2023 (9) TMI 1666 - HC - Income Tax

Estimation of income - bogus purchases - CIT(A) restricted addition at a rate of 6% - HELD THAT - The Tribunal relied upon the judgement of Pankaj A Chaudhary 2021 (10) TMI 653 - ITAT SURAT wherein the coordinate bench at Surat had sustained the addition at the rate of 6% of bogus purchases. Tribunal correctly partly allowed the appeal filed by the assessee and reduced the dis-allowance at 6% on the disputed purchases. This Court in appeal filed by the Revenue confirmed the order passed by the Tribunal.

Summary

1. ISSUES PRESENTED and CONSIDERED

The judgment from the Gujarat High Court considers the following core legal questions:

(i) Whether the Tribunal was justified in estimating the addition in respect of bogus purchases at a rate of 6% of such purchases, as opposed to the disallowance made by the Assessing Officer (AO) at 100% of such purchases, given that these purchases were alleged to be sham transactions through bogus entities?

(ii) Whether the Tribunal's decision to estimate the addition at 6% was appropriate, considering a precedent case where the High Court directed an addition of 5% of the total turnover?

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Justification of 6% Addition for Bogus Purchases

Relevant Legal Framework and Precedents:

The case revolves around the assessment of bogus purchases under the Income Tax Act. The Tribunal's decision was influenced by a precedent case involving Mayank Diamonds Pvt. Ltd., where the High Court had directed an addition of 5% of the total turnover. The legal framework involves the assessment of income under Section 143(3) of the Income Tax Act.

Court's Interpretation and Reasoning:

The Tribunal, in its reasoning, considered the nature of the transactions as accommodation entries and the absence of actual goods being transacted. The Tribunal relied on its previous decision in the case of Pankaj A Chaudhary, which justified a 6% addition based on the facts and figures presented.

Key Evidence and Findings:

The evidence presented included bills, vouchers, stock registers, and banking transactions. However, the Tribunal noted the involvement of the Rajendra Jain Group in providing accommodation entries, which cast doubt on the genuineness of the purchases.

Application of Law to Facts:

The Tribunal applied the principle that only the income component of disputed transactions should be taxed, not the entire transaction. This led to the conclusion that a 6% addition was sufficient to address potential revenue leakage.

Treatment of Competing Arguments:

The assessee argued for the deletion of the 5% addition sustained by the CIT(A), citing genuine transactions. The Revenue, on the other hand, argued for sustaining the AO's 100% disallowance. The Tribunal balanced these arguments by applying a 6% addition, considering the precedent and the specifics of the case.

Conclusions:

The Tribunal's decision to apply a 6% addition was upheld by the High Court, which found no substantial question of law to warrant interference with the Tribunal's findings.

Issue (ii): Appropriateness of 6% Addition Compared to 5% Precedent

Relevant Legal Framework and Precedents:

The precedent case of Mayank Diamonds Pvt. Ltd. was considered, where a 5% addition was applied. The Tribunal's decision to apply a 6% rate was based on a different set of facts and circumstances.

Court's Interpretation and Reasoning:

The Tribunal justified the 6% rate by analyzing the gross profit and net profit margins of the assessee, which differed from those in the Mayank Diamonds case. The Tribunal also considered the specifics of the disputed transactions and the involvement of the Rajendra Jain Group.

Key Evidence and Findings:

The Tribunal's findings were based on the turnover, gross profit, and net profit margins, as well as the nature of the transactions with the Rajendra Jain Group.

Application of Law to Facts:

The Tribunal applied the law by assessing the income component of the transactions and determining that a 6% addition was appropriate given the facts of the case.

Treatment of Competing Arguments:

The Tribunal considered the Revenue's argument for a higher disallowance and the assessee's argument for a lower or no disallowance, ultimately deciding on a 6% addition as a reasonable compromise.

Conclusions:

The High Court upheld the Tribunal's decision, finding no substantial question of law in the application of a 6% addition, given the factual differences from the Mayank Diamonds case.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning:

"...the tax authorities are not entitled to tax the entire transaction, but only the income component of the disputed transaction, to prevent the possibility of revenue leakage."

Core Principles Established:

The judgment reinforces the principle that only the income component of a transaction should be taxed, not the entire transaction amount. It also emphasizes the importance of considering the specific facts and circumstances of each case when applying precedents.

Final Determinations on Each Issue:

The High Court dismissed the appeal, affirming the Tribunal's decision to apply a 6% addition for bogus purchases, finding no substantial question of law in the facts presented. The Court noted that the Tribunal's decision was based on a thorough analysis of the available evidence and circumstances.