2023 (1) TMI 835 - HC - Income Tax

Estimation of income - Bogus purchases - CIT (Appeals) restricted the addition to 12.5% of the disputed purchases - ITAT partly allowed the appeal of the assessee restricting the addition to 6% of the disputed purchases - HELD THAT - Having found that the AO has chosen not to reject the books of accounts of the assessee and had made the estimated additions of the pieces of the purchases. Both the CIT (Appeals) and the Tribunal have concurrently and rightly held to make the additions which the CIT (Appeals) had done @ 12.5% of the impugned purchases which have been reduced and restricted to 6%. It will not be out of place to make a mention that the Assessing Officer s inquiry was based on the report of the Investigation Wing Mumbai the copy of the statement of Shri Bhanwarlal Jain and others had been asked for by the assessee which also had not been provided nor was he allowed a cross-examination. This of course could have been a reason for the Authority concerned to restore the matter back to the AO however noticing the elaborate evidence consisting the details of purchase PAN etc. coupled with the AO and the CIT (Appeals) dealing with the case of Shri Bhanwarlal Jain and others involved therein if addition directed of 6% of the disputed purchases by noting that the profit margin in the said industry is 5% to 7% without even going by the estimation of the possible profit margin in the industry suffice to note that in all cases relating to Shri Bhanwarlal Jain both the AO and the CIT (Appeals) Mumbai have chosen to make addition @ 3% to 5% of the bogus purchases. That view of the matter no purpose is going to be served in interference. This Court in case of Mayank Diamonds Pvt. Ltd 2014 (11) TMI 812 - GUJARAT HIGH COURT was required to decide the estimation of the gross profit @ 12.5% against the gross profit of 1.03% shown by the assessee. The Court allowed the gross profit rate of 5% holding that 12.5% is drastically higher. In N.K. Industries Pvt. Ltd 2016 (6) TMI 1139 - GUJARAT HIGH COURT where the Court had considered the addition of entire amount on the ground that the fictitious purchases is a factually different than what was already held at M/s. Mayank Diamonds Pvt. Ltd 2014 (11) TMI 812 - GUJARAT HIGH COURT In the other cases of Shri Bhanwarlal Jain also addition rates are 3% to 5% where no further challenge possibly is there or it has not been processed further. This Court finds that no question of law much less any substantial question of law arises for consideration of this Court.

Summary

Issues Involved:
1. Justification of the Tribunal's estimation of addition in respect of bogus purchases at the rate of 6%.
2. Comparison with the High Court's direction in the case of Mayank Diamonds Pvt. Ltd. to make addition at the rate of 5% of the total turnover.

Issue-wise Detailed Analysis:

1. Justification of the Tribunal's Estimation of Addition at 6%:

The appellant challenged the order of the Income Tax Appellate Tribunal (ITAT), Surat, which restricted the addition to 6% of the disputed purchases, against the original 100% disallowance made by the Assessing Officer (AO). The AO had disallowed the entire amount of Rs.8,10,56,469/- on account of bogus purchases from entities controlled by Shri Bhanwarlal Jain, citing accommodation entries and fictitious transactions.

The CIT (Appeals) had previously restricted the addition to 12.5% of the disputed purchases, amounting to Rs.1,01,32,060/-, relying on various judicial pronouncements. The ITAT further reduced this to 6%, holding that only the income component of the disputed transactions should be taxed to prevent revenue leakage.

The Tribunal's decision was based on the fact that the AO did not provide the assessee with the report of the Investigation Wing, Mumbai, or the statement of Shri Bhanwarlal Jain, nor was cross-examination allowed. The assessee had provided detailed evidence, including purchase invoices, stock registers, and bank statements, which the AO did not refute. The Tribunal noted that the profit margin in the industry is typically 5% to 7% and found the 12.5% disallowance by the CIT (Appeals) to be on the higher side.

2. Comparison with the Case of Mayank Diamonds Pvt. Ltd.:

The appellant argued that in the case of Mayank Diamonds Pvt. Ltd., the High Court had directed an addition at the rate of 5% of the total turnover, which should be considered in this case. However, the Tribunal noted that in similar cases involving Shri Bhanwarlal Jain, disallowances ranged from 3% to 5% of the impugned purchases. The CIT (Appeals) had also observed that in other cases involving the same group, the AO and CIT (Appeals) had not made 100% disallowances but rather disallowances ranging from 3% to 5%.

The Tribunal's decision to restrict the addition to 6% was consistent with the approach taken in other cases involving accommodation entries from Shri Bhanwarlal Jain's entities. The Tribunal emphasized that the AO did not reject the assessee's books of accounts and made estimated additions based on third-party information without independent verification or providing the assessee an opportunity to cross-examine the witnesses.

Conclusion:

The High Court found no substantial question of law in the appeal. The Tribunal's decision to restrict the addition to 6% was upheld, considering the consistent approach in similar cases and the lack of independent inquiry by the AO. The appeal was dismissed, affirming the Tribunal's order.