2020 (2) TMI 662 - HC - Income Tax

Bogus purchases - none of the supplier parties are in existence and the assessee has just taken accommodation entries without getting actual supplies from the said parties - Tribunal restricting the disallowance to 5% of the gross purchases - HELD THAT - We do not find any error or infirmity in the view taken by the Tribunal. The lower appellate authorities had enhanced the quantum of purchases much beyond that of the Assessing Officer i.e., from ₹ 24,18,06,385.00 to ₹ 65,65,30,470.00 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. While the CIT (A) had assessed profit at 2% which was added to the income of the assessee, Tribunal made further addition of 3% profit, thereby protecting the interest of the Revenue. In Bholanath Polyfab Limited 2013 (10) TMI 933 - 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. 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. No substantial question of law

Issues Involved:
1. Legitimacy of disallowing entire bogus purchases versus adding only the profit margin.
2. Determination of the appropriate profit margin percentage to be added to the income.
3. Admissibility of additional evidence and remand reports in appellate proceedings.
4. Acceptance of sales while disallowing corresponding purchases.
5. Judicial consistency and application of legal principles from previous case laws.

Issue-wise Detailed Analysis:

1. Legitimacy of Disallowing Entire Bogus Purchases vs. Adding Only the Profit Margin:
The primary issue was whether the entire amount of alleged bogus purchases should be added to the taxable income or only the profit margin. The Assessing Officer initially disallowed the entire expenditure of ?24,18,06,385 shown by the assessee as incurred on purchases from parties providing bogus bills. However, the CIT(A) and Tribunal both concluded that only the profit element embedded in the purchases should be taxed. CIT(A) referenced various case laws, including the Gujarat High Court's decision in CIT vs. Bholanath Polyfab Limited, which held that only the profit margin should be taxed when the purchases correspond to sales.

2. Determination of the Appropriate Profit Margin Percentage:
CIT(A) added 2% of the enhanced purchase amount of ?65,65,30,470 as profit, which worked out to ?1,31,30,609, based on the decreasing trend of the gross profit rate of the assessee over the years. The Tribunal, however, found this 2% to be on the lower side and directed the Assessing Officer to make a further addition of 3%, considering that purchases from the grey market typically yield a higher profit margin.

3. Admissibility of Additional Evidence and Remand Reports:
CIT(A) admitted additional evidence under Section 46A of the Income Tax Rules, 1962, and allowed the Assessing Officer to examine the documents and submit remand reports. The Assessing Officer submitted two remand reports, which were considered by CIT(A) before enhancing the quantum of purchases and determining the profit margin.

4. Acceptance of Sales While Disallowing Corresponding Purchases:
Both CIT(A) and the Tribunal noted that the Assessing Officer had accepted the sales and gross profit declared by the assessee. CIT(A) held that there can be no sales without purchases, and thus, when the sales were accepted, the corresponding purchases could not be entirely disallowed. This principle was upheld by the Tribunal, which noted that the assessee's books of accounts showed payments made through account payee cheques and entries of purchases, thereby proving the purchases were made in an alternative way.

5. Judicial Consistency and Application of Legal Principles from Previous Case Laws:
CIT(A) and the Tribunal referred to various judicial precedents, including decisions from the Bombay High Court and Gujarat High Court, to support their findings. The Tribunal specifically referenced the Gujarat High Court's decision in Bholanath Polyfab Limited, which upheld the principle that only the profit margin embedded in the purchase amount should be taxed when the purchases correspond to sales. The High Court agreed with this view and found no error or infirmity in the Tribunal's decision.

Conclusion:
The High Court dismissed the Revenue's appeal, concluding that no substantial question of law arose from the Tribunal's order. The Court upheld the Tribunal's decision to add a profit margin of 3% on the bogus purchases to the income of the assessee, thereby protecting the interest of the Revenue. The Court also noted that the facts of the present case were distinguishable from the cases cited by the Revenue, and thus, the legal principles from those cases were not applicable.

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