Profit on Bogus purchase/ accommodation entries @ 5% upheld by the High Court. Only profit element embedded is to be taxed not entire purchase
ABCAUS Case Law Citation:
ABCAUS 3272 (2020) (02) HC
Important case law relied upon by the parties:
Kaveri Rice Mills vs. Commissioner of Income-Tax, (2006)157 Taxman 376
CIT Vs. Bholanath Polyfab Limited, 355 ITR 290 (Guj)
Commissioner of Income-Tax Vs. La Medica, 250 ITR 575
Profit on Hawala/Bogus purchase @ 5% upheld
In the instant case the appeal had been preferred by the Revenue u/s 260A of the Income Tax Act, 1961 (the Act) against the order passed by the Income Tax Appellate Tribunal (Tribunal/ITAT).
The question of law projected by the Revenue was as to whether the Tribunal was justified in restricting the disallowance to 5% of the gross purchases when it was established that none of the supplier parties existed and assessee had just taken accommodation entries without getting actual supplies from them?
During the course of the scrutiny proceedings, the Assessing Officer (AO) noticed that as per list provided by the Sales Tax Department, the assessee was one of the beneficiaries of bogus hawala bills.
No response was received by notice issued u/s 142(1) of the Act asking for explanation. Therefore the AO drew the inference that assessee had no plausible explanation and had admitted the fact of bogus purchases mentioned in the notice u/s 142(1) of the Act.
Accordingly, the AO completed the assessment u/s 144 of the Act and disallowed the entire purchase claimed by the assessee.
During appellate proceedings before CIT(A), the CIT(A) on the basis of remand reports from AO enhanced the quantum of disallowance towards purchase in terms of Section251(2) of the Act.
However, the CIT(A) noted that while Assessing Officer had treated the purchases as bogus but had accepted the sales and gross profit declared in the return of income. CIT(A) held that there can be no sales without purchases. When the sales were accepted, then the corresponding purchases could not be disallowed. Relying on the decision of the Gujarat High Court the CIT(A) held that only the profit element embedded in the purchases would be subject to tax and not the entire purchase amount.
Accordingly, CIT(A) added 2% of the alleged bogus purchase as profit and deleted the rest of addition made.
The Tribunal considering that since the purchases were made from the grey market, the corresponding profit element would be little higher. Therefore, Tribunal directed the Assessing Officer to make further addition @ 3% on the bogus purchases and to estimate the income on such basis.
The Hon’ble High Court noted that CIT(A) had enhanced the quantum of purchases but having found that the purchases corresponded to sales which were reflected in the returns of the assessee in sales tax proceedings and in addition, were also recorded in the books of accounts with payments made through account payee cheques, the purchases were accepted by the two appellate authorities and following judicial dictum decided to add the profit percentage on such purchases to the income of the assessee. The Tribunal made further addition of 3% profit, thereby protecting the interest of the Revenue.
The Hon’ble High Court observed that Gujarat High Court was also confronted with a similar issue. In that case Tribunal was of the opinion that the purchases might have been made from bogus parties but the purchases themselves were not bogus. Considering the fact situation, Tribunal was of the opinion that not the entire amount of purchases but the profit margin embedded in such amount would be subjected to tax. The Gujarat High Court upheld the finding of the Tribunal. It was held that whether the purchases were bogus or whether the parties from whom such purchases were allegedly made were bogus was essentially a question of fact. When the Tribunal had concluded that the assessee did make the purchase, as a natural corollary not the entire amount covered by such purchase but the profit element embedded therein would be subject to tax
Expressing agreement with the view expressed by the Gujarat High Court the Hon’ble High Court dismissed the appeal.
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