2025 (12) TMI 784 - AT - Income Tax

Appeal dismissed, only 3 percent addition on alleged bogus purchases, rejecting Revenue's bid for full disallowance

ITAT Mumbai dismissed Revenue's appeal and upheld the Commissioner's order restricting addition on alleged bogus purchases to 3% of such purchases, ... Bogus purchases - estimation of income - Commissioner restricting the addition to 3% of bogus purchases, as against 100% of bogus purchases added by Ld. AO - HELD THAT:- Assessee has been able to establish its prima facie onus and also claimed before the authorities below that persons who made the statements qua accommodation entry, in fact have retracted their statements subsequently. Judgment as relied on by the Revenue of Drisha Impex (P) Ltd [2025 (8) TMI 1444 - SC ORDER] wherein Assessee expressed its inability to furnish purchase confirmations and addresses of suppliers and therefore, it was held that the AO was justified in making the addition to income of the Assessee on account of disallowance of peak purchases made from the parties and therefore said case is factually dissimilar to the instant case, as in this case, the Assessee, has duly produced all the relevant documents referred to above and therefore discharged its onus cast, under the relevant provisions of law. Thus, this court though inclined not to sustain the addition but for substantial justice and ends of litigation and to preserve the leakage of revenue, if any, as the Assessee also agreed to, affirming the order of Commissioner in restricting the addition to the tune of 3% of the purchases as the same. Thus, the impugned order is upheld. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether purchases treated as 'bogus' by the Assessing Officer justified addition of the entire purchase amount, or only the profit element embedded in such purchases could be brought to tax. 1.2 Whether the assessee had discharged the primary onus regarding genuineness of purchases from concerns alleged to be accommodation entry providers. 1.3 Whether the decision relied upon by the Revenue, relating to disallowance of peak purchases where no supporting evidence was produced, was applicable on the facts of the present case. 1.4 Whether the restriction of addition to 3% of the value of the impugned purchases, as estimated by the first appellate authority, required interference. 1.5 Consequentially, whether the assessee's cross objection survived when the order of the first appellate authority was upheld. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Nature and extent of addition on account of alleged bogus purchases; discharge of onus by assessee Interpretation and reasoning 2.1 The Tribunal recorded that the assessee had produced, inter alia, bills, vouchers, ledger accounts, confirmations, affidavits of the suppliers, income-tax return acknowledgments, audited financials, stock details, nexus of purchases with sales, VAT returns, and replies to notices issued under section 133(6) of the Act in respect of the impugned suppliers. 2.2 By furnishing the above documentary material, the assessee was held to have discharged its prima facie onus cast under the Act, including the onus referred to under section 68, regarding the genuineness of the transactions and the identity and existence of the suppliers. 2.3 The Tribunal took note that the Assessing Officer had not disputed the sales declared by the assessee. Proceeding on the principle that there can be no sales without corresponding purchases, it was accepted that only the profit element embedded in such purchases, if any, could be brought to tax and not the entire value of purchases. 2.4 The Tribunal also noted that statements earlier made by certain persons regarding accommodation entries were claimed to have been retracted, and that, on the facts, the assessee's case stood on a different footing from cases where no supporting documentation was produced. Conclusions 2.5 The assessee was held to have established its prima facie onus in respect of the impugned purchases. 2.6 The addition of 100% of the alleged bogus purchases, as made by the Assessing Officer, was not sustainable; at most, an addition restricted to the profit element embedded in such purchases was justified. Issue 3: Applicability of precedent relied upon by the Revenue Legal framework (as discussed) 3.1 The Tribunal examined the decision of the Apex Court affirming disallowance where the assessee had failed to produce any documentary evidence, had not established correlation between purchases and sales, and had expressed inability to furnish purchase confirmations and addresses of suppliers, resulting in disallowance of peak purchases. Interpretation and reasoning 3.2 The Tribunal distinguished that decision on facts, noting that in the present case the assessee had produced extensive documentation, including confirmations, invoices, financials, and stock details with nexus between purchases and sales. 3.3 It was held that the factual foundation in the precedent relied upon by the Revenue-namely absence of proof and inability to furnish confirmations-was absent in the present matter. Conclusions 3.4 The decision cited by the Revenue was held to be factually dissimilar and inapplicable to justify addition of the entire purchase amount in the present case. Issue 4: Justification for sustaining addition at 3% of the impugned purchases Legal framework (as discussed) 4.1 The first appellate authority had referred to an order of the Task Force constituted by the Ministry of Commerce and Industry, which estimated gross profit margins in the relevant trade to range from 1% to 3%, and adopted 3% as a reasonable margin to plug possible leakage of revenue. Interpretation and reasoning 4.2 The Tribunal, while observing that on the material produced it was inclined not to sustain any addition, nevertheless considered the need 'for substantial justice and ends of litigation and to preserve the leakage of revenue, if any.' 4.3 It noted that the assessee had agreed to the restriction of the addition to 3% of the value of the impugned purchases as sustained by the first appellate authority. 4.4 In this backdrop, and having regard to the Task Force's indication of profit margins in the trade and the fact that sales were accepted, the Tribunal found no reason to interfere with the estimation of 3% of the purchases as representing the profit element liable to tax. Conclusions 4.5 The restriction of the addition to 3% of the value of the impugned purchases was upheld as a fair and reasonable estimate to prevent possible revenue leakage. 4.6 The order of the first appellate authority sustaining addition of 3% and deleting the balance addition was confirmed, and the Revenue's challenge seeking restoration of 100% addition was rejected. Issue 5: Effect on the assessee's cross objection Interpretation and reasoning 5.1 The assessee's counsel stated that if the order of the first appellate authority was upheld, the assessee would not press the cross objection. 5.2 Since the Tribunal upheld the order restricting the addition to 3% of the purchases, no further adjudication on the cross objection was considered necessary. Conclusions 5.3 In view of the affirmation of the first appellate authority's order, the cross objection filed by the assessee was dismissed as not pressed. 5.4 Consequently, both the Revenue's appeal and the assessee's cross objection stood dismissed.