2017 (12) TMI 1757 - AT - Income Tax

Bogus purchase - CIT(A) considering the GP @ 3% instead of adding 9% as was done by the AO - HELD THAT - Only because the amount has been routed through banking channel would not establish the genuineness of the transaction as held by Hon ble Jurisidictional High Court in the case of Naresh K. Pahuja 2015 (2) TMI 284 - BOMBAY HIGH COURT - Considering the peculiar facts and circumstances of the present case and while relying upon judgments ClT vs Bholanath Poly Fab Ltd. 2013 (10) TMI 933 - GUJARAT HIGH COURT , CIT v Simit P, Sheth 2013 (10) TMI 1028 - GUJARAT HIGH COURT and CIT vs. Sanjay Oil Cake Industries 2008 (3) TMI 323 - GUJARAT HIGH COURT and taking into consideration the facts of the present case, and to account for the profit element embedded in these purchase transactions to factorize profit earned by assessee against purchase of material in the grey market and undue benefit of VAT against bogus purchases, we are of the considered view that restricting the additions @ 3% of purchases by Ld. CIT(A) is unreasonable. The ends of justice would be met in case the additions are restricted @ 6 % of bogus purchases. Consequently orders passed by Ld. CIT(A) are set aside. Issue of accommodation entries is a reality, to arrest such rampant malpractices, a restraint is always inevitable as we cannot encourage such malpractice of obtaining accommodation entries to avoid the impact of levies and defrauding revenue. Since it is proved on record that assessee was indulged in bogus purchases, therefore the assessee is not being given benefit to reduce already GP declared from GP ratio of 6%. Hence no benefit of GP is being given. Direct the AO to restrict the additions to the extent of 6% of the bogus purchases for adding u/s 69C over and above the regular profits disclosed by the assessee. Accordingly this ground raised by the revenue is partly allowed.

Summary

Issues Involved:
1. Whether the CIT(A) erred in considering the Gross Profit (GP) at 3% on alleged bogus purchases instead of 9% as determined by the AO.
2. Whether the assessee should be allowed to raise additional grounds regarding the amount of ?42,00,78,769 out of the total bogus purchases amounting to ?63,65,38,648.
3. Whether the additions made by the AO based on the statements of Bhanwarlal Jain and his group regarding bogus purchases were justified.

Issue-wise Detailed Analysis:

1. Gross Profit on Alleged Bogus Purchases:
The primary contention in the revenue's appeal was the CIT(A)'s decision to consider the GP at 3% on alleged bogus purchases instead of the 9% added by the AO. The AO had based the 9% addition on the statements from Bhanwarlal Jain and his group, who admitted to providing accommodation bills without actual trading. The CIT(A), however, reduced the addition to 3%, drawing on the Gujarat High Court's decision in Simit P. Seth's case, which suggested a disallowance of 12.5% of disputed purchases. The CIT(A) reasoned that the diamond business, unlike the steel business in Simit P. Seth, had lower VAT and customs duty rates, justifying a lower addition. The Tribunal, after reviewing the facts and relevant judgments, concluded that restricting the additions to 6% would be more reasonable, thus partly allowing the revenue's appeal.

2. Additional Grounds Raised by Assessee:
The assessee sought to raise additional grounds concerning the amount of ?42,00,78,769 out of the total bogus purchases of ?63,65,38,648, claiming that the CIT(A) had not addressed this in their order. The Tribunal allowed the assessee to raise these additional grounds, citing principles from the NTPC and Jute Corporation cases, which permit legal grounds that go to the root of the case to be raised at any time. This decision was based on the factual error identified in the CIT(A)'s order.

3. Justification of Additions Based on Statements:
The AO made additions based on the statements of Bhanwarlal Jain and his group, who admitted to providing bogus invoices for a commission. The CIT(A) upheld the finding of bogus purchases but reduced the addition percentage. The Tribunal agreed with the CIT(A) that the link between the bogus concerns and the assessee was established and that the transactions routed through banking channels did not necessarily establish their genuineness. However, the Tribunal found the 3% addition too low and adjusted it to 6%, aligning with the need to account for the profit element embedded in these transactions and the undue benefit of VAT against bogus purchases.

Conclusion:
The Tribunal's consolidated order resulted in partly allowing the revenue's appeals by adjusting the addition to 6% of the bogus purchases and dismissing the assessee's appeals. This decision was based on a thorough evaluation of the facts, relevant legal precedents, and the need to curb malpractices involving accommodation entries. The Tribunal emphasized that the issue of accommodation entries is a reality and that a restraint is necessary to prevent revenue defraudment.