2025 (3) TMI 230 - HC - Income Tax

Bogus purchases - estimation of income - CIT (A) findings that only 12.5% of the bogus purchases should be added - HELD THAT - As in the instant case the respondent-assessee has offered no explanation of the source of the expenditure incurred on account of purchases and therefore AO was justified in making an addition of the said amount and the Appellate Authorities were not justified in estimating the profit rate and thereby impliedly grant deduction of such unexplained expenditure which is contrary to the express provision of Section 69C. In the instant case before us assessee has not appeared in the re-assessment proceedings to discharge its onus on proving purchase transactions under consideration. Before the CIT (A) for the first time scanty details of sundry debtors creditors and stocks were given. CIT(A) gave a finding of the respondent-assessee s involvement in bogus transaction. Therefore the finding of the AO on the genuineness of the purchases was confirmed by the CIT (A). Before the Tribunal assessee has not canvassed any submission on the genuineness of the purchases but only pleaded for an estimation of a certain percentage of such bogus purchases to be added. Therefore assessee has not proved the genuineness of the purchases which inter alia include the source of making the payment for such purchases. Today before this Court assessee s submissions that they have discharged the onus cast upon them to prove the genuineness of the purchases including the source cannot be accepted. Appeal of the appellant-revenue is allowed by answering the question in favour of the appellant-revenue and against the respondent-assessee.

Summary

ISSUES PRESENTED and CONSIDERED

The primary issues considered in this legal judgment are:

(i) Whether the Tribunal, after accepting the case of bogus purchases, could determine a profit rate without confirming the disallowance of purchases, without considering Section 69C of the Income Tax Act, and without considering the Gujarat High Court's decision in N.K. Industries Ltd. vs. Deputy Commissioner of Income Tax.

(ii) Whether the ITAT erred in restricting the disallowance to the profit margin on unproven purchases without considering the legal position established by the Supreme Court in the case of N.K. Protiens Ltd., which upheld 100% disallowance on bogus purchases.

ISSUE-WISE DETAILED ANALYSIS

Issue (i): Tribunal's Determination of Profit Rate

- Relevant Legal Framework and Precedents: The primary legal framework involves Section 69C of the Income Tax Act, which deals with unexplained expenditure. The precedents include the Gujarat High Court decision in N.K. Industries Ltd. and the dismissal of the Special Leave Petition by the Supreme Court in N.K. Protiens Ltd.

- Court's Interpretation and Reasoning: The Court criticized the Tribunal's approach of estimating profit without confirming the entire disallowance of bogus purchases. It emphasized that the Tribunal and CIT (A) failed to consider Section 69C, which prohibits deduction of unexplained expenditure.

- Key Evidence and Findings: The respondent-assessee did not appear before the AO during reassessment proceedings, failing to prove the genuineness of purchases. The CIT (A) and Tribunal's reliance on profit estimation was deemed inappropriate as it impliedly allowed deductions contrary to Section 69C.

- Application of Law to Facts: The Court applied Section 69C, emphasizing that unexplained expenditures should be treated as income. The Tribunal's profit estimation approach was found inconsistent with the statutory provisions.

- Treatment of Competing Arguments: The appellant-revenue argued for 100% disallowance based on Section 69C and precedent cases, while the respondent-assessee contended for profit estimation. The Court favored the appellant-revenue's interpretation.

- Conclusions: The Court concluded that the Tribunal erred in not confirming the entire disallowance of bogus purchases and misapplied the law by estimating profit.

Issue (ii): ITAT's Restriction of Disallowance

- Relevant Legal Framework and Precedents: The legal framework includes Section 69C and the precedent set by the Supreme Court in N.K. Protiens Ltd., which supports 100% disallowance of bogus purchases.

- Court's Interpretation and Reasoning: The Court found that the ITAT's restriction of disallowance to the profit margin was contrary to the established legal position. It emphasized that the entire bogus purchase should be disallowed as per Section 69C.

- Key Evidence and Findings: The respondent-assessee's failure to prove the genuineness of purchases and the source of expenditure was critical. The CIT (A) had already found involvement in bogus transactions.

- Application of Law to Facts: The Court applied the principle that unexplained expenditure should be added to income, rejecting the ITAT's partial disallowance approach.

- Treatment of Competing Arguments: The appellant-revenue's argument for full disallowance was upheld, while the respondent-assessee's defense based on profit estimation was rejected.

- Conclusions: The Court concluded that the ITAT erred in not disallowing the entire amount of bogus purchases, aligning with the legal precedent and statutory provisions.

SIGNIFICANT HOLDINGS

- Core Principles Established: The Court reinforced the principle that in cases of bogus purchases, the entire expenditure should be disallowed under Section 69C, and partial disallowance based on profit estimation is inappropriate.

- Final Determinations on Each Issue: The Court allowed the appellant-revenue's appeal, restoring the AO's order and reversing the decisions of the CIT (A) and the Tribunal. It emphasized that the total addition should not exceed the amount of Rs. 20,06,80,150/-.

- Verbatim Quote of Crucial Legal Reasoning: "In our view, both the Appellate Authorities ought to have appreciated that the issue before them was whether the respondent-assessee had proved the purchases of which the claim for deduction was made. The respondent-assessee, having failed to discharge its onus on this issue before all three authorities, in our view, the additions made in the assessment order by the AO was justified."