ITAT Surat: Disallowance may be restricted to the extent of profit embedded in bogus purchases

Fact and Issue of the case

Brief facts of the case are that assessee is a proprietor of M/s Kaushal Exports, engaged in the business of trading in diamonds. The assessee filed his return of income for AY 2008-09 on 29.09.2008 declaring income of Rs.6,10,770/-. Initially the return was processed under section 143(1) without making any variation in the return of income. Subsequently, the case was re-opened on the basis of information received from Director of Income Tax (Investment.) Mumbai, wherein it was informed that investigation wing carried out a search and seizure operation under section 132 of the Act against Praveen Kumar Jain Group Mumbai (‘P.K. Jain’ in short), who was indulging in providing accommodation entries through its various benami concerns for providing bogus bills of sales are purchases of diamonds without delivery of actual goods.

The Revenue in its appeal in ITA No.284/SRT/2019 has raised the following grounds of appeal:-

“(i) On the facts and circumstances of the case and in Law, the Ld. CIT(A) has erred in restricted the addition made by the AO of Rs.3,40,03,788/- on account of bogus purchases to 5%.

(ii) On the facts and circumstances of the case and in Law, the Ld. CIT(A) has failed to appreciate the fact that the entire purchase from alleged concerns were bogus and was only to suppress the profit of the beneficiaries which is substantiated by the statement on oath given by the entry provider.

(iii) On the facts and circumstances of the case and in Law, the Ld. CIT(A), Surat ought to have upheld the order of the Assessing Officer. It is, therefore, prayed that the order of the Ld. CIT(A)-1 Surat may be set-aside and that of the Assessing Officer’s order may be restored.”

Observation of the Court

The Tribunal has considered the rival submissions of both the parties and have gone through the orders of authorities below. We have also deliberated on the various documentary evidences placed on record by the assessee. We have further deliberated on the various case laws relied by the assessee. We find that during the assessment the AO made addition of 100% of purchases shown by the assessee from four parties which were managed by “PK Jain” and his group. The AO made addition on the basis of report of Investigation Wing about the search & seizure made at the ‘PKJain’ group and the statement recorded therein by taking view that there was clinching evidence collected by Investigation agency that the assessee is beneficiary of the accommodation entry. The AO rejected the contention of assessee is that they are maintaining all records. The AO also held that the books of account maintains by assessee cannot be regarded as full and complete. The Assessing Officer rejected the books of account of assessee by holding that information received from the investigation wing that all the concerns from whom the assessee has shown purchases are managed by PK Jain are not genuine. The Assessing Officer made addition of 100% purchases shown from all four parties. The ld CIT(A) upheld the addition to the extent of 5% of the aggregate of purchases shown from four parties by taking view that profit element of profit embedded in such type of transactions can be added to the income of the assessee. The ld CIT(A) while restricting the addition to the extent of 5% referred various decision of Tribunal and Jurisdictional High Court. Before us, the ld CIT-DR for the revenue vehemently argued that the disallowances restricted by ld CIT(A) is very low and it should be at least be restricted to 25% of the disputed purchases. We have examined the facts of the case independently and find that the AO while making 100% disallowances of the disputed purchases solely relied on the report of the investigation wing. No independent investigation was carried out by the AO. No specific findings were given on the documentary evidences filed by the assessee. The sale of the assessee was not disputed by the AO. As recorded above the ld CIT(A) restricted the disallowances to the extent of 5% of the disputed purchase on the basis of theory evolved in various decision that disallowance may be restricted to the extent of profit embedded in such purchases. It is also a matter of fact that such purchases are shown to inflate the expenses and to reduce the profit. The AO made addition of 100% of the disputed/ impugned purchase. In our view, the AO is not justified in disallowing the 100% of purchases in absence of proper investigation of such purchases. No doubt the disallowance made by the ld CIT(A) is also on estimated basis.

On verification of facts, we find that the assessee has shown total turnover of Rs.186.96 Crore. The assessee while filing return of income has shown income of Rs. 6,10,770/-. The assessee has shown net profit @ 0.0051%, which is extremely on lower side. The submission of Ld. AR of the assessee on the basis of report of task force constituted by Department of Commerce, Ministry of Commerce & Industry, wherein the industries have requested for presume to tax for net profit @ 2% which will encourage traders that BAP introduce by Government would achieve success. We are not convinced the submission of Ld.AR as the dispute before us is about the genuinely of purchases, which has been shown only to inflate the expenses and reduce the profitability. As we have already noted that the assessee had shown extremely low net profit. Therefore, considering overall facts and circumstances of the case, we are of the view that the disallowance restricted by Ld. CIT(A) in on the lower side. Hence, we modify the order of the ld CIT(A) and restrict the addition of the disputed purchases to the extent of 6% and direct the AO to re-compute the disallowances accordingly. In the result, the grounds of appeal raised by the revenue are partly allowed.

In the result, appeal of Revenue for both the years are partly allowed and appeal of assessee for A.Y. 2013-14 is dismissed. A copy of the instant common order be placed in the respective case file(s).