2025 (3) TMI 359 - HC - Income Tax

Estimation of income - bogus purchases - CIT(A) estimating profit at 12.5% on the bogus purchases - As per AO assessee did not discharge its onus of proving the purchases made from various parties during the course of the assessment proceedings - HELD THAT - If the approach of the Appellate Authorities of estimating the profit on such purchases is to be accepted then in effect the consequence would be that even if respondent-assessee has failed to prove its claim of deduction of purchases still by estimating profit impliedly deduction of purchases is given. For example if the purchases by accommodation entries are Rs.100/- and a profit of 10% is estimated then to the extent of Rs.90/- deduction on account of purchases is deemed to have been given by the Appellate Authorities. This approach would not be correct since it is nobody s case that the respondent-assessee has made sales out of books by purchasing the goods out of books. If the approach of the Appellate Authorities is accepted then the provision of Section 69C which is an enabling provision would become redundant. Section 69C provides that where an assessee has incurred any expenditure and offers no explanation about the source of expenditure or the explanation offered is not in the opinion of the AO satisfactory then the amount of expenditure may be deemed to be the income of the assessee and such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income. In our view if the approach of the CIT(A) and the Tribunal is accepted then it would amount to endorsing outright conduct of illegality contrary to the express provisions of Section 69C of the Act which the Appellate Authorities have entirely ignored. In the above example by estimating 10% and thereby impliedly giving a deduction of Rs.90/- in the teeth of the provisions of Section 69C of the Act which expressly bars the allowability of unexplained expenditure. The question of law admitted by this Court is answered against the revenue and in favour of the respondent-assessee insofar as the purchases from various suppliers except M/s Neptune Trading Co. and Hari Om Traders are concerned. With respect to the purchases from M/s Neptune Trading Co. and Hari Om Traders are concerned the question is answered in favour of the appellant-revenue and against the respondent-assessee. The order of the CIT(A) and the Tribunal is reversed insofar as the purchases from these two parties are concerned. However we make it clear that the total additions would not exceed Rs. 1, 00, 10, 773 which is the total purchase from M/s Neptune Trading Co. and Hari Om Traders.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

(i) Whether the Tribunal, after acknowledging that the case involved bogus purchases, could determine the profit rate without confirming the disallowance of purchases, without considering Section 69C of the Income Tax Act, 1961, and without considering the Gujarat High Court's decision in N.K. Industries Ltd. Vs. Deputy Commissioner of Income Tax, especially since the Supreme Court dismissed the Special Leave Petition against this decision?

(ii) Whether the ITAT erred in restricting the disallowance to the profit margin on unproven purchases without considering the Supreme Court's position in N.K. Proteins Ltd, which upheld 100% disallowance on bogus purchases?

2. ISSUE-WISE DETAILED ANALYSIS

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

- Relevant Legal Framework and Precedents: The Court considered Section 69C of the Income Tax Act, which deals with unexplained expenditure and its implications on income declarations. The Court also referenced the Gujarat High Court's decision in N.K. Industries Ltd. and the Supreme Court's dismissal of the appeal in N.K. Proteins Ltd., which upheld 100% disallowance on bogus purchases.

- Court's Interpretation and Reasoning: The Court found that the Tribunal erred by not fully disallowing the purchases from M/s Neptune Trading Co. and Hari Om Traders. The Tribunal's approach of estimating profit on such purchases was deemed incorrect as it impliedly allowed deductions of unproven purchases, contrary to Section 69C.

- Key Evidence and Findings: The Tribunal upheld the CIT (A)'s decision to restrict disallowance to 12.5% of the purchases from M/s Neptune Trading Co. and Hari Om Traders. However, the Court noted that these parties did not provide bank statements, making it impossible to verify the genuineness of the transactions.

- Application of Law to Facts: The Court applied Section 69C, emphasizing that unexplained expenditure should be treated as income and not allowed as a deduction. The absence of bank statements from M/s Neptune Trading Co. and Hari Om Traders meant the purchases could not be verified, justifying a full disallowance.

- Treatment of Competing Arguments: The respondent-assessee argued that the purchases were genuine, supported by other suppliers' bank statements. However, the Court held that the lack of verification for M/s Neptune Trading Co. and Hari Om Traders warranted full disallowance.

- Conclusions: The Court concluded that the Tribunal erred in not confirming the full disallowance of purchases from M/s Neptune Trading Co. and Hari Om Traders, as the purchases were unproven and Section 69C applied.

Issue (ii): Restriction of Disallowance to Profit Margin

- Relevant Legal Framework and Precedents: The Court referenced the Supreme Court's decision in N.K. Proteins Ltd., which upheld 100% disallowance on bogus purchases, emphasizing the need for strict adherence to Section 69C.

- Court's Interpretation and Reasoning: The Court criticized the Tribunal's approach of estimating a profit margin on unproven purchases, as it effectively allowed deductions for bogus transactions, contravening Section 69C.

- Key Evidence and Findings: The Court highlighted that the CIT (A) and Tribunal's findings on other suppliers' purchases were based on verified bank statements, unlike those from M/s Neptune Trading Co. and Hari Om Traders.

- Application of Law to Facts: The Court applied the principles from N.K. Proteins Ltd., asserting that the entire amount of unproven purchases should be disallowed, not just a profit margin.

- Treatment of Competing Arguments: The respondent-assessee's acceptance of a 12.5% addition was seen as an implicit acknowledgment of unproven purchases, supporting full disallowance.

- Conclusions: The Court concluded that the Tribunal erred in restricting disallowance to a profit margin, as the entire amount of unproven purchases should be disallowed under Section 69C.

3. SIGNIFICANT HOLDINGS

- The Court held that the Tribunal's approach of estimating profit on unproven purchases was incorrect, as it impliedly allowed deductions for bogus transactions, contrary to Section 69C.

- The Court emphasized that the absence of bank statements from M/s Neptune Trading Co. and Hari Om Traders meant the purchases were unproven, justifying full disallowance.

- The Court concluded that the Tribunal erred in not confirming full disallowance of purchases from M/s Neptune Trading Co. and Hari Om Traders, as the purchases were unproven and Section 69C applied.

- The Court reversed the CIT (A) and Tribunal's orders concerning M/s Neptune Trading Co. and Hari Om Traders, confirming the full disallowance of purchases from these parties.

- The Court clarified that the total additions would not exceed Rs. 1,00,10,773, the total purchase amount from M/s Neptune Trading Co. and Hari Om Traders.