ITAT Upholds Partial Relief in Rs. 5.31 Lakh Bogus Purchase Dispute, Dismisses Revenue Appeal

The Income Tax Department has filed this present appeal in the ITAT Mumbai, challenging an order dated October 09, 2024, passed by the Commissioner of Income Tax (Appeals) [CIT(A)] under section 250 of the Income-tax Act. The case is related to the Assessment Year 2010-11.

The assessee is involved in the business of trading in plywood, timber, and laminate sheets. The assessee filed its income tax return (ITR) for the year under consideration, declaring a total income of approximately Rs. 54.73 lakh. The return was initially accepted by the Assessing Officer (AO). Later, the case was reopened twice by the AO based on the information collected from the Investigation Wing, on the grounds of alleged bogus purchases made by the assessee.

The AO received information that the assessee had obtained purchase bills from certain parties who were identified by the Sales Tax Department as hawala operators providing accommodation entries without actual supply of goods. In the reassessment, the AO had questioned purchases amounting to Rs. 9.26 lakh, of which purchases from M/s Dezens Associates amounting to Rs. 3.94 lakh had already been subjected to addition in an earlier reassessment order dated March 03, 2014. The remaining purchases from M/s Kwality Enterprises and M/s Supreme Sales amounting to Rs. 5.31 lakh, the AO treated as non-genuine and made the addition of the complete amount to the assessee’s income under section 69C.

The aggrieved assessee filed an appeal before the CIT(A). Despite giving several opportunities, no one appeared for a personal hearing, nor were any submissions made. When the CIT(A) analysed the facts of the case, it noted that although the suppliers were not genuine, the sales declared by the assessee were accepted by the AO. Citing earlier judgments based on a similar issue, the CIT(A) held that when sales are accepted, the entire purchase cannot be disallowed. Instead, only the profit element embedded in such purchases could be brought to tax. Hence, the CIT(A) directed the AO to restrict the imposed addition to 20 per cent of the alleged purchases in question, granting partial relief to the assessee.

The Income Tax Department, dissatisfied with the action of the CIT(A), thereafter filed an appeal before the ITAT Mumbai, arguing that the full amount should be disallowed. When the tribunal examined the facts of the case, it did not find any evidence proving that the assessee had introduced unaccounted stock into the books or that the sales performed were not real. It held that the assessee likely made purchases from the open market and used accommodation bills. Therefore, taxing only the profit element was justified. The tribunal did not find any valid reason to interfere with the findings of CIT(A), and, in conclusion, dismissed the appeal of the tax department and granted partial relief to the assessee.