Bogus Purchase: Income Tax Addition can be best limited to GP Ratio

Briefly stated the facts of the case is that a survey operation u/s 133A was conducted in the business premises of Shri Sanjay Sharma, Hanuman Market, Raipur and Shri Kamlesh Keshrwani, Canvassing Agent, Raipur including the premises of the assessee on 15/03/2016.

The point of inquiry was of bogus bills that required through the broker and entry providers to the rice millers and rice traders. These brokers and entry providers were individuals related to the rice milling and rice trading business. Fake or bogus bills were provided to the rice millers by the brokers himself and through entry providers. Survey action was also carried out in the case of Nagrik Sahakari Bank, Raipur where some of these bank accounts were maintained. The official’s statements were recorded where they have admitted that they were aware that these accounts were run by a few other individuals (entry providers). It would be pertinent to mention here that all these bogus firm’s operators (brokers and entry providers) have admitted on oath at the time of their statement recorded u/s 131 of the IT Act that they never owned or operated any godowns or mills or never owned any stock in order to carry out any sale and purchase of goods. Their only work was to provide bogus bills to rice traders and millers.

In their statements, it was categorically admitted that they acted as an intermediary in arranging the bogus sale and purchase bills between the parties without actual delivery of goods. It was revealed from their statements that the modus operandi of these firms is to provide bogus purchase bills. Brokers Shri Sanjay Sharma, Shri Aditya Sharma, Shri Kamlesh Kesharwani, Shri Ghanshyam Rijwani, Shri Narad Sahu and others have stated on oath that they provided bogus entries or bogus bills to various rice millers in lieu of which they received commission income only. It was stated that after receiving the payment from the rice millers in their respective bank accounts, the same were withdrawn in cash on the same day. Later on, the cash withdrawn was given back to these millers after deducting their commission. These bogus bills had no transport or bill/transport challans or weigh bridge ships in support of its genuineness. In normal course of business events, the bills of purchases are accompanied by the bills of transport and with bridge ships. This is more important in present scenario where volume of goods purchased and transported is in huge quantity. But factually since no such physical movement of goods ever occurred, the bills do not accompanied the aforesaid vital documents. The survey action at multiple points supported the fact that these bogus bills were provided to the rice millers and traders. The rice millers then made an RTGS payments on these bogus bills into the bank account of these bogus firms. Cash was withdrawn by these operators from the banks and given back to the rice millers.

It was established that these bogus dealers don’t carry out any business activity either by way of purchase or sale of goods. Transactions are carried out by issuing bills to the intending purchasers without any transfer of goods. Such dealers indulging in the business of bogus bills and in some cases individuals, as above, have opened multiple firms by different names.

Addition of Bogus Purchase

The AO made disallowance of 25% of the bogus purchases to the present case. Also, the facts mentioned above reveals that said amount of bogus purchase which leads to rejection of books of account for the specific purpose and for the reasons detailed above, the purchases recorded in the books of account of the assessee amounting to 167376250/- and out of that bogus purchase AO made disallowance of 25% of such purchase which worked out to Rs. 41844062/- and accordingly added to the total income of the assessee.

Aggrieved from the order of the assessing officer, the assessee carried the matter before the ld CIT(A) where in the assessee succeeds partly and got the relief as the CIT(A) restricted the Additions to GP Rate.

Aggrieved, from the order of the ld. CIT(A) the Revenue has filed this appeal.

ITAT Order:

9. We have persuaded the facts of the case and also have heard the lengthy arguments of both the counsel. It is undisputed facts that the assessee is indulging in bogus billing activities and at the same time respectfully following the decision of Hon’ble Bombay High Court relied upon by the counsel where in it is held that the entire purchase amount of such bogus purchase cannot be added at best the addition limited to the extent of G. P. Rate on purchases at the same rate of the genuine purchase. On being asked about the computation of separate G. P. Rate of these two activities the ld. AR of the assessee has submitted a chart which requires the detailed verification and since the said analyses has not been so far placed by the assessee before lower authorities we restore the matter back to the file of the assessing officer with a direction to tax the appropriate rate of G. P. which the assessee has adopted for other genuine purchase and sale transactions with this remark the grounds of the revenue is allowed for statistical purposes. At the same time assessee is also directed to submit the correct and full details as may be required by the assessing officer in this matter.