Estimated bogus purchase profit taxable as normal business income, not under Sections 69C and 115BBE

ITAT Ahmedabad allowed the assessee's appeal partly. It held that, although absence of transportation and related evidences created doubt about the genuineness of purchases, the existence of corresponding accepted sales established that real trading had occurred. Applying settled law that entire purchases cannot be disallowed even where suppliers are unverifiable, the Tribunal restricted the addition to 2% of the disputed purchases, i.e., Rs. 3,50,330/-, as profit embedded in such purchases. Since the purchases were recorded in regular books and payments were made through banking channels, the addition so sustained was treated as estimated business income, outside the ambit of s. 69C, and therefore not taxable under s. 115BBE.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether, and to what extent, purchases treated as bogus could be disallowed in full or only to the extent of profit element embedded therein.

1.2 Whether the addition sustained on account of disputed purchases could be brought to tax under section 69C read with section 115BBE, or was liable to be taxed at normal rates.

1.3 Effect of withdrawal of grounds challenging the validity of reopening under section 147, and consequential directions for recomputation of income and interest.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Extent of disallowance of purchases treated as bogus

Legal framework (as discussed)

2.1 The reassessment was based on information that purchases from a particular supplier were accommodation entries without physical movement of goods. The Assessing Officer invoked section 69C, treating the entire amount of purchases as unexplained expenditure and disallowed it in full.

2.2 The Tribunal referred to the settled judicial principle that where purchases are found to be non-genuine or from non-existent/unverifiable parties, only the profit element embedded in such purchases can be brought to tax and not the entire purchase value.

Interpretation and reasoning

2.3 The Tribunal noted adverse factors such as absence of transportation evidence, weighbridge slips, PAN and complete addresses of transporters, and inconclusive verification by the Designated Verification Unit, which cast doubt on the actual physical movement of goods from the stated supplier.

2.4 Simultaneously, the Tribunal found that the assessee's corresponding sales had been accepted, books of account were audited, quantitative records (stock and inward-outward registers) existed, and the books were not rejected under section 145. These circumstances indicated that actual trading in goods did occur.

2.5 In view of the accepted sales and non-rejection of books, the Tribunal held that it would be unrealistic and excessive to disallow the entire purchases; only an estimated profit element embedded in such purchases could be taxed to neutralise possible inflation of expenditure and prevent revenue leakage.

2.6 The assessee disclosed a gross profit rate of 1.57 per cent and, during hearing, fairly conceded that a disallowance restricted to 2 per cent of the impugned purchases could be sustained as an alternate contention. The Departmental Representative did not object to this alternate plea.

Conclusions

2.7 The Tribunal held that disallowance of the entire purchases was not justified. It restricted the addition to 2 per cent of the disputed purchases of Rs. 1,75,16,480/-, sustaining an addition of Rs. 3,50,330/- only, in substitution of the addition made and confirmed by the lower authorities.

Issue 2: Applicability of section 69C and taxation under section 115BBE

Legal framework (as discussed)

2.8 The Assessing Officer had invoked section 69C and taxed the entire disallowed purchases under section 115BBE, treating them as unexplained expenditure.

2.9 The assessee contended that, since the purchases were duly recorded in regular books and payments were made through banking channels, the conditions for invoking the deeming fiction under section 69C, and consequently section 115BBE, were not satisfied.

Interpretation and reasoning

2.10 The Tribunal, having restricted the addition to 2 per cent of purchases as an estimate of profit element, held that the nature of the sustained addition was that of estimated profit and not unexplained expenditure within the meaning of section 69C.

2.11 Once the addition is determined on an estimated basis as profit embedded in purchases, it ceases to fall within the scope of section 69C and, therefore, cannot attract the special rate of tax prescribed under section 115BBE.

Conclusions

2.12 The Tribunal held that the sustained addition of Rs. 3,50,330/- is not assessable under section 69C, and section 115BBE is inapplicable. The Assessing Officer was directed to tax the said income at normal rates.

Issue 3: Challenge to reopening and consequential recomputation

Interpretation and reasoning

2.13 During hearing, the assessee expressly did not press the grounds challenging the validity of reopening under section 147. The Tribunal, therefore, treated those grounds as withdrawn and dismissed them as not pressed, without adjudicating on their merits.

2.14 In view of the modification of the quantum addition and the direction to apply normal tax rates, the Tribunal directed recomputation of total income and consequential interest.

Conclusions

2.15 Grounds against reopening under section 147 were dismissed as not pressed and not decided on merits.

2.16 The Assessing Officer was directed to recompute the income based on the restricted addition of Rs. 3,50,330/- and to recompute consequential interest under sections 234B and 234C accordingly, applying normal rates of tax.

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