No disallowance for bogus purchase when there is one to one reconciliation of purchase with sales

No disallowance for bogus purchase when there is one to one reconciliation of purchase with sales – ITAT 

ABACUS Case Law Citation
ABCAUS 3349 (2020) (07) ITAT

Important case law relied upon by the parties:
Indian Woolen Carpet Factory v. ITAT (2003) 260 ITR 658 (Raj.) (HC)
ITO vs. M/s. Super Sthal India Pvt. Ltd
ACIT vs. M/s. Fortuned Steel Industries
DCIT vs. M/s. Sunrise Mettalic (India) Pvt. Ltd.
J. R. Solvent Industries (P.) Ltd. [2012] 22 taxmann.com 115 (Punj. & Har.) [HC]

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming the addition under the head “bogus purchase” on the information of Sales Tax Department and consequential disallowance of freight and lorry hire charges and also sustaining the rejection of books of accounts.

The Income Tax Department received information from the Customs / Sales Tax regarding the bogus sales bills by dealers showing false purchases to claim Input Tax Credit (ITC) fraudulently.

The AO received information from DDIT (Inv.) stating that assessee had made bogus sales bills and showed fake purchases to claim ITC facility fraudulently and, therefore, the AO was intimated to take appropriate action. 

The AO recorded the reason to believe that the income chargeable to tax had escaped assessment and reopened the assessment u/s 147 of the Income-tax Act, 1961 (the Act) and issued show cause notice u/s 148 of the Act.

The assessee was called upon to prove the genuineness of the purchases and he was also required to produce suppliers of the goods in question. However, the assessee stated that its responsibility came to an end after receiving the goods and after handing over the cheque to the suppliers. Also, it was stated that the assessee had no contact and or transactions with the parties and therefore, their appearance could not be enforced.

Not satisfied with the assessee’s reply, the AO rejected the books of the assessee u/s 145(3) of the Act and disallowed the purchases as bogus. Thereafter, the AO also disallowed the consequent claim of expenses incurred towards freight charges on these purchases.

No disallowance for bogus purchase on reconciliation of purchase with sales

Before the Tribunal, the assessee stated that the suppliers after delivery raised the bill on the assessee and the assessee in turn made payments. Thereafter the assessee also raised corresponding bills on the ultimate purchasers and received payments.   

The assessee furnished item to item reconciliation of goods delivered. Further the assessee furnished the details of registration of each truck used for transportation downloaded from the RTO

The assessee submitted that Sales Tax Department had made adverse view against the assessee only in respect of the claim of ITC since the dealer had failed to reconcile the mismatch of ITC, mainly on the ground of quoting the wrong vehicle no. in some cases. Therefore, it cannot be a ground to disbelieve the assessee’s genuine purchases.

The Tribunal noted that the basic premise on which the addition was made i.e., that the assessee had accepted the findings of the Sales Tax Authorities was wrong as the Appellate & Revisional Board had given part relief and held that the allegation was of quoting of wrong vehicle nos. in some cases and not that the purchases were bogus etc.

The Tribunal noted that assessee had filed details of suppliers. Date-wise, truck-wise, challan-wise details of the supply had been given. Full details of the purchases and sales and ledger copies of the parties had been filed. It was also a fact that five parties under question had supplied goods to the assessee in the earlier years also. The assessee had outstanding balances payable to some of them. Stock registers were maintained and the purchases were co-related with the sales.

The Tribunal opined that in this type of business, if the purchase was held to be bogus then as a logical consequence, the sale also had to be held as bogus. When the Assessing Officer believed all the sales and hold the same as genuine sales, there was no reason to come to a conclusion that the purchases are fake or bogus. 

The Tribunal further noted that the Coordinate Bench had held that one limb of the transaction cannot be accepted while rejecting the other limb of the same transaction. It also held that no addition can be made for alleged bogus purchases based on the enquiry of the Sales Tax Department and denial of input credit, even when the parties have made confessional statements, in cases where there is corresponding sale and the payments were made by a/c payee cheques, stock register was maintained, bills were produced and when there was no evidence to show that money paid to the seller was returned in cash to the purchaser. It further held that no addition can be made of gross profit, when the gross profit declared on such purchase was fair and reasonable.

The Tribunal stated that when one to one reconciliation of purchase and sales is made by the assessee, no disallowance can be made.

The Tribunal stated that there was no reason to come to a conclusion that the purchases in this case of an intermediary were fake or bogus. All the parties in question were registered with the VAT Authorities and that payments had been made through cheques. Except for the fact that the assessee could not be found by the Inspector of the Income Tax Department for service of notice and the mention by the Sales tax Authorities that there was mis-match in the numbers of trucks and that some were non-transport trucks, the revenue had no evidence whatsoever to support this disallowance. Further, Quantitative reconciliation of stock was not challenged by the Revenue.

In view of the above, the Tribunal deleted the addition made on account of bogus purchases. Consequently, the disallowance made on account of transport payments were also deleted.

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