ITAT Surat Partly Allows Appeal in Bogus Purchase Case: Reopening Valid, Addition Cut to 5%

Background of the Dispute

The Income Tax Appellate Tribunal, Surat Bench, adjudicated an appeal filed by Mahavir Agro Industries Vs ITO for Assessment Year 2012-13, relating to alleged bogus purchases aggregating to ₹48,53,545 from entities linked to an alleged accommodation entry operator.

The impugned order under challenge was issued by the National Faceless Appeal Centre (NFAC), Delhi on 31-07-2024. The assessee contested both:

  • The validity of reopening under Section 148 of the Income Tax Act 1961, and
  • The quantum of addition made towards alleged non-genuine purchases.

The Tribunal ultimately:

  • Upheld the reopening of the assessment, rejecting the jurisdictional objections, and
  • Restricted the addition on account of bogus purchases to 5% of the purchase value, treating it as the profit element embedded in such purchases.

Issues Before the ITAT

Jurisdictional Challenge: Validity of Reopening under Section 148

The assessee raised an additional ground before the Tribunal challenging the reopening of assessment on multiple counts:

  1. The assessee claimed it was not provided with the statement of Shri Narendrakumar Narayandas Agrawal.
  2. It was argued that no opportunity of cross-examination of Shri Narendrakumar Narayandas Agrawal was granted.
  3. The reopening was alleged to be based purely on information from the DDIT (Investigation) without the Assessing Officer conducting any independent inquiry.
  4. The notice under Section 148 dated 29.03.2019 was alleged to be mechanically issued and therefore invalid.

The Tribunal examined these contentions in light of the material available with the Assessing Officer and the procedural steps undertaken before issuance of notice.

Substantive Issue: Addition on Account of Bogus Purchases

On the merits, the central controversy was whether the entire purchase amount of ₹48,53,545 alleged to be bogus should be added to income, or whether only a reasonable profit margin embedded in such purchases should be taxed.

The purchases in question were from the following concerns:

  • Shyam Baba Trading Co.
  • Balaji Agro Tradelink
  • Sai Baba Trading Company

All three concerns were stated to be controlled and operated by Shri Narendrakumar Narayanlal Agrawal, who was identified as an accommodation entry provider.

The Revenue relied heavily on the statement of Shri Narendrakumar Narayanlal Agrawal, wherein he reportedly admitted that:

  • He merely provided accommodation entries,
  • He never supplied any physical goods to the assessee, and
  • The assessee was one of the beneficiaries of such accommodation entries.

At the same time, the Revenue had:

  • Accepted the assessee’s total turnover of approximately ₹15 crore, and
  • Not disputed the quantitative details of sales reported by the assessee.

This created a legal tension: while purchases from specific parties were alleged to be non-genuine, the sales and over­all trading results of the assessee were accepted as such.

Tribunal’s Findings on Reopening under Section 148

Information from Investigation Wing and Application of Mind

The Tribunal observed that the Assessing Officer was in possession of specific information received from the Investigation Wing, including:

  • Material indicating that the concerns from which purchases were made were run by an accommodation entry operator, and
  • The statement of Shri Narendrakumar Narayandas Agrawal, implicating the assessee as a beneficiary of such entries.

After analysing this material, the Assessing Officer: