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BOGUS TRANSACTIONS UNDER INCOME TAX ACT, 1961 |
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BOGUS TRANSACTIONS UNDER INCOME TAX ACT, 1961 |
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Bogus transactions In order to reduce the tax burden the some business people may indulge in making entries which are not genuine and bogus transactions. The bogus transactions may be done in any one of the following ways-
In GST regime also issuing of fake invoices for availing input tax credit is huge and many registered persons were arrested and action has been taken against them. Bogus transaction under Income Tax Act Where purchases are found to be bogus/non-existent and were introduced to lower profits, entire amount of such bogus purchases and added to the income of the assessee under Income Tax Act. Where purchases found to be genuine and supplier parties found to be bogus / non-existing, only profit embedded in such amount could be taxed. In most cases bogus transactions are identified only after the assessment of the income of the business entity. On receipt of the report of the Investigation Wing about receipt of loans / LTCG / bogus bills the Assessing Officer re-opens the assessment proceedings and issue notices to the assessee. The assessee is to give reply. Reasonable opportunity shall be given to the assessee. The assessee is to prove the genuinity of the transactions by means of direct evidence or indirect evidence. Results of bogus transaction The bogus transactions will result in the following consequences-
Burden of proof When the allegations are made against the assessee for bogus purchase it is the obligation of the assessee to prove before the Authorities that the transactions are genuine. The assessee may prove the genuineness of the transactions by means of direct evidences such as delivery challans, lorry receipts invoices, stock register, lab report etc. The indirect evidences are comparison of the gross profit, comparison with other products, valuation report etc. When the assessee is able to prove the alleged transactions as genuine, then the obligation is on the part of the Revenue to prove that the transactions are bogus transaction. The Assessing Officer has to cause a detailed investigation. Case laws Information from authorities In most cases the bogus transactions are reported from other departments dealing with indirect taxes etc. In such cases the Assessing Authority is to give notice to the assessee, investigate the matter and then only come to the conclusion as the bogus transaction. In ‘Shri Hasmukh J. Ruparelia v. Income Tax Officer, Ward 22 (1) (5), Mumbai and (vice versa)’ - 2020 (11) TMI 739 - ITAT Mumbai, the assessee filed his return of income for the assessment year (AY) 2009-10 on 03.10.2009 declaring total income of ₹ 9,83,250/-. On receipt of information from the Sales Tax Department, Government of Maharashtra that the assessee had obtained bogus purchase bills from the hawala parties amounting to ₹ 60,72,978/- (Vaishali Enterprises ₹ 30,74,342/- and Maulik Steel Corporation ₹ 29,98,636/-), the Assessing Officer re-opened the assessment by issuing notice under section 148 dated 08.03.2014. In response to it, the assessee filed a reply vide letter dated 21.07.2014 stating that the return filed on 03.10.2009 may be treated as return filed in response to the notice under section 148 of the Act. The assessee claimed to have made purchase of ₹ 29,98,636/- from Maulik Steel Corporation. But he did not make payment to Maulik Steel Corporation. The entire claim of purchase from Maulik Steel Corporation of ₹ 29,98,636/- and 12.5% of claim of purchase from Vaishali Enterprises i.e. 12.5% of 30,74,342/-, which works out to ₹ 3,84,293/- is disallowed and added back to the total income of the assessee. The total disallowance, therefore, works out to ₹ 33,82,929/- (₹ 29,98,636 + ₹ 3,84,293), which is added back to the total income of the assessee.” The assessee filed an appeal before the Commissioner of Income Tax (Appeals) against the order of Assessing Officer. The Commissioner (Appeals) confirmed the disallowance @ 12.5% made by the AO in the case of purchases of ₹ 30,74,342/-from Vaishali Enterprises which comes to ₹ 3,84,293/-. However, he restricted the disallowance in the case of purchases from Maulik Steel Corporation to 12.5% of the disputed purchases of ₹ 29.98,636/-. Thus the Commissioner (Appeals) restricted the total disallowance to ₹ 7,59,122/-. Against the order of Commissioner (Appeals) the assessee as well as the Revenue filed appeals before the Appellate Tribunal. The Appellate Tribunal observed that there was information from the Sales Tax Department, Government of Maharashtra that the assessee had obtained bogus purchase bills of ₹ 60,72,978/- from two hawala parties. During the course of assessment proceedings, the assessee filed before the Assessing Officer copy of purchase bills of the said two parties and a chart showing corresponding sales details. Similar issue arose before the ITAT “SMC-II” Bench, Mumbai in assessee’s own case for AYs 2010-11 & 2011- 12. The Tribunal in this case estimated the profit rate at the rate of 8% of the bogus purchases and directed the Assessing Officer to recompute the income accordingly. Since the facts and circumstances are exactly identical and hence, the Tribunal restricted the estimation of profit to 8% of the disputed purchases of ₹ 60,72,978/-. In ‘Income Tax Officer 28 (2) (5), Navi Mumbai v. Raj Tools Center PAP, 2020 (11) TMI 697 – ITAT, Mumbai, three appeals are filed by the revenue against different orders of the Learned Commissioner of Income Tax (Appeals) – 26, Mumbai dated 27.02.2019 for the A.Ys., 2009-10, 2010-11 & 2011-12 in restricting the disallowance to 12.5% of purchases as against the entire purchases disallowed as non-genuine/bogus by the Assessing Officer. The assessee was engaged in the business trading in industrial tools and accessories like bearings belts, bits drills, filed return of income on 21.09.2009, 16.09.2010 and 24.09.2011 and declaring income of ₹ 77,236/-, ₹ 24,192/- & ₹ 1,41,979/- for the A.Y: 2009-10, A.Y. 2010-11 and A.Y.2011-12 respectively. Subsequently, Assessing Officer received information from the DGIT (Inv.,), Mumbai about the accommodation entries provided by various dealers without there being transportation of any goods and assessee was also one of the beneficiary from those dealers. The assessments were reopened under section 147 of the Act. The Assessee vide letters dated 12.02.2015 and 25.06.2015 furnished 3CD audit report along with schedule and ROI and bank statements and submitted that the purchases made are genuine. The Assessee further submitted that the payments are made through account payee cheques as such contended that all the purchases are genuine. The assessee did not produce the parties before the Assessing Officer. Assessing Officer treated entire purchases of ₹ 2,06,304/-, ₹ 3,43,073/- &₹ 2,60,603/- for the A.Y.2009-10, A.Y. 2010-11 and A.Y. 2011-12 respectively as non-genuine and added to the income of the assessee. On appeal the Commissioner (Appeals), considering the evidences and various submissions of the assessee, restricted the disallowance to an extent of 12.5% of the non-genuine purchases. Against the order of Commissioner (Appeals) appeal was filed before the Appellate Tribunal by the Revenue. On a perusal of the order of the Commissioner (Appeals), the Appellate Tribunal found that the Commissioner (Appeal) considered this aspect of the matter elaborately with reference to the submissions of the assessee and the averments in the Assessment Order and following the decision of Gujarat High Court in the case of ‘Commissioner of Income Tax – I v. Simit P. Seth’ – 2013 (10) TMI 1028 – Gujarat High Court restricted the disallowance to 12.5% of the non-genuine purchases. The High Court did not find any infirmity in the order passed by the Commissioner (Appeals) in restricting the addition/disallowance to the extent of 12.5% of the purchases. Grounds raised by the revenue are dismissed. Third party information In ‘COMMISSIONER OF INCOME TAX-7, NEW DELHI VERSUS M/S ODEON BUILDERS PVT. LTD.’ – 2019 (8) TMI 1072 - SUPREME COURT, the Commissioner (Appeal) found that the entire disallowance in this case is based on third party information gathered by the Investigation Wing of the Department, which have not been independently subjected to further verification by the AO who has not provided the copy of such statements to the appellant, thus denying opportunity of cross examination to the appellant, who has prima facie discharged the initial burden of substantiating the purchases through various documentation including purchase bills, transportation bills, confirmed copy of accounts and the fact of payment through cheques and VAT Registration of the sellers and their Income Tax Return. The Commissioner (Appeals) held that the purchases made by the appellant from Padmesh Realtors Private Limited is found to be acceptable and the consequent disallowance resulting in addition to income made for ₹ 19,39,60,866/-, is directed to be deleted. The said order was affirmed by the Appellate Tribunal and High Court. The Supreme Court dismissed the appeal stating that no substantial question of law arises from the impugned order of the Appellate Tribunal. Inquiry to be conducted In ‘Nish Gems v. Income Tax Officer – 21 (2) (4), Mumbai’ 2020 (11) TMI 521 - ITAT MUMBAI – the assessee was engaged in the business of Exporters of Cut and polished Diamonds, filed return of income on 27.10.2007 for the A.Y.2007-08 declaring income of ₹ 87,141/- and the return was processed u/s. 143(1) of the Act. The Assessing Officer received information from the DGIT (Inv.), Mumbai about the accommodation entries provided by A2 Jewels and Kothari & Co. and assessee was also one of the beneficiaries from such dealers. The assessee produced purchase bills showing details of sales, bank statements, and copy of ledger account showing payment made to the said parties and submitted that the purchases made are genuine. The Assessing Officer was of the opinion that assessee had obtained only accommodation entries without there being any transportation of materials. He treated purchases of ₹ 15,42,185/- as non-genuine and added to the income of the assessee. The Commissioner (Appeals) sustained the reopening of assessment and restricted to disallowance to 30% of alleged bogus purchases and sustained 70% of the addition made by the Assessing Officer. The Appellate Tribunal observed that the Assessing Officer treated the purchases made by the assessee as bogus purchases through one of the concerns which issued only accommodation entries. No independent enquiries have been conducted by the Assessing Officer before treating such purchases as bogus. The Appellate Tribunal relying on the judgment in’ Amy Diam Vega Jewellery Private Limited v. Deputy Commissioner of Income Tax’ (supra) directed the Assessing Officer to estimate the profit element from bogus purchases @4% and recompute the income of the assessee. Fair profit The Revenue Authorities may, in the course of dealing with bogus transactions, may calculate the gross profit that can be earned from the value of bogus transactions and such amount would be disallowed. In ‘Commissioner of Income Tax – I v. Simit P. Seth’ – 2013 (10) TMI 1028 – Gujarat High Court, the assessee is engaged in the business of trading in steel on wholesale basis. For the assessment year 2006-07, the assessee filed a return of income declaring total income of ₹ 1,95,500. The assessment was reopened by issuing notice under section 148 of the Income-tax Act on March 28, 2008. During the course of the reassessment proceedings, the Assessing Officer noticed that some of the alleged suppliers of steel to the assessee had made their statements on oath to the effect that they had not supplied the steel to the assessee but had only provided sale bills. In turn, they were receiving a small commission. The Assessing Officer, therefore, concluded that the total purchases of ₹ 41,04,903 cumulatively made from the said three parties were bogus and added the entire amount of ₹ 41,04,903 to the gross profit of the assessee. The assessee thereupon preferred appeal an before the Commissioner (Appeals). The Commissioner (Appeals) held that the purchases were not made by the said three parties, but believed that the appellant-assessee had made the purchases from other parties in the open market. The Commissioner (Appeals) retained 30% of the purchase cost as the probable profit of the assessee. The Commissioner (Appeals) reduced the additions from ₹ 41,04,903 to ₹ 12,31,471 and deleted the balance of ₹ 28,73,432. On the appeal the Tribunal was of the opinion that 12.5% of the disputed purchases should be retained in the hands of the assessee as business profit. Against this order the assessee filed appeal before High Court. The High Court held that the only question that survives is what should be the fair profit rate out of the bogus purchases which should be added back to the income of the assessee. The Commissioner adopted the ratio of 30% of such total sales. The Tribunal, however, scaled down to 12.5%. The High Court noticed that in the immediately preceding year to the assessment year under consideration the assessee had declared the gross profit at 3.56% of the total turnover. If the yardstick of 30% as adopted by the Commissioner (Appeals) is accepted the gross profit rate will be much higher. In essence, the Tribunal only estimated the possible profit out of purchases made through non-genuine parties. No question of law in such estimation would arise. The estimation of rate of profit return must necessarily vary with the nature of business and no uniform yardstick can be adopted. The High Court dismissed the appeal filed by the assessee. This case law has been followed by High Courts and Appellate Tribunals. In ‘Mohamed Ismail I.A., Shaikh v. Income Tax Officer 26(3)(4), Mumbai’ – 2020 (11) TMI 604 – ITAT, Mumbai, the assessee is a scrap dealer and the gross profit during the year was 4.04%. The Commissioner (Appeals) held that it is only the net profit which can be brought to tax and not the entire purchases. The Commissioner (Appeals) allowed the addition to the extent of 25% of the bogus purchases thereby confirming ₹ 12,80,322/- by following the decisions of the Gujarat High Court in the case of CIT vs. Simit P. Sheth (supra). The Appellate Tribunal considered that addition sustained by Commissioner (Appeals) is on the higher side and is unreasonable. The Appellate Tribunal considered that in such type of cases the normal presumption is that assessee might have purchased the goods from the grey market thereby saving incidental expenses thereby earning a higher profit than the normal profits. It would be fair and reasonable if a rate of 8% is applied on the said alleged bogus purchases. The Appellate Tribunal directed the Assessing Officer to apply gross profit @ 8%. The order of Commissioner (Appeal) is modified, accordingly. In ‘Income Tax Officer – 19 (2)(3), Mumabi v. Mtihalal Bhavarlal Jain’ 2020 (11) TMI 477 – ITAT, Mumbai, the Appellate Tribunal observed that considering the nature of business of the assessee the Assessing Officer has made peak amount invested in alleged bogus purchases, whereas the Commissioner (Appeals) has scaled down addition to 12.50% gross profit on total alleged bogus purchase. Although, both authorities have taken different method and rate of profit for estimation of income from alleged bogus purchase, but no one could support said rate of gross profit with necessary evidences or any comparable cases. The assessee is into the business of trading in ferrous and nonferrous metals and the rate of profit in this kind of business is very low. Considering facts and circumstances of this case and consistent with view taken by the Co-ordinate Bench in number of cases, the Appellate Tribunal was of the considered view that 12.50% gross profit rate adopted by the Commissioner (Appeals) appears to be on higher side and hence, the Appellate Tribunal directed the the Assessing Officer to estimate 6% gross profit on alleged total bogus purchases from those parties. - Decided partly in favor of assessee. Evidence In case of allegations on bogus transactions, the assessee is to prove that alleged transaction is genuine, with proper documents as evidence. Otherwise it is possible that the Assessing Officer may conclude that the same is bogus transaction. In ‘Amy Diam Jewellery Private Limited v. Deputy Commissioner of Income Tax’ 13(3)(2), Mumbai’ 2017 (10) TMI 236 – ITAT, Mumbai, the Appellate Tribunal held that in the absence of delivery challans, proper stock records and based on the depositions of the suppliers that they have provided only accommodation bills, the Assessing Officer has rightly concluded that the assessee has obtained only bogus bills and assessee might have purchased goods in gray market. The Assessing Officer estimated the Gross Profit Margin on such purchases at 8% which the Commissioner (Appeals) reduced to 4% taking note of the report of the Task Group for Diamond Sector submitted to the Department of Commerce in which it was reported that net profit in diamond manufacturing is in the range of 1.5 to 4.5% and in trading in the range of 1 to 3%. The appellants business is of trading in polished diamonds in respect of the impugned purchases. The Appellate Tribunal held that a margin of 4% is considered to be appropriate. Bogus LTCG In ‘Uttung Hitendra Thakur v. Income Tax Officer, Ward 4(5), Thane’ – 2020 (11) TMI 641 – ITAT, Mumbai, the assessee filed the return of income electronically on 28.11.2014 declaring an income of ₹ 18,24,000/-. The prices of the shares were rigged by the group of operators to accommodate beneficiaries seeking long term capital gain and losses to evade the taxes. The Assessing Officer also noted that the SEBI found evidences of share price rigging to create non genuine long term capital gain to benefit various beneficiaries and consequently passed order under section 11(1), 11(4) and 11(e) of SEBI Act, 1992. The Assessing Officer also relied on the statements recorded of the chairmen and main directors of the Companies involving in rigging of prices. The AO came to the conclusion that it was an organized way of doing price rigging, securing gains to beneficiaries by paying STT on the sale and purchase of shares done on the recognized stock exchange and finally treated the said long term capital gain and made an addition of ₹ 98,93,959/- and further added ₹ 66,948/- towards commission paid for securing such capital gain by framing assessment under section 143(3) of the Act dated 30.12.2016. The Commissioner (Appeals) upheld the findings of the Assessing Officer. Aggrieved against the order of Commissioner (Appeals), the appellant filed the present appeal before the Appellate Tribunal. The Appellate Tribunal observed that the assessee purchased 43000 shares of Jolly Plastic Industries Ltd. on 08.05.2012 at a cost of ₹ 6,96,600/- through South Asia Portfolio Pvt. Ltd., Delhi. Thereafter, the same number of shares i.e. 43000 equity shares were sold for a consideration of ₹ 1,06,27,540/- within 13 months from the date of purchase. From the perusal of the nature of credit, it is seen that the same has come through sales of shares which fact has also not been doubted by the Department. The source of money is through broker who has undertaken the transaction of the shares lying with the assessee purchased in the earlier years and same has been sold after paying due taxes in the form of STT. Thus, nature of the credit stands fully explained. If it is to be held that assessee has routed his own unaccounted money, then there has to be some material to provide live link nexus to show that the unaccounted money has been routed under the garb of transaction of purchase and sale of shares. If the availability of shares is not in doubt then the sale of the same also cannot be doubted. It is not a case here that any such information or material was found or discovered that the assessee beneficiary of any accommodation entry nor there is any such statement or material either from the broker or from the stock exchange or from elsewhere. The Tribunal set aside the addition made by the Assessing Officer. Bogus purchase of machinery In ‘Income Tax Officer 22(2)(7), Mumbai v. Shashi Natwar Waghela (Legal heir of late Mr. Natwar B. Waghela), Mumbai and (vice versa)’ – 2020 (11) TMI 595 – ITAT, Mumbai, the assessee purportedly purchased Offset printing machine from M/s. Span Enterprises and the machine was installed at the premises of the assessee by Jupiter Graphics. The Assessing Officer in order to verify genuineness of the purchase issued notice under section 133(6) of the Act to the vendor of the machine. The notice was received back unserved with the remarks ‘Left’. The Assessing Officer thereafter, sent Inspector to the address who reported that the vendor was not available at the address furnished by the assessee. The Assessing Officer merely on the basis of enquiries conducted at the alleged premises of the supplier formed an opinion that it is a case of bogus purchase. The first appellate authority deleted the addition of ₹ 57,36,933/- in respect of bogus purchases . Against the order of Commissioner (Appeals) both the assessee and the Revenue filed appeal before the Appellate Tribunal. The Revenue contended that the Assessing Officer reopened assessment for assessment year 2009-10, as the assessee had indulged in bogus purchase of machinery from declared hawala dealers. The notices sent to the parties returned as ‘Left’. The assessee failed to produce the vendor of the machine as well as the party that had installed the machine. The names of both the above said parties appear in the list of hawala dealers declared by Maharashtra Sales Tax Department. Since the assessee failed to prove genuineness of the purchase, the Assessing Officer rightly disallowed the cost of machinery, cost of installation as well as, depreciation claimed by assessee on the said machine. The Revenue prayed for reversing the finding of Commissioner (Appeals) and restoring the addition/disallowance made by Assessing Officer in respect of bogus purchase. The Appellate Tribunal observed that the assessee in order to prove the genuineness of the purchase has furnished invoice and the sanction letter of the bank. The assessee had financed the purchase and installation of the machine from Andhra Bank. The bank had certified that payments were made to Span Enterprises, the vendor and Jupiter Graphics, who had installed the machine. This fact has not been rebutted by the Department. It is noteworthy that the machine was purchased during the financial year 2008-09 and Inspector visited the premises of the vendors in December, 2014. The possibility of vendors shifting the place of business in between cannot be ruled out. Further, no finding of fact has been recorded by the Assessing Officer that these parties never had their place of work at the given addresses. Thus, the right course to verify purchase and installation of machine was to visit the premises of the assessee, which the Inspector failed to do. The purchases alleged to be bogus is not a trading asset but a fixed asset. The purchase of fixed asset is not reflected in the P&L Account, hence, the same was not claimed by the assessee as expenditure. Once the expenditure has not been claimed, the same cannot be disallowed. The Appellate Authority upheld the order of Commissioner (Appeal) in deleting the addition qua alleged bogus purchase of machinery and allowing assessee’s claim of depreciation on the same. The appeal of Revenue is without any merit and hence, the same is dismissed. Conclusion The number of cases dealing with the bogus transactions under the income tax is more. In GST it is enormous. This will retard the revenue of the Government and also affect the economy of the country. Therefore the Government has to take actions to arrest such transactions by making suitable laws. The business entities are also to revert from dealing with bogus transactions by which the business can be run smoothly.
By: Mr. M. GOVINDARAJAN - December 15, 2020
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