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2022 (5) TMI 837 - AT - Income TaxAddition made u/s 69C on account of bogus purchases - AO after recording reasons that the assessee is one of the beneficiary of the accommodation entry received from Bhanwar lal Jain proceeded for assessment. The assessing officer made the disallowance of the entire purchase shown from the entity managed by Bhanwar Lal Jain and his Group - HELD THAT - Disallowance of 100% of the purchases are not justified when the sales of the assessee is not disputed. No doubt, the assessee is engaged in export of cut and polished diamonds and entire profit of the assessee from eligible export is exempt. Yet, the assessee has not fully established, the fact that entire purchases from the concern managed by Bhanwarlal Jain Group is genuine. The purchases from such hawala traders are mainly made to inflate the expenses. Assessing Officer has clearly recorded the modus operandi disclosed by Bhanwarlal Jain and his associates during the search action. The payments in such transaction is made through banking transaction to show the sham transaction as genuine transaction. The combination of this bench in other similar cases wherein the purchases are shown from Bhanwarlal Jain or Rajendra Jain or Gautam Jain group have restricted or enhanced the addition to the extent of 6% of such amount or disputed purchases. Order of Ld. CIT(A) is modified and the Assessing Officer is directed to restrict the disallowance of bogus purchases to the extent of 6% of aggregate purchases shown from four parties of Rs.3.09 crores. AO is further directed to work out the eligibility of exemption under section 10AA. In the result, grounds of appeal raised by Revenue are partly allowed.
Issues Involved:
1. Deletion of addition under Section 69C for bogus purchases. 2. Applicability of Section 69C when the source of payments for purchases is explained. 3. Eligibility for deduction under Section 10AA for income derived from bogus purchases. 4. Overall validity of the order of the Commissioner of Income Tax (Appeals) [CIT(A)]. Issue-wise Detailed Analysis: 1. Deletion of addition under Section 69C for bogus purchases: The Revenue challenged the deletion of the addition made under Section 69C of the Income Tax Act concerning bogus purchases claimed by the assessee. The Assessing Officer (AO) had disallowed the entire expenses on account of purchases from entities managed by the Bhanwarlal Jain group, which were alleged to be providing accommodation entries without actual delivery of goods. The AO based this on the investigation and statements from Bhanwarlal Jain, which suggested that the transactions were sham. The CIT(A) deleted this addition, citing that the assessee's case was similar to the Sajani Jewels case, where no escapement of income was found for concerns eligible for Section 10AA deduction. 2. Applicability of Section 69C when the source of payments for purchases is explained: The AO contended that the assessee failed to produce necessary documentation like the day-to-day purchase and consumption register and could not establish the physical transfer of goods. Despite payments being made through banking channels, the AO viewed these as sham transactions. The CIT(A) held that since the source of payments was duly explained in the books of accounts, Section 69C was not applicable. However, the Tribunal noted that the mere explanation of the source of payments does not suffice if the physical delivery of goods is not established. 3. Eligibility for deduction under Section 10AA for income derived from bogus purchases: The CIT(A) reasoned that even if the purchases were bogus, they would qualify for deduction under Section 10AA as they were derived from the eligible business. The Tribunal, however, highlighted that the decision in the Sajani Jewels case, which the CIT(A) relied on, was primarily about the validity of reopening under Section 147 and not directly applicable to the present facts. The Tribunal emphasized that the assessee failed to prove the delivery of goods and did not produce necessary purchase registers or certifications from Customs Authorities. 4. Overall validity of the order of the Commissioner of Income Tax (Appeals) [CIT(A)]: The Tribunal found that the AO had not disputed the sales or exports of the assessee, which made it unlikely that the entire purchases were bogus. It was noted that disallowing 100% of the purchases was not justified when sales were not disputed. The Tribunal decided to restrict the disallowance to 6% of the aggregate purchases from the four entities managed by the Bhanwarlal Jain group, aligning with the consistent view taken in other similar cases. The AO was directed to work out the eligibility of exemption under Section 10AA accordingly. Conclusion: The appeal by the Revenue was partly allowed. The Tribunal modified the order of the CIT(A), directing the AO to restrict the disallowance to 6% of the aggregate purchases and to reassess the eligibility for exemption under Section 10AA. This decision balanced the need to address potential revenue leakage while acknowledging the legitimacy of the assessee's sales and exports.
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