ITAT’s 10% Addition on Alleged Bogus Purchases Upheld by Bombay High Court

Background of the Revenue’s Appeal

The Revenue approached the Bombay High Court under Section 260A of the Income Tax Act 1961 challenging the order dated 10th November 2021 passed by the Income Tax Appellate Tribunal, Pune in the case of PCIT Vs Amcon Construction for AY 2011–12.

The dispute centred on additions made on account of alleged bogus purchases. The Assessing Officer had treated certain purchases as non-genuine based on information relating to hawala dealers and made additions accordingly. The CIT(A) sustained the addition at 25% of such purchases.

The assessee carried the matter to the ITAT. The Tribunal granted partial relief and confined the disallowance to 10% of the alleged bogus purchases, instead of 25% sustained by CIT(A). The Revenue, not satisfied with this reduction, filed an appeal before the High Court.

Questions of Law Raised by the Revenue

In its appeal, the Revenue framed the following substantial questions of law:

  1. Whether, in the facts and circumstances of the case, the ITAT was justified in directing the Assessing Officer to restrict the disallowance to 10% of hawala purchases, despite the assessee’s failure to produce primary evidence such as delivery challans, weighment slips and octroi receipts from M/s Oriental Enterprises?

  2. Whether the ITAT was correct, in law and on facts, in restricting the addition to 10% of the alleged bogus purchases without any explicit basis or reasoning, as alleged by the Revenue?

  3. Whether the ITAT erred in not applying the ratio of N K Proteins Ltd. v. Dy. CIT, where the Hon’ble Supreme Court had held that once purchases are found to be bogus, the entire purchase amount is liable to be added and not merely the profit element?

Assessee’s Stand: Issues Already Covered by Earlier Bombay HC Decisions

At the very outset before the High Court, learned counsel for the assessee submitted that the controversy raised by the Revenue stood concluded by earlier binding decisions of the same Court. Reliance was specifically placed on:

  • Principal Commissioner of Income-tax-1 vs. SVD Resins & Plastics (P.) Ltd.
  • CIT v. Ramelex (P) Ltd
  • Principal Commissioner of Income-tax vs. M/s. Paramshakti Distributors Pvt. Ltd.

According to the assessee, these judgments clearly laid down that:

  • When sales are accepted and not disputed by the Department; and
  • Purchases are not fully rejected;

only the profit embedded in such suspected purchases can be brought to tax, typically by applying a reasonable percentage, and not the entire purchase value.

Revenue’s Argument: Restore 25% Addition

Counsel for the Revenue, on the other hand, argued that:

  • The CIT(A) had reasonably sustained 25% disallowance on alleged hawala purchases.
  • The ITAT, by further reducing this to 10%, had acted without adequate justification.
  • The assessee allegedly failed to furnish basic evidences supporting actual movement of goods, such as delivery challans and weighment slips.
  • The decision in N K Proteins Ltd. v. Dy. CIT was cited to contend that where purchases are held to be bogus, the entire amount of such purchases must be disallowed and added to income.