2025 (4) TMI 482 - HC - Income Tax

Estimation of income - bogus purchases - primary onus of proving the purchases - Tribunal justification in estimating only 3% of bogus purchases - HELD THAT - CIT (A) held that entire purchases cannot be held to be bogus since the sales have been made and thereafter estimated 1% on the bogus purchases and confirmed the same. In our view the first appellate authority was too casual in his approach in adjudicating this matter without considering or giving findings on the various grounds on which the AO made the addition. In our view based on the findings above which the Tribunal confirmed the Tribunal erred by estimating only 3% of the alleged purchases as bogus to justify disallowance. There was a clear error of law and the ITAT s approach contradicted several decisions on the subject as discussed in Kanak Impex 2025 (3) TMI 230 - BOMBAY HIGH COURT and others. By indulging in speculative reasoning that was never urged by or on behalf of the Assessee the Tribunal should not have estimated only 3% instead of confirming the disallowance of all the purchases. Revenue is justified in relying upon the ratio of the decision in the case of Kanak Impex (Supra) wherein this Court has examined this issue and confirmed the disallowance of the whole of the purchases. We are conscious that in the case of Kanak Impex (Supra) the assessee did not co-operate with the revenue which was one reason for confirming the disallowance. However we have examined the legal position on this issue based on the findings of the Tribunal. Therefore the ratio of the said decision squarely applies to the facts of the present case before us. The non-cooperation was only one of the grounds and not the sole ground. Besides it is not as if the present assessee was very cooperative. Practically every vital information was not produced by citing convenient inabilities. The documents and paperwork that would have invariably accompanied genuine transactions were missing or the assessee expressed inability to produce them. This can hardly be called cooperation. Therefore no case is made out to distinguish Kanak Impex (Supra) or the principles therein. Revenue is also justified in placing reliance on the decisions of La Medica 2001 (3) TMI 68 - DELHI HIGH COURT and Kaveri Rice Mills 2005 (3) TMI 776 - ALLAHABAD HIGH COURT wherein in very similar fact situations if not identical the addition of all the bogus purchases has been confirmed. We reverse the orders passed by the CIT (A) and the Tribunal and restore the addition made in the assessment orders by the Assessing Officer. Questions of law are answered in favour of the Revenue and against the Assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment were:

(i) Whether the Tribunal, after acknowledging 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, 1961, and without considering the decision of the Gujarat High Court 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 precedent set by the Apex Court in the case of N. K. Protiens Ltd., which upheld 100% disallowance on bogus purchases.

2. ISSUE-WISE DETAILED ANALYSIS

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

- Relevant Legal Framework and Precedents: The Tribunal's decision to determine a profit rate on bogus purchases was challenged for not considering Section 69C of the Income Tax Act and the precedent set by the Gujarat High Court in N.K. Industries Ltd., which was upheld by the Supreme Court.

- Court's Interpretation and Reasoning: The Tribunal acknowledged the purchases as bogus but concluded that the profit rate did not show abnormal variations, suggesting purchases were from the grey market. It estimated a 3% profit rate on these purchases.

- Key Evidence and Findings: The Tribunal found that the Respondent-Assessee failed to discharge the onus of proving the purchases, as they could not produce evidence of actual delivery or confirmatory letters from suppliers.

- Application of Law to Facts: The Tribunal's approach was deemed erroneous as it speculated on grey market purchases without such a case being presented by the Respondent-Assessee. The Tribunal's decision to apply a 3% profit rate was not justified given the findings of bogus purchases.

- Treatment of Competing Arguments: The Tribunal's reasoning was challenged by the Revenue, which argued for a 100% disallowance based on the precedent set by N.K. Protiens Ltd.

- Conclusions: The Court found the Tribunal's decision to estimate a 3% profit rate unsupported by evidence or legal precedent, leading to the conclusion that the entire purchase amount should be disallowed.

(ii) Restriction of Disallowance to Profit Margin

- Relevant Legal Framework and Precedents: The ITAT's decision to restrict disallowance to the profit margin was contested against the backdrop of the Supreme Court's decision in N. K. Protiens Ltd., which upheld full disallowance on bogus purchases.

- Court's Interpretation and Reasoning: The Court criticized the Tribunal for not fully disallowing the purchases despite acknowledging them as bogus. The Tribunal's speculation on grey market purchases was deemed perverse and erroneous.

- Key Evidence and Findings: The Tribunal's findings that the Respondent-Assessee failed to prove the genuineness of the purchases, maintain proper records, or provide necessary documentation were pivotal in the Court's decision.

- Application of Law to Facts: The Court applied the legal precedent of full disallowance in cases of bogus purchases, as established in prior judgments, to the facts of this case.

- Treatment of Competing Arguments: The Respondent-Assessee's arguments regarding the lack of cash flow evidence and non-invocation of Section 69C were rejected. The Court emphasized that the enabling provisions of Section 69C allowed for disallowance even without explicit invocation.

- Conclusions: The Court concluded that the Tribunal erred in limiting the disallowance to 3% and should have upheld the full disallowance as per established legal principles.

3. SIGNIFICANT HOLDINGS

- Verbatim Quotes of Crucial Legal Reasoning: "The Tribunal has concluded that the purchases were bogus and, therefore, was not justified in estimating, after giving such a finding, to confirm the disallowance of only 3% of the bogus purchases."

- Core Principles Established: The judgment reinforced the principle that in cases of bogus purchases, the entire purchase amount is subject to disallowance, as upheld by the Supreme Court in N. K. Protiens Ltd.

- Final Determinations on Each Issue: The Court reversed the orders of the CIT (A) and the Tribunal, restoring the Assessing Officer's addition of the entire purchase amount as bogus. The questions of law were answered in favor of the Revenue, affirming the full disallowance of the purchases.