2025 (7) TMI 1170 - AT - Income Tax

Unverified purchases disallowance limited to 10% profit element when corresponding sales properly accounted and taxed

Rudra Global Infra Products Ltd. Versus Assistant Commissioner of Income Tax, Circle-1, Bhavnagar

The ITAT Ahmedabad held that where purchases from certain parties could not be verified as genuine, the entire purchase amount should not be added back as ... Bogus purchases - estimation of NP - HELD THAT:-Genuineness of transaction made by the assessee from these parties remains un-verifiable. Further, the fact that in the GST assessment, the figure of turnover has not been disturbed cannot lead to the necessary implication that the aforesaid purchases from these parties was genuine. However, we also find force in the alternate argument of assessee that entire purchases made by the assessee could not be added back as income where sale proceeds have been duly accounted in the books of accounts and offered to tax. In such type of cases, various Courts have held that addition should be restricted only to the profit element embedded in the value of disputed purchases. Looking into various judicial precedents on the subject as cited above and the alternate argument of assessee, it would be reasonable to restrict the disallowance to 10% of the alleged bogus purchases. ISSUES: Whether the reopening of assessment under Section 147 of the Income Tax Act was valid and within jurisdiction.Whether disallowance of alleged bogus purchases amounting to Rs. 39,00,60,232/- was justified.Whether Section 69C of the Income Tax Act was correctly invoked for disallowance of purchases recorded in books of accounts.Whether disallowance of alleged bogus purchases without disturbing corresponding sales is legally sustainable.Whether the assessee was denied opportunity of cross-examination or information relied upon in making additions.Whether disallowance should be restricted only to the profit element embedded in the alleged bogus purchases.Whether interest under Sections 234A/B/C/D and penalty under Section 270A of the Act were rightly levied and confirmed. RULINGS / HOLDINGS: Reopening of assessment under Section 147 was held valid as the Assessing Officer had sufficient material indicating transactions were bogus, and the reopening was not without jurisdiction.The disallowance of Rs. 39,00,60,232/- as bogus purchases was upheld, as the assessee failed to demonstrate actual supply of goods, and the transactions were found un-verifiable by the Designated Verification Unit and Investigation Wing.Section 69C was correctly invoked since the purchases were found to be accommodation entries and not genuine, despite being recorded in books of accounts, as 'mere production of paperwork without corroborative evidence of delivery' does not establish genuineness.Disallowance of purchases without disturbing sales was sustained, but the Court recognized that entire purchases could not be added back as income where sales were duly accounted and offered to tax.The assessee was not denied opportunity of cross-examination; the Assessing Officer and CIT(A) relied on detailed enquiry and reports from DVU and Investigation Wing.The disallowance was restricted to 10% of the alleged bogus purchases, representing the profit element embedded therein, following judicial precedents that additions should be limited to the profit margin rather than entire purchase value.Interest and penalty levied under Sections 234A/B/C/D and 270A were confirmed as the additions and reopening were justified. RATIONALE: The Court applied the statutory provisions of Sections 147, 133(6), 69C, 234A/B/C/D, and 270A of the Income Tax Act, supported by evidentiary findings from the Designated Verification Unit and Investigation Wing reports.Judicial precedents from various High Courts, notably Gujarat High Court, were relied upon to establish that in cases of bogus purchases, additions should be restricted to the profit element embedded in such purchases rather than the entire amount.The Court emphasized that 'mere producing paperwork without corroborative evidence of delivery' is insufficient to prove genuineness of transactions.The decision reflects a doctrinal approach balancing revenue protection and fairness to the assessee by limiting disallowance to the profit margin when sales are duly declared and taxed.No dissenting or concurring opinions were noted; the reasoning aligns with established legal principles and precedents.