2025 (6) TMI 281 - AT - Income Tax

Estimation of income and bogus purchases: GST records and books accepted, departmental addition applying gross profit rate rejected

Estimation of income dispute concerned allegations of bogus purchases where reliance was placed on GST-recorded delivery and documentary proof of goods ... Estimation of income - Bogus purchases - reliance on information given by the GST department - HELD THAT:- As documentary evidence on account of delivery of raw material at the factory premises and there is documentary evidence of the goods having been entered into the State of Himachal Pradesh, where the Unit of the assessee is located at Barotiwala, Distt. Solan, H.P. and sales have been accepted by the CIT (A), the books of accounts of the assessee stands accepted and it was found that no sales were undervalued or the purchases were inflated. Though, both the assessee and department have accepted the fact that the raw material have been reached at the factory premises of assessee concern and regarding the profit element, since it has been proved by the assessee, beyond any iota of doubt that since the purchases were not under-valued or inflated and, thus, the sustaining of addition by applying the gross profit rate of 5.94% on the alleged bogus purchases was not justified and the appeal of the department be dismissed. Justification in applying a profit rate of 12.5% on such purchases of raw material from the parties concerned - CIT(A) has accepted the books of account presented by the Assessee which was earlier rejected by the AO and he has also accepted that the alleged purchases were made at par of other purchases made or even at lower rates. In such a situation, we find no reason to sustain any addition made on this ground, it is because if such alleged purchases were either at par to the rate of other purchases or at lower rate than the purchases made in the books of account, then, where is the possibility of earning extra income ( i.e. from so called profit embedded purchases ) from such purchases. Thus, the findings of the CIT(A) of restricting the disallowance @ 5.9% for such alleged purchases from bogus parties cannot be sustained. Accordingly, Assessee’s appeal on this ground is allowed. The core legal questions considered in this case revolve around the treatment of alleged bogus purchases in the assessment of income tax, specifically:1. Whether the purchases made by the assessee from certain parties, whose GST registrations were subsequently cancelled or surrendered, can be treated as bogus purchases for disallowance under the Income Tax Act.2. The extent and manner of disallowance applicable on such alleged bogus purchases, particularly whether the entire purchase amount or only the profit element embedded therein should be disallowed.3. The correctness of the gross profit ratio applied by the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) (CIT(A)) for computing the disallowance under section 69C of the Income Tax Act.4. The evidentiary value of documentary proofs such as tax invoices, e-way bills, transportation documents, payment proofs, and other records submitted by the assessee to establish the genuineness of purchases.5. The legal implications of the non-response by the alleged suppliers to notices issued under section 133(6) of the Income Tax Act.6. The validity of rejecting the books of accounts under section 145(3) of the Income Tax Act based on alleged bogus purchases.Issue-wise Detailed Analysis:1. Legitimacy of Purchases from Parties with Cancelled or Surrendered GST RegistrationsThe legal framework involves provisions under the Income Tax Act relating to unexplained expenditure (section 69C) and the GST regime rules, particularly Rule 138 of the GST Rules, which governs the generation of e-way bills. The Court noted that e-way bills can only be generated by persons with valid GST registrations and that such bills are generated online with unique numbers prior to the movement of goods.The assessee furnished comprehensive documentary evidence including tax invoices, e-way bills, goods receipts, transportation permits, driver identification, payment proofs, and photographs of goods in transit. These documents demonstrated that at the time of purchase and movement of goods, the suppliers had valid GST registrations and the goods physically reached the assessee's premises.The Court referenced judicial precedents where it was held that if purchases and transactions are supported by valid documents and were made before cancellation of registration, the purchases cannot be treated as bogus. The Court also observed that retrospective cancellation of GST registrations by the GST department does not adversely affect the genuineness of purchases made when the registrations were valid.Thus, the Court concluded that the purchases were genuine despite subsequent cancellation or surrender of GST registrations, relying on the statutory requirement for e-way bills and corroborative documentary evidence.2. Extent of Disallowance on Alleged Bogus PurchasesThe AO initially disallowed 12.5% of the total alleged bogus purchases amounting to Rs. 8.53 crores, reasoning that the purchases were made from grey market sources to inflate profits and evade taxes. The AO rejected the books of accounts under section 145(3) on this basis but did not doubt the sales or the physical receipt of goods.The CIT(A), however, disagreed with the AO's approach of disallowing 12.5% profit margin and accepted that since sales were not doubted and payments were recorded, the purchases could not be entirely bogus. The CIT(A) directed recomputation of disallowance at the declared gross profit ratio (GPR) of 5.94%, which the assessee had reported for the relevant financial year.Judicial precedents were cited where it was held that if sales are not doubted, only the profit element embedded in such purchases should be disallowed and not the entire purchase amount. The Court found this approach logical and consistent with established law.Further, the Court examined the price rates at which the alleged purchases were made and found that these were at par or even below the rates of other purchases, negating the possibility of inflated profits embedded in such purchases.Therefore, the Court held that disallowance based on a gross profit ratio of 5.94% was justified and the higher rate of 12.5% applied by the AO was not sustainable.3. Evidentiary Value of Documentary ProofsThe assessee submitted extensive documentary evidence including:Tax invoices with valid GST numbers.E-way bills generated online.Goods receipt notes (GR), truck permits, driver licenses, and photographs of loaded trucks with location stamps.Proof of payments through bank statements and cheque endorsements.Additional Goods Tax receipts evidencing entry of goods into the State of Himachal Pradesh.Confirmation letters and ledger accounts from suppliers certified by Chartered Accountants with UDIN numbers.The Court found that these documents collectively established the genuineness of the purchases and physical receipt of goods at the assessee's premises. The Court also noted that the AO and CIT(A) did not find any defects in the maintenance of books of accounts, stock registers, production and consumption records, or sales records.Based on this evidence, the Court rejected the AO's presumption of bogus purchases and surmises based on non-response to notices under section 133(6) by the suppliers. It was held that the assessee had discharged the onus of proving genuineness of purchases.4. Non-Response to Notices under Section 133(6)The AO issued notices to the alleged suppliers who did not respond. The revenue argued that this non-response indicated that the parties were bogus. However, the Court relied on precedents holding that where the assessee has filed confirmed copies of accounts and other corroborative evidence, and the AO has not pursued the matter further, no adverse inference can be drawn against the assessee for the suppliers' non-response.5. Rejection of Books of Accounts under Section 145(3)The AO rejected the books of accounts on the ground of alleged bogus purchases. The CIT(A) reversed this finding, accepting the books of accounts after considering the documentary evidence and the fact that sales were not doubted.The Court concurred with the CIT(A)'s view, noting that no defects were found in the quantitative records or stock maintenance, and that the rejection of books of accounts was not justified.6. Application of Legal Precedents and PrinciplesThe Court extensively referred to authoritative judgments including:The Supreme Court's ruling that where purchases are supported by invoices, payments, and transportation documents, and sales are not doubted, additions on account of bogus purchases cannot be sustained.High Court decisions affirming that retrospective cancellation of GST registrations does not render prior purchases bogus if valid registrations existed at the time of purchase.Precedents emphasizing that disallowance under section 69C should be limited to the profit element embedded in bogus purchases, not the entire purchase amount, especially where sales are accepted.The Court applied these principles to the facts, emphasizing that the assessee's declared gross profit ratio of 5.94% was reasonable and that the AO's higher estimate was not supported by evidence.Conclusions and Significant Holdings:'The purchases were genuine (though found from unverifiable sources) because goods manufactured from such purchases were accepted by the Assessing Officer and the CIT(A) has also given his finding that the rate of procurement of such purchases by the Assessee are either at par or even below the market rate on which the Assessee has procured such alleged purchases.''If such alleged purchases were either at par to the rate of other purchases or at lower rate than the purchases made in the books of account, then, where is the possibility of earning extra income ( i.e. from so called profit embedded purchases ) from such purchasesRs.''The assessee having filed the confirmed copies of account of the parties and apart from issuance of notice u/s 133(6), the Assessing Officer did not pursue the matter further and under such circumstances, the assessee could not do anything further and, as such, no adverse view could be drawn on such non-communication by the parties concerned.''In case of bogus purchases, if the sale is not in doubt, then only the profit element embedded in such purchases may be subject to tax in the hands the assessee.'Accordingly, the Court held that:The disallowance on account of alleged bogus purchases should be limited to the gross profit ratio of 5.94% declared by the assessee and not the 12.5% applied by the AO.The purchases made from parties whose GST registrations were subsequently cancelled or surrendered cannot be treated as bogus if the registrations were valid at the time of purchase and the assessee has furnished valid documentary evidence.The books of accounts of the assessee cannot be rejected under section 145(3) solely on the basis of alleged bogus purchases when sales and records are not doubted.No adverse inference can be drawn against the assessee for non-response by the suppliers to notices under section 133(6) when the assessee has furnished adequate evidence.The appeals filed by the assessee were allowed, and the appeals filed by the revenue were dismissed.