Appeal on alleged bogus purchases fails; only 6% profit element taxable based on section 133(6) confirmation

ITAT Mumbai dismissed the revenue's appeal and upheld the CIT(A)'s order restricting addition on alleged bogus purchases to 6% of such purchases. The AO had treated the entire purchases as non-genuine despite supplier confirmation in response to notice under s.133(6), without bringing contrary material on record. Relying on its earlier decision in the assessee's sister concern, the CIT(A) held that only the profit element embedded in the disputed purchases was taxable. ITAT found no infirmity in this reasoning and confirmed the partial disallowance at 6%.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether purchases shown from the alleged accommodation-entry provider were to be treated as bogus and, if so, whether the entire purchase amount was liable to disallowance or only the profit element embedded therein.

1.2 Whether, in the facts of the case, the Assessing Officer was justified in making a 100% addition of the alleged bogus purchases notwithstanding confirmation of transactions by the supplier and other supporting documents.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Characterisation of purchases as bogus and extent of disallowance (100% vs. profit element)

Legal framework (as discussed by the Court/Tribunal)

2.1 The Tribunal proceeded on the basis of the factual and evidentiary matrix discussed by the lower authorities, including: (i) investigation reports indicating the supplier as an accommodation-entry provider; (ii) analysis of the supplier's financials suggesting a shell concern; and (iii) supporting documents produced by the assessee such as purchase bills, sales records, bank statements, stock records, confirmations, and affidavit of the supplier. The Tribunal also noted that notice under section 133(6) of the Act had been issued and the supplier had confirmed the transactions. The decision of the Tribunal in the case of a sister concern engaged in similar line of business, where only a percentage of alleged bogus purchases was sustained as addition, was treated as a guiding precedent on estimation.

Interpretation and reasoning

2.2 The Tribunal noted that the Assessing Officer, relying on information from the Investigation Wing and analysis of the supplier's balance sheet, treated the entire purchases from the said concern as bogus and disallowed 100% of such purchases.

2.3 The first appellate authority, after examining the material, agreed that the supplier was part of an accommodation-entry network and that the purchases were not genuine in the ordinary sense, thereby upholding the characterisation of the purchases as bogus. It rejected the assessee's contention that regular documentation and cheque payments conclusively established genuineness, observing that such features are common in accommodation-entry transactions.

2.4 However, the first appellate authority accepted the argument that the sales declared by the assessee had not been disturbed and that "there can be no sales without purchase". On this premise, it held that only the profit element embedded in the impugned purchases could be brought to tax, not the entire purchase value.

2.5 In estimating such profit element, the first appellate authority relied on a decision of the Tribunal in the case of a sister concern operating in the same line of diamond trading business, where under similar circumstances an addition at 6% of the alleged bogus purchases had been upheld. It therefore restricted the disallowance to 6% of the amount of disputed purchases and deleted the balance.

2.6 The Tribunal, in second appeal, took note that in response to notice under section 133(6) the supplier had confirmed the transactions. It held that in such circumstances the entire addition of the purchase amount could not be justified "unless anything contrary to the details furnished by the assessee is established by the revenue authorities".

2.7 The Tribunal observed that the first appellate authority had already followed the coordinate bench decision in the case of the assessee's sister concern, involving the same line of business and comparable factual pattern, and had restricted the addition to 6% of the alleged bogus purchases. The Tribunal found no material brought by the Revenue to dislodge either the confirmations obtained under section 133(6) or the basis on which the first appellate authority had applied the 6% rate.

2.8 As regards the assessee's cross-objection seeking further reduction of the rate below 6% (by reference to past assessments and another related concern), the Tribunal did not find any infirmity in the specific rate adopted by the first appellate authority, having been based on a directly comparable Tribunal decision under similar circumstances, and therefore declined to interfere.

Conclusions

2.9 The purchases from the concerned supplier were treated as bogus in character, but since the corresponding sales were accepted, only the profit element embedded in such purchases was held taxable.

2.10 A 100% disallowance of the purchase value was held unjustified in view of the supplier's confirmation under section 133(6) and absence of further contrary material from the Revenue.

2.11 The restriction of the disallowance to 6% of the value of the alleged bogus purchases, following the coordinate bench decision in a sister concern's case in the same line of business, was upheld.

2.12 Both the Revenue's appeal seeking restoration of 100% disallowance and the assessee's cross-objection seeking reduction of the disallowance below 6% were dismissed, sustaining the first appellate authority's order in full on this issue.

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