2025 (5) TMI 1544 - AT - Income Tax

Estimation of income - bogus purchases - CIT(A) restricted addition to the extent of 10% only - HELD THAT - It is a settled law as observed by the Ld. Commissioner that the estimation varies with the nature of business and no uniform yardstick could be adopted and once the sale is accepted then the very basis of purchase would not be questioned. Only profit element embedded in the purchase should be taxed. The decision of the Ld. Commissioner is based on the logical reasoning and under the facts and circumstances of the case therefore the same needs no interference except sustaining the addition to the extent of 10% which we in the Assessee s appeal reduced to 5%.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal include:

- Whether the addition made by the Assessing Officer (AO) on account of purchases from M/s. Arihant Exports, declared as bogus by Sales Tax Authorities in previous years, is justified for the assessment year 2017-18.

- Whether the AO was justified in making a full addition of Rs. 55,41,394/- as bogus purchases without verifying the current year's facts and documents.

- The extent to which the addition on account of alleged bogus purchases can be sustained, considering precedents and consistency in assessment orders of previous years.

- Whether the Revenue's appeal against the reduction of addition to 10% by the Commissioner of Income Tax (Appeals) should be admitted despite delay and merits of the claim for 100% addition.

- The applicability and interpretation of judicial precedents regarding disallowance of bogus purchases and the quantum of addition to be made (full addition vs. partial addition as profit element).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legitimacy of Addition on Account of Purchases from M/s. Arihant Exports

Relevant Legal Framework and Precedents:

The Income Tax Act, 1961 empowers the AO to make additions to income if purchases are found to be bogus or not genuine. Judicial precedents such as CIT vs. Simit P. Sheth (356 ITR 051) and Bholenath Fab Pvt. Ltd. (355 ITR 290) provide guidance on the quantum of addition in cases of bogus purchases, often restricting additions to the profit element rather than the entire amount.

Court's Interpretation and Reasoning:

The AO made a full addition of Rs. 55,41,394/- based on prior years' findings that M/s. Arihant Exports was a bogus party (hawala dealer). However, the Assessee contested this addition, providing documentary evidence and an affidavit from the proprietor of M/s. Arihant Exports, asserting the genuineness of transactions in the current year and differentiating the current proprietor from the party declared bogus in earlier years.

The Commissioner of Income Tax (Appeals) acknowledged the Assessee's submissions but upheld the addition partially, restricting it to 10% of the bogus purchase amount as profit element, relying on the Gujarat High Court's decision in CIT vs. Simit P. Sheth.

Key Evidence and Findings:

The Assessee submitted party-wise purchase details, affidavits, and GST registration details of M/s. Arihant Exports, establishing its business legitimacy and continuity over several years. The AO's assessment record lacked PAN and VAT/TIN details of the seller, which the Assessee failed to provide despite specific requests.

Application of Law to Facts:

The Tribunal noted that the AO relied heavily on past years' assessments without adequately verifying the current year's facts. The Assessee's documentary evidence and affidavit indicated a genuine business transaction with a different proprietor than the one previously declared bogus. However, the Assessee's failure to provide PAN and VAT/TIN details weakened its position.

Treatment of Competing Arguments:

The AO and Revenue argued for full addition based on prior findings of bogus purchases. The Assessee argued for deletion of the addition citing current year's evidence and distinction from previous years. The Commissioner's approach to restrict addition to 10% balanced these views, recognizing some merit in the Assessee's claim but not fully absolving the addition.

Conclusions:

The Tribunal, considering the principle of consistency and the Assessee's partial compliance, further restricted the addition to 5%, following the precedent of similar disallowances in earlier years. The Tribunal emphasized that the addition should not be mechanical but based on current facts and evidence.

Issue 2: Admission of Revenue's Appeal Despite Delay and Merits of Revenue's Claim for 100% Addition

Relevant Legal Framework and Precedents:

Procedural rules under the Income Tax Act govern the time limits for filing appeals. Courts have discretion to condone delays if bona fide and unintentional. Judicial precedents such as N.K. Industries Ltd. support full addition in cases of bogus purchases.

Court's Interpretation and Reasoning:

The Tribunal condoned the Revenue's delay of five days in filing the appeal, accepting the explanation of workload pressure and absence of objection from the Assessee.

Regarding the merits, the Revenue contended that the entire amount should be added back as per the judgment in N.K. Industries Ltd., advocating for 100% disallowance in bogus purchase cases.

The Assessee and Commissioner relied on Gujarat High Court decisions (CIT vs. Simit P. Sheth and Bholenath Fab Pvt. Ltd.) which restrict additions to the profit element embedded in bogus purchases, not the entire amount.

Key Evidence and Findings:

The Tribunal observed that the nature of business and estimation methods vary, and once sales are accepted, the basis of purchases should not be doubted fully. The Commissioner's reasoning to tax only the profit element was found logical.

Application of Law to Facts:

The Tribunal applied these principles and rejected the Revenue's claim for full addition, sustaining the addition at 10% as per the Commissioner's order but further reducing it to 5% in the Assessee's appeal for consistency.

Treatment of Competing Arguments:

The Tribunal balanced the Revenue's strict approach with the Assessee's evidence and judicial precedents favoring partial disallowance, emphasizing fairness and consistency.

Conclusions:

The Revenue's appeal was dismissed on merits, maintaining the reduced addition.

3. SIGNIFICANT HOLDINGS

- "The AO has nowhere mentioned the PAN number of the alleged proprietary concern M/s. Arihant Exports and therefore in order to verify the business details... the addition is restricted to 5% of the bogus purchases, instead of 10% as sustained by the Ld. Commissioner."

- "It is a settled law... that the estimation varies with the nature of business and no uniform yardstick could be adopted and once the sale is accepted then the very basis of purchase would not be questioned."

- "Only profit element embedded in the purchase should be taxed."

- "Considering the peculiar facts and circumstances in totality... we are inclined to restrict the addition to the tune of 5% instead of 10% by following the rule of consistency."

- The Tribunal upheld the principle that additions on account of bogus purchases must be based on current year evidence and not merely on previous years' findings, emphasizing the need for documentary proof such as PAN and VAT/TIN details.

- The Tribunal condoned a brief delay in filing appeal by the Revenue, noting the bona fide nature of the delay.

- The Tribunal dismissed the Revenue's appeal for full addition, thereby endorsing the approach of taxing only the profit element in bogus purchase cases.