ITAT Mumbai Limits Addition to 20% in Bogus Purchase Cases: Rejects 100% Disallowance Where Sales are Genuine
In a significant ruling concerning the assessment of accommodation entries and alleged non-genuine commercial transactions, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has reinforced the principle of "Real Income." In the case of ITO Vs Ashokkumar Kothari, the Tribunal adjudicated that when the Revenue Department accepts the sales figures of an assessee as genuine, it cannot simultaneously treat the entire value of corresponding purchases as bogus. Consequently, the Tribunal upheld the decision to restrict the tax addition to a profit estimation of 20%, rejecting the Assessing Officer's attempt to disallow 100% of the purchase value.
This detailed analysis explores the factual matrix of the case, the procedural history under the Income Tax Act 1961, the arguments presented regarding Section 69C, and the judicial reasoning that led to the dismissal of the Revenue's appeal.
Factual Background and Assessment History
The dispute centers on the assessment year 2010–11. The assessee, an individual, operates a trading business dealing in timber, plywood, and laminate sheets. Initially, the assessee filed a return of income declaring Rs. 54,73,590/- on 28.09.2010. This return was processed under Section 143(1) of the Income Tax Act 1961. Subsequently, the case was selected for scrutiny, and an assessment order was passed under Section 143(3) on 30.01.2013, accepting the returned income.
Reopening of Assessment
The tranquility of the concluded assessment was disturbed when the Directorate of Income Tax (Investigation), Mumbai, forwarded information suggesting that the assessee was a beneficiary of hawala transactions. Based on this intelligence, the assessment was reopened under Section 147. A reassessment order was passed on 03.03.2014, assessing the income at Rs. 58,68,037/-.
However, the matter did not end there. Further intelligence indicated that the assessee had procured accommodation entries—essentially bogus purchase bills—from specific hawala operators. Consequently, a second round of reassessment was initiated under Section 143(3) read with Section 147 by the Assistant Commissioner of Income Tax, Circle–29(1), Mumbai (hereinafter referred to as the Assessing Officer). The order for this round was passed on 17.03.2016.
The Core Controversy: Bogus Purchases
During the reassessment proceedings, the Assessing Officer (AO) confronted the assessee with data received from the DGIT (Investigation). The data alleged that the assessee had booked bogus purchase bills totaling Rs. 9,26,170/- from three specific entities:
- M/s Kwality Enterprises: Rs. 3,24,788/-
- M/s Supreme Sales: Rs. 2,06,395/-
- M/s Dezens Associates: Rs. 3,94,447/-