ITAT Surat Rules Out Section 271(1)(c) Penalty on Estimated Addition in Alleged Bogus Purchase Case

Background of the Dispute

The Income Tax Appellate Tribunal, Surat Bench, in Ramprakash Vijayvergia Vs ITO (ITAT Surat), examined whether penalty under Section 271(1)(c) of the Income Tax Act 1961 can be sustained when the final addition in the quantum assessment is made only on an estimated/ad hoc basis.

The appeal arose from an order dated 22/12/2023 passed by the National Faceless Appeal Centre, Delhi / Commissioner of Income Tax (Appeals), confirming a penalty of Rs. 18,42,620 imposed by the Assessing Officer (AO) under Section 271(1)(c) through order dated 09/03/2018 for Assessment Year (AY) 2012-13.

The assessee is engaged in the business of trading, manufacturing, importing and exporting diamonds and had filed its return of income for AY 2012-13 on 14/08/2012 declaring a total income of Rs. 3,43,200.

Origin of the Alleged Bogus Purchase Addition

Search on Bhanwarlal Jain Group and Investigation Findings

During scrutiny assessment, the AO relied on the outcome of a search conducted by the Investigation Wing, Mumbai, on Bhanwarlal Jain Group on 03/10/2013. According to the AO, the search material revealed that:

  • Certain concerns allegedly controlled by the said group were benami concerns.
  • These concerns were allegedly engaged in issuing accommodation entries.
  • The assessee was identified as one of the beneficiaries of such accommodation entries.

On this basis, the AO concluded that purchases claimed from two parties – Ankita Exports and Megha Gems – aggregating to Rs. 4.98 crores represented bogus or ingenuine purchases.

Addition by AO in Quantum Assessment

After issuing a show cause notice and referring to the modus operandi of the alleged entry provider, the AO treated the full amount of purchases of Rs. 4.98 crores from Ankita Exports and Megha Gems as bogus and added the entire sum to the income of the assessee in the assessment order.

Thereafter, in the quantum appeal, the matter travelled to the CIT(A).

Relief in Quantum Proceedings

Restriction by CIT(A) to 12.5%

In the first appellate proceedings, the CIT(A), vide order dated 17/02/2017 in Appeal No. CAS/3/26/2015-16, did not uphold the entire disallowance of Rs. 4.98 crores. Instead, the CIT(A):

  • Accepted that only a profit element embedded in such purchases could be brought to tax.
  • Restricted the disallowance to **Rs.