Only profit on bogus purchases taxable; Tribunal limits addition to 15 percent where sales and consumption accepted

ITAT (Delhi) upheld the principle that where incriminating material establishes bogus purchases but corresponding sales/consumption are accepted, it is impermissible to treat the entire purchase value as income. The Tribunal affirmed the approach of taxing only the profit element embedded in such non-genuine purchases. However, it found the 20% rate of addition adopted by CIT(A) to be excessive and, exercising its appellate jurisdiction, reduced the addition to 15% of the value of disputed purchases as a reasonable estimate of profit. Consequently, the assessee's appeal was partly allowed with a restricted addition on account of bogus purchases.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the assumption of jurisdiction under Section 153C of the Income-tax Act, 1961, based on incriminating material seized during search on a third party, was valid in the assessee's case.

1.2 Whether the purchases made from entities linked to an accommodation entry operator were bogus, and if so, whether the entire amount of such purchases was liable to disallowance under Section 37(1) or only the profit element embedded therein was taxable.

1.3 What rate should be applied for estimating the profit element in the disputed purchases-whether the 20% adopted by the appellate authority was justified or required modification.

1.4 Whether the Revenue's appeals were maintainable in view of the monetary limits prescribed by CBDT Circular No. 9/2024 dated 17.09.2024.

1.5 Whether the findings and conclusions for one assessment year were applicable mutatis mutandis to the other assessment year under consideration.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of jurisdiction under Section 153C

Legal framework (as discussed)

2.1 The Tribunal noted that Section 153C permits initiation of proceedings against a person other than the searched person when documents or assets seized during search "pertain to" such other person and have a nexus to undisclosed income. Reference was made to judicial precedent including the Supreme Court decision in CIT v. Calcutta Knitwears affirming that prima facie satisfaction of such nexus is sufficient for valid assumption of jurisdiction.

Interpretation and reasoning

2.2 The assessment under Section 153C was initiated on the basis of search conducted on an accommodation entry operator, where tally data and other incriminating material (including ledger entries, transaction details and references to entities from which the assessee allegedly took entries) were found and seized.

2.3 The Assessing Officer recorded a satisfaction note that the seized material pertained to the assessee and had bearing on its undisclosed income, and issued notice under Section 153C accordingly. These foundational facts were not controverted by the assessee.

2.4 The appellate authority had already examined and rejected the assessee's objections that (i) no incriminating material pertaining to it was found, and (ii) mere mention of the assessee's name in seized documents could not confer jurisdiction. It was held that the seized tally records and documents, when read with other facts and cross-verification with the assessee's known activities, clearly related to the assessee and constituted incriminating material.

2.5 The Tribunal found that the assessee failed to show how the satisfaction note was invalid or how the seized documents did not "pertain to" it. It further accepted the finding that the procedural amendments introduced by the Finance Act, 2021 were inapplicable as the search was prior to 01.04.2021.

Conclusions

2.6 The Tribunal upheld the validity of assumption of jurisdiction under Section 153C and affirmed the appellate authority's rejection of the assessee's challenge. All grounds relating to jurisdiction were dismissed.

Issue 2: Nature of purchases from alleged accommodation entry providers and scope of disallowance under Section 37(1)

Interpretation and reasoning

2.7 The Assessing Officer treated the entire value of purchases from specified entities linked to an entry operator as bogus and disallowed the full amount under Section 37(1), relying mainly on: (i) statements of the entry operator and his associate admitting provision of accommodation entries without delivery of goods, and (ii) seized tally records reflecting financial adjustments and absence of actual movement of cement.

2.8 The assessee contended that: (i) all impugned purchases were supported by invoices, e-way bills, transport details (verified on e-Vahan portal), and Goods Receipt Notes; (ii) payments were made through banking channels and recorded in audited books; and (iii) sales and consumption of materials corresponding to these purchases were not disputed. It was argued that even if the suppliers were accommodation entry providers, the materials were in fact utilized in executing contracts, and only the profit element in such transactions could be brought to tax, relying on judicial precedents concerning bogus purchases.

2.9 The appellate authority found that the assessee had successfully rebutted some allegations of the Assessing Officer by producing verifiable transport details, purchase invoices and GRNs, thereby lending partial credibility to actual procurement of materials. However, it also accepted the evidentiary value of the statements of the entry operator and associate and the seized tally records, and held that the purchases were not entirely genuine and had been routed through back-channel operations.

2.10 Both the appellate authority and the Tribunal noted that the Assessing Officer had not challenged the corresponding sales or consumption of materials. This indicated that the goods were indeed procured, though possibly from different sources than the named suppliers. In such circumstances, treating the entire purchase amount as bogus and disallowing it in full was considered excessive.

Conclusions

2.11 The Tribunal concurred with the finding that the purchases, as recorded from the named entities, were accommodation entries and therefore "bogus" in that sense, but also that the assessee had in fact procured and used the goods in its business and that corresponding sales were accepted.

2.12 Consequently, the Tribunal held that only the profit element embedded in the disputed purchases was liable to be taxed, and not the entire amount disallowed under Section 37(1).

Issue 3: Appropriate rate for estimating profit element in bogus purchases

Interpretation and reasoning

2.13 The appellate authority substituted the Assessing Officer's 100% disallowance by estimating the profit element at 20% of the disputed purchases, reasoning inter alia that: (i) GST on cement at 28% implied inherent higher costs and margins where back-channel/accommodation entry operations were used; (ii) commissions and logistics involved in such operations warranted a higher estimate; and (iii) though in Simit P. Sheth the Gujarat High Court had sustained a 12.5% addition, the factual matrix and higher GST rate justified a higher rate of 20% in this case.

2.14 The assessee challenged the 20% rate as arbitrary, excessive, and inconsistent with its disclosed gross profit ratios of 22.56% and 26.02%. The Revenue, on the other hand, sought restoration of the full disallowance and relied on N.K. Proteins to contend that where bogus purchases are established, higher or full additions are permissible.

2.15 The Tribunal accepted the general approach of taxing only the profit element but evaluated the reasonableness of the 20% rate. Taking note of the facts that: (i) GP and NP rates declared by the assessee were already substantial; (ii) sales and consumption were accepted; and (iii) the addition was only to capture extra profit embedded in purchases routed through accommodation concerns, the Tribunal considered a 20% rate on total disputed purchases to be on the higher side.

Conclusions

2.16 The Tribunal held that a 15% rate on the value of disputed purchases would be a fair and reasonable estimation of the profit element involved, in the totality of the circumstances.

2.17 Accordingly, the appellate authority's orders were modified by reducing the addition from 20% to 15% of the disputed purchases for both assessment years under consideration, and the assessee's appeals were partly allowed to that extent while the Revenue's challenge on this issue was rejected.

Issue 4: Maintainability of Revenue appeal in view of CBDT monetary limits

Legal framework (as discussed)

2.18 The Tribunal considered CBDT Circular No. 9/2024 dated 17.09.2024 prescribing monetary limits for filing appeals by the Revenue before the Tribunal, providing that appeals below the specified tax effect are not maintainable, subject to exceptions.

Interpretation and reasoning

2.19 On examining the grievance and the tax effect involved in the relevant Revenue appeal, the Tribunal found that the tax effect was less than Rs. 60 lakhs, which was below the threshold prescribed for filing appeals before the Tribunal under the applicable CBDT Circular.

Conclusions

2.20 The Revenue's appeal with tax effect below Rs. 60 lakhs was held to be not maintainable and was dismissed on that ground, with liberty reserved to the Revenue to seek recall or other relief in accordance with law if it was later established that the tax effect exceeded the prescribed limit.

Issue 5: Application of findings across assessment years

Interpretation and reasoning

2.21 The Tribunal noted that the facts and circumstances relating to the nature of purchases, linkage with accommodation entry providers, availability of supporting documentation, acceptance of sales and consumption, and the legal issue of estimation of profit element were mutatis mutandis similar for both assessment years in question.

2.22 Having already adjudicated on jurisdiction under Section 153C and the quantum addition on an estimated profit basis for one year, and finding no distinguishing features, the Tribunal applied the same reasoning and percentage of addition to the other year.

Conclusions

2.23 The Tribunal uniformly applied the 15% rate of addition on disputed purchases for both assessment years and dismissed the Revenue's appeals, while partly allowing the assessee's appeals to the extent of reduction of the estimated profit element from 20% to 15%.

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