[Bombay HC] – Only a profit element can be added in respect of bogus purchases under Section 69 of the Income Tax Act, 1961 when the sales are not doubted.
The Hon’ble High Court of Bombay upheld the ITAT decision in the case of The Principal Commissioner of Income Tax v. Ashwin Purshotam Bajaj[1], wherein it was held that only the profit component of a bogus purchase can be included in the taxable when the sales are not doubted, and the stocks are reconciled.
Brief facts and observation of the Court
Based on the information received from the sales tax department, the Assessing Officer (‘A.O.’) re-opened the assessment proceedings u/s. 148 of the Income Tax Act, 1961 (‘ITA’) against the Respondent Assessee. The AO alleged that the Respondent had obtained accommodation entries from hawala operators and thus booked bogus purchases without the supply of any goods. The A.O., therefore, treated the transaction as bogus purchases and added the entire amount of bogus purchases to the income of the Respondent and passed the assessment order.
The CIT(A) held in favour of the Respondent that since the sales are not doubtful i.e., the Respondent had indeed purchased goods from other dealers, only the profit element of 12.5% of the bogus purchases could be added to the income of the Respondent. Aggrieved by the decision, both the Appellant department and Respondent Assessee filed an appeal before the Income Tax Appellate Tribunal (‘ITAT’). The ITAT upheld the findings of the CIT(A).
The Hon’ble High Court of Bombay agreed with the findings of the CIT(A) and ITAT and held that where the sales are not doubted, the entire amount of bogus purchases cannot be added to the income. The Hon’ble Bombay High Court held that the estimation of 12.5% as gross profit on bogus purchases is a question of fact and refused to go into this question.
Conclusion
This decision is significant since it reiterates the legal position that where the sales are not doubted by the AO, the addition u/s 69 of the ITA can only be in respect of the profit element contained in such bogus purchases. However, it is important to note that the estimation of the profit element in bogus purchases is subjective and would depend on the facts and circumstances of each case.
[1] The High Court of Bombay (2023), Income Tax Appeal 576 of 2018.
Authored by Purvi Garg, Associate at Metalegal Advocates. The views are personal and do not constitute legal opinion.