The Bombay High Court has ruled that the income tax addition could be made only on the basis of proper proof of bogus purchases.
The court opined that any half hearted approach on the part of the AO to make additions on the issue of bogus purchases would not be conducive. It also cannot be on the basis of superficial inquiry being conducted in a manner not known to law in its attempt to weed out any evasion of tax on bogus transactions. The bogus transactions are in the nature of a camouflage and/or a dishonest attempt on the part of the assessee to avoid tax, resulting in addition to the assessee’s income. It is for such reason, the approach of the AO is required to be well considered approach and in making such additions, he is expected to adhere to the lawful norms and well settled principles. After scrutiny, the transactions are found to be bogus as the law would understand, in that event, they are required to be discarded by making an appropriate permissible addition.
The court stated that if the Income Tax Authorities are of the view that there are questionable and / or bogus purchases, in that event, it is the solemn obligation and duty of the Income Tax Authorities and more particularly of the A.O. to undertake all necessary enquiry including to procure all the information on such transactions from the other departments / authorities so as to ascertain the correct facts and bring such transactions to tax. If such approach is not adopted, it may also lead to assessee getting away with a bonanza of tax evasion and the real income would remain to be taxed on account of a defective approach being followed by the department.
Facts
The assessee is stated to be engaged in the business of trading in resins and chemicals on a wholesale basis. On information received from the DGIT (Investigation), Mumbai the Assessing Officer (AO) invoked Section 147 of the Income Tax Act, 1961 to reopen the completed assessment by issuing notice under Section 148. In response, the assessee filed a revised return on 20 March 2013, as also sought the reasons as recorded by the A.O. The A.O. was of the opinion that the assessee had made purchases from six parties who were declared by the Sales Tax Department as ingenuine dealers. During the assessment proceedings, the assessee filed ledger accounts, conformation of suppliers, purchase bills, delivery bank statements and other documentary evidences to justify the genuineness of the purchases.
The AO nonetheless was of the opinion that the disputed purchases did not have nexus with the corresponding sales. AO made an addition of the amount under Section 69C of the Act on the ground of there being unexplained payments qua the disputed purchases.
Order passed by the AO was challenged by the assessee in appeal before the Commissioner of Income Tax (Appeals).
The assessee contended that the AO has not rejected the books of accounts by invoking the provisions of Section 145(3), hence, the A.O. was not justified in invoking the provisions of Section 69C. It was also assessee’s case that during the hearing in question as well as the preceding two years, the assessee had declared gross profit for the assessment year 2007-2008 at 4.23% and for the assessment year 2008-2009 at 4.28%.
It was also contended that for the subsequent assessment year 2009-2010 a gross profit of 4.74 % was declared in respect of the disputed purchase the disclosed gross profit was 0.27% which was lower by 4.47% than the normal gross profit margin of 4.74% in respect of other accepted genuine transactions. It was also contended that if the disallowance is sustained, there will be an abnormal increase in the gross profit at 17.81% which was almost impossible in trading activity of chemicals and hence it was urged before the CIT(A) that an alternate to estimate the total income at 5% on the purchases needs to be accepted.
Conclusion
The court dismissed the appeals of the department and held that the appeal did not give rise to a substantial question of law.
Case Details
Case Title: Pr. Commissioner Of Income Tax V/S SVD Resins & Plastics Pvt. Ltd.
Citation: INCOME TAX APPEAL NO. 1662 OF 2018
Judges: Justice G. S. Kulkarni & Justice Somasekhar Sundaresan
Date of Order / Judgment: 07/08/2024
