Bogus Purchases: ITAT Restricts Addition to 5% Following Consistency Principle

The assessee, an individual engaged in business, filed his return for AY 2010–11 declaring income of Rs. 1,11,68,137. The assessment was reopened under section 147 on the basis of information from the Investigation Wing, Mumbai, relying on data from the Sales Tax Department, Maharashtra, alleging that certain suppliers were issuing accommodation purchase bills without actual delivery of goods.

The Assessing Officer treated purchases aggregating to Rs. 5,68,98,134 from 26 parties as non-genuine and, while accepting corresponding sales, estimated profit at 25% of such purchases. On appeal, the CIT(A) upheld rejection of books under section 145(3) but reduced the profit rate to 12.5%. Both the assessee and the Revenue filed cross appeals before the Tribunal.

Question of Law: What should be the appropriate percentage of profit to be estimated and added to income in respect of alleged bogus purchases where sales are accepted and quantitative records are maintained?

ITAT’s Decision: The ITAT held that since sales were not disputed, quantitative stock records were maintained, and payments were made through banking channels, the entire purchase amount could not be disallowed. Only the profit element embedded in such purchases could be brought to tax.

Following the Tribunal’s own decisions in the assessee’s case for AYs 2011-12 and 2012-13, involving identical facts and the same parties, the ITAT applied the principle of consistency and restricted the addition to 5% of the alleged bogus purchases. Therefore, the Revenue’s appeal was dismissed and the assessee’s appeal was partly allowed.

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