Only Profit Element Embedded in Alleged Bogus Purchases Must be Taxed: ITAT Upholds CIT(A)’s Order
The assessee, Amar Ghanasingh, is engaged in the manufacturing, buying, and selling of jewellery. The assessing officer, during the assessment, observed that the assessee had made transactions amounting to Rs 9,40,52,460 with five entities that were connected to Banwarilal Jain Group, a company alleged to have engaged in providing accommodation entries. Based on this, the AO treated this transaction as a fake purchase in the books of the assessee.
The assessee also submitted documentary evidence, including purchase and sales registers, quantitative details, bank statements, sales-tax registration, confirmations, and income tax returns of the supplier parties to prove the genuineness of the purchase. However, the AO rejected them, estimated the additional gross profit at 8% and made an addition of Rs 75,24,197 to the income of the assessee. The assessee filed an appeal before the CIT(A) to challenge this addition.
The CIT(A) observed that the sales and closing stock were duly accepted by the revenue, as the books of account were not disturbed by the AO while applying section 145 of the Income Tax Act, 1961. The CIT(A) observed that without the purchases, the assessee could not have affected the sales and
Therefore, CIT(A), after considering the documentary evidence, reduced the gross profit from 8% to 3% and partly allowed the appeal. Aggrieved by this order, the revenue filed an appeal before the Income Tax Appellate Tribunal (ITAT), Mumbai.
The revenue contended that the CIT(A) restricted the GP to 3% without considering the facts of the case.
The Tribunal referred to the CIT(A)’s order and observed that the CIT(A) has followed the decision of ITAT Mumbai in the case of Trustar Diamonds v. ACIT (ITA Nos. 748 & 1278/Mum/2023 dated 23.10.2023), where the Tribunal held that the addition of bogus purchases should be restricted to 3% of the alleged purchase amount, in line with the pattern accepted in earlier and subsequent assessment years by the revenue.
The Tribunal further observed that the Revenue has not submitted any fresh material to prove that the CIT(A)’s estimation was incorrect. The Tribunal confirmed the CIT(A)’s order and held that only the profit element embedded in such purchases can be added to the income and not the entire purchase. The revenue’s appeal was rejected.