpretation and Reasoning: The Tribunal examined the findings of the AO and the CIT(A), which were based on evidence from a search and seizure operation indicating that Macro IT Systems Pvt. Ltd. was a paper company controlled by Jain Brothers. The AO added the entire purchase amount to the appellant's income, citing the lack of genuine business activities by the alleged supplier.Key Evidence and Findings: Evidence included documents and electronic data seized from Jain Brothers, indicating that the appellant received accommodation entries. The AO noted that the appellant failed to produce Macro IT Systems Pvt. Ltd. for examination and did not provide sufficient evidence to prove the genuineness of the transactions.Application of Law to Facts: The Tribunal found that the AO's decision was based on substantial evidence, including the absence of genuine business activity by the supplier and the appellant's failure to prove the transaction's authenticity.Treatment of Competing Arguments: The appellant argued that the disallowance was based on third-party information without providing an opportunity for cross-examination. However, the Tribunal noted that the AO conducted independent inquiries and found the supplier to be non-existent, thus justifying the addition.Conclusions: The Tribunal upheld the CIT(A)'s decision to restrict the disallowance to 12.5% of the alleged bogus purchases, amounting to Rs. 22,28,125/-, considering the profit element embedded in such purchases.2. Denial of Opportunity for Cross-ExaminationRelevant Legal Framework and Precedents: The appellant cited judicial pronouncements emphasizing the right to cross-examine as part of natural justice principles.Court's Interpretation and Reasoning: The Tribunal acknowledged the appellant's request for cross-examination but found that the AO's decision was not solely based on third-party statements. Independent inquiries and evidence from the search supported the AO's findings.Key Evidence and Findings: The AO's independent inquiries and the evidence from the search were deemed sufficient to establish the non-genuineness of the transactions.Application of Law to Facts: The Tribunal concluded that the absence of cross-examination did not violate natural justice principles, given the substantial evidence supporting the AO's decision.Treatment of Competing Arguments: The appellant's reliance on the right to cross-examine was not upheld due to the independent evidence and inquiries conducted by the AO.Conclusions: The Tribunal found no failure on the AO's part regarding natural justice principles.3. Addition of Profit Element in Bogus PurchasesRelevant Legal Framework and Precedents: The Tribunal referred to judicial precedents where only the profit element in bogus purchases is taxable, not the entire amount.Court's Interpretation and Reasoning: The Tribunal agreed with the CIT(A) that the entire purchase amount could not be added to income, as sales were not questioned, implying some purchases were made.Key Evidence and Findings: The CIT(A) noted that the appellant provided some documentation, such as bank statements and VAT returns, but these did not prove the genuineness of the purchases.Application of Law to Facts: The Tribunal applied the principle that only the profit element in bogus purchases is taxable, aligning with precedents from the Gujarat High Court and ITAT Mumbai.Treatment of Competing Arguments: The appellant's argument for the genuineness of transactions was partially accepted, leading to the restriction of the addition to the profit element.Conclusions: The Tribunal upheld the CIT(A)'s decision to restrict the disallowance to 12.5% of the alleged bogus purchases.4. Initiation of Penalty Proceedings under Section 271(1)(c)Relevant Legal Framework and Precedents: Section 271(1)(c) of the Income-Tax Act pertains to penalties for concealing income or furnishing inaccurate particulars.Court's Interpretation and Reasoning: The Tribunal noted that the CIT(A) did not adjudicate this issue, deeming it premature at this stage.Key Evidence and Findings: The initiation of penalty proceedings was based on the AO's finding of inaccurate particulars and concealed income.Application of Law to Facts: The Tribunal did not address the merits of the penalty proceedings, as the CIT(A) dismissed this ground for being premature.Treatment of Competing Arguments: The Tribunal did not engage with arguments on this issue, as it was not adjudicated by the CIT(A).Conclusions: The Tribunal dismissed the ground related to penalty proceedings for statistical purposes.SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: The Tribunal upheld the CIT(A)'s reasoning that 'a fair estimation of the disallowance of 12.5% of unverified alleged bogus purchase of Rs. 1,78,25,000/- from M/s Macro IT Systems Pvt. Ltd. as mentioned above under the facts and circumstances of the case, in my opinion, will meet the ends of justice.'Core Principles Established: The judgment reinforced the principle that only the profit element in bogus purchases is taxable, not the entire purchase amount, particularly when sales are not questioned.Final Determinations on Each Issue: The Tribunal dismissed the appeal, upholding the CIT(A)'s decision to restrict the disallowance to 12.5% of the alleged bogus purchases and dismissing the penalty proceedings issue as premature.