Delhi ITAT Says Entire Bogus Purchase Value Can't Be Added To Income, Applies 5% Rate On ₹5.94 Cr Turnover

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) on 31 August held that where both purchases and corresponding sales are found to be bogus, the entire purchase value cannot be added to income without accounting for the profit element arising from the transactions.

Judicial Member Anubhav Sharma and Accountant Member Sanjay Awasthi partly allowed HSB Home Solutions Ltd.'s appeal for Assessment Year 2012-13, upholding the reopening of the assessment and directing the Assessing Officer to apply a 5% gross profit rate to the turnover instead of adding the entire purchase value. The Tribunal held:

“We find force in the Ld. AR's contention that the profit shown from such allegedly bogus transactions has not been considered and the sales would appear to be considered genuine if we simply go by the logic that has been adopted by the Ld. AO, in as much as out of bogus sales and purchases only the purchases have been treated adversely.”

The case arose from a survey conducted on 30 November 2018 in the case of Ashok Kumar Gupta and others, during which Gupta allegedly admitted to providing accommodation entries for bogus purchases and sales through his proprietary concern, Gayatri Maa Enterprise. HSB Home Solutions Ltd. was among the entities named in connection with such entries.

The original assessment had been completed under Section 143(3) of the Income Tax Act, 1961 (which provides for scrutiny assessment) on 29 March 2014. The Tribunal found that the relevant transactions had not been meaningfully examined during the original assessment.

It therefore upheld the reopening, holding that the subsequent survey material provided sufficient information for the Assessing Officer to form a belief that income had escaped assessment. Since the transactions had not been meaningfully examined earlier, the reopening could not be treated as a mere change of opinion.

On merits, however, the Tribunal found that the Assessing Officer had adopted an inconsistent approach by treating both the purchases and sales as bogus while adding the entire purchase value to the company's income.

HSB Home Solutions Ltd. had disclosed Rs. 13.34 lakh as profit from the business, which had not been appropriately factored into the addition. The Bench held that the actual profit element arising from the transactions had to be determined instead of treating the entire purchase value as undisclosed income. It rejected the company's contention that the transactions should be accepted as genuine merely because the payments had been routed through banking channels.

It noted that HSB Home Solutions Ltd. had failed to establish the physical movement of goods or satisfactorily prove the bona fides of the parties from whom the purchases were allegedly made. It therefore found that the transactions could not be accepted as genuine solely on the basis of banking records. It observed:

“It is a trite position that an assessee needs to establish the bona fides of the transactions that have an impact on the assessable income.”

The ITAT nevertheless found the Revenue's approach of taxing the entire purchase value unwarranted. It referred to the Gujarat High Court's decision in Prathana Gems, where an addition relating to bogus purchases had similarly been restricted to a percentage of the disputed transactions.

Considering the facts of the case, it held that a 5% gross profit rate was a reasonable and conservative estimate. It accordingly directed the Assessing Officer to apply the rate to the total business turnover of Rs. 5,94,91,966 and give credit for the profit already disclosed by HSB Home Solutions Ltd. The Bench held:

“...considering the totality of facts and circumstances of the case, we deem it fit to apply a gross profit rate of 5% on the turnover of business (Rs.5,94,91,966/-) and direct the ld. AO to work out the gross profit through this formula. The Ld. AO would give the benefit of the profit already disclosed by the assessee.”

Accordingly, the ITAT partly allowed the appeal, sustaining the reopening of the assessment while restricting the addition to the estimated profit element instead of the entire value of the allegedly bogus purchases.

Counsel for the Assessee: Balwant Singh, AR

Counsel for the Revenue: Ashok Gautam, CIT-DR