ITAT Mumbai Caps Bogus Purchase Addition At 3% Where Sales Are Not Disputed

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) in D.G. Exports Vs DCIT has once again clarified that when alleged bogus purchases are linked to fully accepted sales and no defects are found in stock or quantitative records, the entire purchase value cannot be added to income. Instead, only the profit component embedded in such purchases can be brought to tax.

This ruling reiterates two key income-tax principles:

  1. Taxing only the real income, not merely book entries; and
  2. Maintaining consistency with the Department’s own stand in earlier assessment years involving the same assessee and same set of parties.

The Tribunal ultimately restricted the disallowance to 3% of the alleged bogus purchases, following the approach already adopted by the Assessing Officer (AO) in earlier years in the assessee’s own case.

Background of the Dispute

Reopening of Assessment and Basis of Allegation

  • The assessee, D.G. Exports, had filed its original return of income on 16-08-2011, which was processed under Section 143(1) of the Income Tax Act 1961.
  • Subsequently, based on information received from DGIT (Inv.), Mumbai, the AO reopened the assessment under Section 147.
  • The allegation was that the assessee had obtained accommodation entries in the guise of purchase bills from entities belonging to the Bhanwarlal Jain Group, aggregating to Rs. 4,06,38,798/-.
  • Notice under Section 148 was issued, and the assessee filed its return in response.

The AO examined the documents and explanations submitted by the assessee but did not accept them. Holding the purchases to be entirely bogus, the AO:

  • Treated the full amount of Rs. 4,06,38,798/- as non-genuine purchases, and
  • Added the same to the assessee’s income,
  • Completing the reassessment under Section 147 read with Section 143(3) on 06-12-2018, determining total income at Rs. 4,35,31,620/-.

Order of CIT(A), NFAC

The assessee challenged the reassessment order before the CIT(A), National Faceless Appeal Centre (NFAC), Delhi.

The CIT(A):

  • Relied heavily on the findings of the Investigation Wing, Mumbai, which had concluded that the concerns from which purchases were shown were shell companies or accommodation entry providers linked to Bhanwarlal Jain Group.
  • Accepted that the Investigation Wing’s material was credible and relevant for the assessee’s case.
  • Observed that these entities existed primarily for issuing bogus bills and facilitating tax evasion.

On this basis, the CIT(A) fully endorsed the AO’s view and confirmed the entire addition of Rs. 4,06,38,798/- as bogus purchases. The assessee then carried the matter in further appeal before the ITAT.

Issues Raised Before the ITAT

The key grievances, particularly in Ground No. 7 and Ground No. 8, were centered around:

  1. Whether the entire amount of purchases could be added when corresponding sales had been accepted by the Department, and
  2. Whether the disallowance should be restricted to the Gross Profit (GP) rate of 3%, in line with the treatment accorded in earlier assessment years in the assessee’s own case.

Assessee’s Arguments

The assessee, represented by the Learned Authorised Representative (Ld. AR), primarily contended as follows: