ITAT Mumbai Deletes Addition on Alleged Bogus Purchases: GP Rate Comparison Prevails Over Ad Hoc Estimation

Background and Overview

The Mumbai Bench of the Income Tax Appellate Tribunal, in the case of Dwarkaprasad Dhanraj Bharadia Vs ITO (ITAT Mumbai), partly allowed the assessee's appeal for Assessment Year 2009-10 and directed deletion of an addition of Rs. 16,72,877/-, which represented 12.5% of purchases aggregating to Rs. 1,33,83,012/- from four concerns alleged to be accommodation-entry providers. The ruling rests on a comparative gross profit analysis and reinforces the binding precedent laid down by the Bombay High Court on the treatment of disputed purchases in trader assessments.

Profile of the Assessee and Original Assessment

The assessee, an individual proprietor of M/s Melitha Impex, was engaged in the import, export, and trading of fabrics and fabric pieces. For AY 2009-10, he filed his original return of income on 24.09.2009 declaring a total income of Rs. 2,87,102/-. The return was initially processed under Section 143(1) and subsequently taken up for scrutiny, culminating in an assessment under Section 143(3) on 25.11.2011, which determined the total income at Rs. 3,25,510/-.

Trigger for Reassessment: Investigation Wing Findings

The case was later reopened following information received from the office of the Director General of Income Tax (Investigation), Mumbai, arising out of a search and seizure operation conducted by the Investigation Wing in the Pravin Kumar Jain group. The Investigation Wing reported that concerns controlled by this group were engaged in providing accommodation entries in the nature of unsecured loans, advances, and fictitious purchases, without conducting any real trading activity. These concerns were said to be operated through dummy directors, proprietors, or partners and had no physical stock.

On this basis, the Assessing Officer formed the belief that the assessee had obtained purchase invoices amounting to Rs. 1,33,83,012/- from the following four concerns:

A notice under Section 148 of the Income-tax Act, 1961 was issued on 19.03.2015, after obtaining prior approval of the Principal Commissioner of Income Tax-18, Mumbai. The assessee requested that his original return be treated as the return filed in response and sought the recorded reasons, which were furnished on 09.02.2016.

Documents Furnished by the Assessee During Reassessment

In response to notices issued under Section 143(2) and Section 142(1), the assessee furnished an extensive set of documents, including:

• Ledger accounts of the four suppliers along with their confirmations
• Purchase invoices from the disputed suppliers
• Bank statements evidencing payments through account-payee cheques
• Copies of corresponding sale invoices and delivery challans
• Purchase, sale, and stock registers
• A party-wise nexus chart linking disputed purchases to corresponding sales with quantitative details
• Tax audit report, profit and loss account, and balance sheet

Assessing Officer's Findings and Addition Made

Despite the above, the Assessing Officer declined to accept the submissions in full. He observed that documents such as invoices, ledger accounts, and cheque payments were routinely maintained by both accommodation-entry providers and their beneficiaries and did not, by themselves, establish genuineness. He also stated that the assessee had submitted details at the fag end of the time-barring period, preventing cross-verification of the four suppliers through notices under Section 133(6).

Crucially, however, the Assessing Officer did not dispute receipt of the goods or the corresponding sales. The assessment order recorded the following categorical finding:

"Thus the receipt of material in question is not in doubt having regard to the quantitative details furnished by the assessee. But, the profit offered on these purchases can certainly be unreliable and is required to be estimated."