[Opinion] Taxability of Alleged Bogus Purchases

Mukesh Kohli – [2023] 146 taxmann.com 428 (Article)

Now a days we see number of assessment orders in which addition had been made u/s 69C on the allegation of bogus purchases by the Assessing officers. Due to this there are many points which came to the minds of professionals like us, let us discuss these points.

Can the A.O. disallow the bogus purchases if he had not disputed corresponding sales transactions?

If the A.O. disallows the alleged bogus purchases but he does not dispute the corresponding sales transactions, then no disallowance can be made by A.O. There are number of case laws on this subject, few of these case laws are as under: –

The Hon’ble Bombay High Court in the case of Pr. CIT v. Nitin Ramdeoji Lohia [2022] 145 taxmann.com 546 held that Where Assessing Officer made addition by disallowing expenses on purchases on ground that an information was received from sales tax department that assessee was beneficiary of accomodation entries on account of bogus purchases, since Assessing Officer had not disputed corresponding sales transactions, purchases also could not be bogus and, thus, impugned addition made on account of bogus purchases to be deleted.

In this case the Respondent assessee was engaged in the business of trading in industrial oil and transport services. A return of income was filed by the assessee declaring a total income at Rs. 4,47,970/-. The Sales Tax Department of the Government of Maharashtra provided information to the Assessing Officer (A.O.) giving names, addresses and details of persons, who had provided entries of bogus purchases. The said information also contained details of beneficiaries of such bogus bills. Based upon the information so received, the A.O. issued notice under section 148 of the Act, followed by the statutory notices under sections 143(2) and 142(1) of the Act and the order of assessment under section 143(3) r/w section 147 of the Act was passed on 30th March, 2015 and total income assessed at Rs. 1,46,82,548/-. The A.O. thus made an addition of Rs. 1,42,34,578/- on account of alleged bogus purchases from Hawala dealers/parties.

An appeal was preferred by the assessee before the CIT (Appeals). The appeal was allowed interalia on the ground that the A.O. having not disputed the sales, it was not a case of bogus purchases and that it was at best a case of inflated purchases. The CIT (Appeals), however, was of the opinion that the gross profit shown by the assessee at 0.69% was very low in that particular kind of trade and, therefore, estimated the gross profit at 5% and further directed the A.O. to make an addition in the gross profit ratio and delete the balance addition made.

Both the Revenue as also the assessee preferred appeals against the order passed by the CIT (Appeals), whereas the Revenue in its appeal challenged the deletion of Rs. 2.45 crores on account of alleged bogus purchases, the assessee questioned the order to the extent the gross profit rate was calculated at 5% as against 0.69% declared by the assessee, which had resulted in an addition of Rs. 10,59,974/-. The Tribunal dismissed the appeal filed by the Revenue and allowed the appeal preferred by the assessee. It was held that the case of the Revenue was based on the investigation carried out by the Sales Tax Department only and that no cross-examination of the persons, whose names had figured in the list so prepared by the Sales Tax Department, was allowed. It was held that the A.O. had failed to complete the investigation in the case and that the affidavits and the confirmation letters filed by the assessee from three dealers from whom it had made purchases, were not inquired into at all and that the assessee had discharged the onus of proving the factum of making purchases from the respective parties and that there was no contrary evidence brought on record by the A.O. in that regard. It, therefore, while allowing the appeal of the assessee, directed the A.O. to delete the addition on account of bogus purchases.

From the above facts it is thus clear that the CIT (Appeals) partially allowed the appeal of the assessee on the ground that the A.O. had not disputed the sales and, therefore, this was not a case of bogus purchases, inasmuch as if the purchase was bogus, it would not be possible for assessee to complete the transaction by way of sale, unless it could be shown from the record that the corresponding sale was also a sham transaction.

We are in agreement with the view expressed by the CIT (Appeals) that, if the purchases are bogus, it would be impossible for the assessee to complete the business transaction and that if the purchase is bogus, the corresponding sale also must be bogus or else the transaction would be impossible to complete and as a necessary corollary, unless the corresponding sale is held to be bogus, the purchase also cannot be held to be bogus, rather it would be a case of purchase from bogus entities/parties. That view has been upheld by the Tribunal in principal while dismissing the appeal of the Revenue.

Insofar as the question of law framed as (d) is concerned, we find that the Tribunal has not addressed the issue of adopting the gross profit rate of 5% on the alleged Hawala purchase of Rs. 2.45 crores as against the rate of 0.69% declared by the assessee, despite the fact that the CIT (Appeals) had specifically gone into that question in its order dated 18th August, 2015 and had directed the A.O. to make 5% addition in the gross profit ratio, while deleting the balance addition.

We, therefore, deem it appropriate to remand the matter back to the Tribunal only to the limited extent of going into that issue. Parties to appear before the Tribunal on 05th December, 2022 and orders to be passed thereupon, preferably within a period of three months thereafter.

The Hon’ble Bombay High Court in the case of Pr. CIT v. Jagdish Thakkar [2022] 145 taxmann.com 414 held that Where assessee-proprietor, engaged in resale of industrial goods, made payments through banking channels towards certain purchases and furnished evidences in form of delivery challans, purchase bills etc. relating to same, Tribunal was justified in holding that assessee had discharged initial burden or onus of providing details of parties and, thus, case did not fall within ambit of section 69C.

The assessee, a proprietor, was engaged in the business of resale of industrial goods. During the previous year relevant to the assessment year under consideration, the assessee earned profits and gains from business or profession and income from other sources. He filed his return of income after claiming deduction under chapter VI-A.

The Assessing Officer was of the view that the goods were purchased in cash from the market and sale bills were obtained from hawala dealers for that purpose. He, thus, made an addition on the ground that the assessee had violated section 69C.

On appeal, the Commissioner (Appeals) all the purchases in the case could not be treated as bogus. The Commissioner (Appeals) also observed that the Assessing Officer had not made available any evidence to show that the money which was given by cheques to such persons had come back to the assessee in the form of cash. Thus, Commissioner (Appeals) restricted disallowance out of bogus purchases to 10 per cent of such purchases and directed Assessing Officer to disallow 10 per cent of alleged bogus purchases being the profit from purchases made from parties during the year under consideration.

On second appeal, the Tribunal upheld the order passed by the Commissioner (Appeals).

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