Bogus Purchase Additions Restricted to Profit Element; ITAT Delhi Reduces GP Rate to 11% Net of GST

The assessee, an individual, was subjected to search and seizure proceedings as a beneficiary of alleged accommodation entries in the form of bogus purchase bills provided by entities managed and controlled by the Sanjay Jain group. Pursuant to the search, assessments for AYs 2018-19, 2019-20 and 2020-21 were completed under Section 153A read with Section 143(3). The Assessing Officer made multiple additions on account of alleged bogus purchases, including purchases from Sanjay Jain group entities, purchases from certain parties with low income disclosures, and purchases from a party treated as non-existent based on a Section 133(6) inquiry.

The CIT(A) partly allowed the assessee’s appeals by sustaining additions only to the extent of profit element on purchases from Sanjay Jain group entities at 12.5% and deleting other purchase-related additions. Both the assessee and the Revenue filed cross appeals before the Tribunal for all three years.

Question of Law Before Tribunal: Whether, in cases of alleged bogus purchases found during search, the entire purchase amount is liable to be added to income, or whether only the profit element is; and whether the GST component forming part of such purchases should be excluded while estimating profit.

ITAT’s Ruling: The ITAT upheld the finding that purchases made from entities controlled by the Sanjay Jain group were not genuine. However, it rejected the Revenue’s plea for full disallowance of such purchases. The Tribunal reiterated that where sales are not doubted and consumption is accepted, only the profit element embedded in bogus purchases can be taxed.

The Tribunal found the CIT(A)’s application of 12.5% GP to be excessive, particularly when the assessee’s declared GP was 8.71%. It further held that the value of alleged bogus purchases must be taken net of GST, including GST adjusted through input tax credit, before applying any profit rate. Thus, the Tribunal directed the Assessing Officer to compute additions by applying a GP rate of 11% on the net value of such purchases, and thereafter reduce the GP already declared by the assessee.

The Tribunal also upheld the deletion of additions relating to purchases from parties merely on the basis of low-income disclosures and alleged non-existence, holding that the assessee had discharged its onus through documentary evidence and that the Assessing Officer failed to rebut the same. The assessee’s appeals were partly allowed, and all appeals of the Revenue were dismissed for AYs 2018-19, 2019-20, and 2020-21.

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