Gujarat High Court Upholds ITAT’s Restriction of Addition on Bogus Purchases to Profit Component Only

Background and Context

The Gujarat High Court in PCIT-1 Vs Pankaj K Choudhary reaffirmed an important income-tax principle: in cases of disputed or bogus purchases, only the profit embedded in such purchases can be brought to tax, not the entire purchase value.

The Revenue had invoked Section 260A of the Income Tax Act 1961 challenging the order dated 27.09.2021 passed by the Income Tax Appellate Tribunal (ITAT), Surat, relating to Assessment Year 2007-08. The controversy stemmed from additions made on alleged bogus purchases routed through entities linked to the Bhanwarlal Jain Group, a group commonly associated with providing accommodation entries in diamond trade.

The assessee was engaged in the business of import, export and trading in cut, polished and rough diamonds.

Original Assessment and Reassessment Proceedings

Initial Assessment

  1. An assessment under Section 143(3) of the Income Tax Act 1961 was completed on 10.03.2009.
  2. The total income was assessed at approximately Rs. 6.50 lakh (specifically Rs. 6,50,490/-).

Reopening of Assessment

Subsequently, the Investigation Wing at Mumbai provided information indicating that the assessee had allegedly taken accommodation entries in the nature of bogus purchases. Acting on this information:

  • The Assessing Officer (AO) reopened the assessment under Section 143(3) read with Section 147.
  • The reassessment culminated in a significantly enhanced assessed income of Rs. 4,40,50,830/-.
  • This figure incorporated an addition of Rs. 4,34,00,343/- on account of alleged bogus purchases.

Alleged Bogus Purchase Parties

The Revenue’s case was that the assessee had booked purchases from certain entities said to be controlled by the Bhanwarlal Jain Group, namely:

  • Parvati Exports
  • Mahalaxmi Gems Pvt. Ltd.
  • Mayur Exports

According to the department, these were mere name-lenders or paper concerns with no real trading activity, used only for issuing bills and providing accommodation entries.

Stand of the Assessing Officer

The AO treated the entire value of the disputed purchases as non-genuine.

  • 100% of the alleged bogus purchases, amounting to Rs. 4,34,00,343/-, was added to the income of the assessee.
  • The AO rejected the assessee’s contention that the purchases were genuine based on:
    • Confirmations
    • Purchase bills
    • Bank statements
    • Stock register
    • Copy of ITR of the suppliers

The AO held that routing transactions through the banking system alone could not establish genuineness when there was substantial material from the Investigation Wing to suggest that the suppliers were accommodation entry providers linked to Bhanwarlal Jain Group.

Relief Before Commissioner of Income Tax (Appeals)

Assessee’s Position

Before the Commissioner of Income Tax (Appeals) [CIT(A)], the assessee argued that:

  • Actual purchases had indeed been made, but perhaps not from the named parties.
  • Bills may have been obtained from the impugned concerns for business reasons (price, availability, etc.).
  • Disallowing the entire purchase value would be excessive since the goods had been traded and sales were accepted.

Findings of CIT(A)

The CIT(A) analyzed the accounts and audit details, including the trading and profit and loss account.

Key observations included: