Tax authority confirms 12.5% addition for bogus purchases, limits disallowance to profit element, distinguishes Kanak Impex under section 144

ITAT, Mumbai upheld the CIT(A)'s order restricting addition on alleged bogus purchases to 12.5%. The assessee, a manufacturer, had produced sufficient evidence before the AO to substantiate the purchases, and its sales were not disputed. Distinguishing the facts from Kanak Impex, where assessment was under section 144 and the source of purchases itself was doubted, the Tribunal held that only a profit element could be added. Accordingly, the disallowance at 12.5% was confirmed and the revenue's appeal was dismissed.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether, in respect of purchases held to be from non-genuine / hawala dealers, the entire amount of such purchases was liable to be disallowed, or only the profit element embedded therein could be brought to tax.

1.2 Whether restriction of addition to 12.5% of the impugned purchases by the first appellate authority was justified on the facts and in law.

1.3 Whether the principles laid down in decisions upholding 100% disallowance of purchases (including where assessment was under section 144 and source of purchases was doubted) were applicable to the present case.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Quantum of disallowance in respect of purchases from alleged hawala dealers and justification for restriction to 12.5%

Interpretation and reasoning

2.1 The Assessing Officer treated purchases from two dealers, whose names appeared in the Sales Tax Department's list of hawala traders, as non-genuine. Notices under section 133(6) to those dealers remained uncomplied with. Relying on the Sales Tax Department and Investigation Wing reports, and recording absence of response from the assessee in assessment, the Assessing Officer disallowed 100% of such purchases as accommodation entries.

2.2 Before the first appellate authority, the assessee contended that it was engaged in manufacturing activities; the impugned purchases were consumed in manufacturing; sales were not disputed; and purchases were made through account payee cheques. Ledger copies and bank statements were stated to have been furnished during assessment and again during remand proceedings. The assessee further pointed out that, in similar Maharashtra VAT "suspicious dealers" matters, only a percentage of purchases had been added.

2.3 In remand, the Assessing Officer noted that the ledger did not contain PAN details of the suppliers but did not rebut that payments were through banking channels or that goods were consumed in manufacturing. The first appellate authority, following consistent Tribunal view in similar fact situations, held that only the profit element embedded in such purchases could be taxed and estimated that element at 12.5% of the impugned purchases, thereby restricting the disallowance.

2.4 The Tribunal observed that sales were not in dispute and that the assessee was a manufacturer, rendering complete disallowance of purchases inconsistent with the accepted sales and manufacturing activity. On independent examination and "keeping in view a series of decision of Tribunal and Higher Courts," the Tribunal reiterated the principle that "entire transaction can never be treated as income of the assessee; rather profit element embedded in such transaction can only be brought to tax."

2.5 The Revenue could not point to any contrary factual material or legal authority to displace the estimation adopted by the first appellate authority. No new adverse facts were brought to justify departure from the consistent line of decisions restricting additions to the profit element in such cases.

Conclusions

2.6 Only the profit element embedded in purchases from parties treated as hawala / non-genuine dealers is liable to be taxed where sales and manufacturing activity are accepted and evidence of payment through banking channels and consumption in business exists.

2.7 The estimation of such profit element at 12.5% of the impugned purchases, as made by the first appellate authority, is reasonable and in consonance with judicial precedent; the restriction of disallowance to that extent is upheld.

Issue 3: Applicability of precedents upholding 100% disallowance, including where assessment is under section 144 and source of purchases is doubted

Legal framework (as discussed)

3.1 The Revenue relied on decisions in which 100% of purchases had been disallowed, including cases where higher courts upheld such disallowance and special leave petitions were dismissed, and on a jurisdictional High Court decision where assessment was completed under section 144 and the source of purchases itself was doubted.

Interpretation and reasoning

3.2 The Tribunal distinguished those authorities on facts. In the cited High Court decision relied upon by the Revenue, assessment was framed under section 144 and the Assessing Officer had doubted the very source of purchases. In the present case, however, the assessee had furnished supporting evidence (ledger accounts, bank statements, payments by cheque) and its manufacturing activity and sales were not disputed.

3.3 The Tribunal held that, in such a factual matrix-manufacturer assessee, undisputed sales, and evidence of payments-precedents where the entire purchases were disallowed due to absence of cooperation in assessment and serious doubt on the very source of purchases were not applicable.

Conclusions

3.4 Decisions upholding 100% disallowance of purchases in cases involving best judgment assessments under section 144 and doubts on the source of purchases are not applicable where the assessee is a manufacturer with undisputed sales and has produced evidence of purchase payments and consumption.

3.5 The Revenue's reliance on such precedents does not dislodge the application of the principle that only the profit element in disputed purchases is to be taxed in the present factual situation.

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