2022 (9) TMI 831 - AT - Income Tax

Estimation of income - Bogus purchases - reasonability of disallowance of bogus/tainted/disputed purchases - HELD THAT - We find that Hon ble Jurisdictional High Court in various case laws, including in the decision in Simit P Seth 2013 (10) TMI 1028 - GUJARAT HIGH COURT and Bholanath Poly Fab 2013 (10) TMI 933 - GUJARAT HIGH COURT held that only profit element embedded in such bogus purchases should be disallowed, to avoid the possibility of revenue leakage and not the entire aggregate of disputed purchases. Considering the fact that Shri Praveen Kumar Jain was well known entry provider. Shri Gautam Jain was also actively involved along with Praveen Kumar Jain. The department has taxed Shri Praveen Kumar Jain and Gautam Jain as entry provider and taxed certain percentage on total entry provided by them. We find that in a similar case, the combination of this Bench, wherein the cases of beneficiary in case of Shri Rajendra Jain, Gautam Jain or Praveen Kumar Jain, disallowance of similar purchases were either increased to 6% or wherein the disallowance was restricted at higher percentage, was restricted to 6%, therefore, taking a consistent view, the disallowance restricted by the ld. CIT(A) is modified and the Assessing Officer is directed to restrict the disallowance of purchases from all five parties to the extent of 6% only. Appeal of the revenue is partly allowed

Issues Involved:
1. Confirmation of certain purchases as in-genuine.
2. Addition under Section 69C for in-genuine purchases.
3. Sustaining disallowance of 5% of purchases.
4. Revenue's challenge to the restriction of addition to 5%.

Issue-wise Detailed Analysis:

1. Confirmation of Certain Purchases as In-genuine:
The assessee contested that the Commissioner of Income Tax (Appeals) [CIT(A)] erred in confirming certain purchases as in-genuine based on documents and statements recorded by the Directorate of Income Tax (DIT) without the assessee's knowledge and without providing copies or an opportunity for cross-examination. The assessee argued that these should not be considered as evidence, rendering the confirmation legally flawed.

2. Addition Under Section 69C for In-genuine Purchases:
The assessee argued that the CIT(A) erred in confirming additions under Section 69C of the Income Tax Act, treating certain purchases as in-genuine without evidence of connection to the Pravin Jain or Gautam Jain groups. The assessee maintained that the purchases were recorded in the books and payments were made through account payee cheques from regular business funds, negating the applicability of Section 69C, which applies when the source of payment is unexplained.

3. Sustaining Disallowance of 5% of Purchases:
The CIT(A) sustained a disallowance of Rs. 8,63,900/- (5% of the purchases) from certain parties purportedly part of the Pravin Jain and Gautam Jain groups. The assessee contended that these purchases were fully evidenced by invoices, challans, stock records, and supplier confirmations, including their income returns.

4. Revenue's Challenge to the Restriction of Addition to 5%:
The revenue appealed against the CIT(A)'s decision to restrict the addition made by the Assessing Officer (AO) of Rs. 1,64,14,100/- on account of bogus purchases to 5%. The revenue argued that the entire purchases from the alleged concerns were bogus, substantiated by statements on oath from the entry provider, and the CIT(A) should have upheld the AO's order.

Analysis:

1. Confirmation of Certain Purchases as In-genuine:
The Tribunal examined the assessee's claim that the purchases were genuine, supported by stock registers, invoices, and bank statements. The AO's reliance on third-party information and statements without providing these to the assessee was noted. The Tribunal found that the AO did not dispute the sales or reject the books of accounts, making a 100% disallowance unjustified.

2. Addition Under Section 69C for In-genuine Purchases:
The Tribunal noted that the AO made the addition based on the Investigation Wing's report, which identified a racket providing accommodation entries. The assessee provided documentary evidence, including ledger accounts, invoices, and bank statements, which the AO did not adequately address. The Tribunal found the AO's 100% disallowance without rejecting the books of accounts or disputing sales to be excessive.

3. Sustaining Disallowance of 5% of Purchases:
The CIT(A) restricted the disallowance to 5% of the purchases, referencing various judicial decisions that only the profit element in such bogus purchases should be disallowed to avoid revenue leakage. The Tribunal upheld this approach but modified the disallowance to 6%, consistent with similar cases involving entry providers like Pravin Kumar Jain and Gautam Jain.

4. Revenue's Challenge to the Restriction of Addition to 5%:
The Tribunal considered the revenue's argument for a higher disallowance but found the CIT(A)'s restriction to 5% reasonable, given the evidence and judicial precedents. However, the Tribunal increased the disallowance to 6%, aligning with other similar cases.

Conclusion:
The Tribunal partly allowed the revenue's appeal by increasing the disallowance to 6% of the purchases and dismissed the assessee's appeal. The decision emphasized the need for a balanced approach, disallowing only the profit element in disputed purchases to prevent revenue leakage while acknowledging the assessee's documentary evidence supporting the genuineness of transactions. The judgment was pronounced on 15/09/2022.

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