Genuine Sales Bar Full Disallowance Of Purchases From Entry Provider: ITAT Mumbai

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) on 7 May held that where sales are accepted as genuine and supported by invoices and delivery challans, the entire purchase amount cannot be treated as bogus merely because the supplier was found to be an accommodation entry provider.

Judicial Member Sandeep Singh Karhail and Accountant Member Vikram Singh Yadav held that only the profit element embedded in such purchases can be brought to tax and partly allowed an appeal filed by Mumbai-based steel trader Hemantkumar Sumermal Bhansali, proprietor of Pushpak Steel and Engineering Co. The Bench observed:

“Therefore, we are of the considered view that even though the assessee has failed to prove the genuineness of the purchase transaction from M/s Shiv Sales, only the profit margin from the said transaction can be added in the hands of the assessee.”

The taxpayer had declared income of Rs. 40.42 lakh. The Department later reopened the assessment on allegations of bogus purchases from Shiv Sales. During the reassessment proceedings, the taxpayer voluntarily added 12.5 per cent of the disputed purchases to income.

However, the Assessing Officer treated the entire purchase amount of Rs. 1.46 lakh as bogus and added the remaining amount under Section 69C of the Income Tax Act, which deals with unexplained expenditure.

Before the Tribunal, the taxpayer submitted that the goods purchased from Shiv Sales were subsequently sold to Tata Chemicals Ltd. The taxpayer also produced invoices and delivery challans in support of the sales transactions.

The Bench noted that although the taxpayer could not conclusively establish actual delivery by Shiv Sales, the Revenue had not disputed the corresponding sales. The Bench further noted that the sales transactions were supported by documentary evidence.

Relying on its earlier order in the taxpayer's own case and the decision of the Bombay High Court in PCIT v. Paramshakti Distributors Ltd., the Tribunal held that only the profit element embedded in the purchases could be taxed. Since the taxpayer had already offered 12.5 per cent of the disputed purchases to tax, the Tribunal deleted the balance addition sustained by the Commissioner of Income Tax (Appeals).

The Bench also recorded that the taxpayer did not press the challenge to the reopening of assessment during the hearing. Further, it dismissed the challenge to initiation of penalty proceedings under Section 271(1)(c) as premature.

Accordingly, the ITAT partly allowed the appeal.