Supreme Court refuses to interfere with 6% addition on bogus purchases in PCIT Vs Prathana Gems

Background of the dispute

The controversy in PCIT Vs Prathana Gems arose out of an assessment framed for Assessment Year 2014-15. The assessee had e-filed its return of income declaring nil income. Subsequently, information was passed on by the Investigation Wing, Mumbai to the Assessing Officer, indicating that the assessee had allegedly obtained accommodation entries in the form of non-genuine purchase bills.

The allegation was that the assessee had booked purchases aggregating to ₹1.31 crore from concerns linked with the Bhanwarlal Jain Group, which was identified by the Investigation Wing as an organized network engaged in issuing bogus bills and providing accommodation entries without actual movement of goods.

Relying on this information, the Assessing Officer concluded that the purchases recorded from these entities were non-genuine and represented bogus purchases intended to inflate expenses and suppress true profits.

Assessment proceedings and 100% addition

Action by the Assessing Officer

During scrutiny, the Assessing Officer treated the entire purchase amount of ₹1.31 crore from the entities associated with the Bhanwarlal Jain Group as bogus. On this basis, a 100% addition of the disputed purchase value was made to the income of the assessee:

• The purchases were considered entirely non-genuine.
• The entire amount of ₹1.31 crore was added back as income.
• The logic adopted was that since the purchases were bogus, the entire claimed expenditure must be disallowed.

The assessee challenged this action in appeal, contending that only the profit element embedded in such alleged bogus purchases can be brought to tax, and not the full amount of the purchase value itself, particularly when corresponding sales were not disputed.

Order of the Commissioner (Appeals)

The Commissioner (Appeals), however, affirmed the view of the Assessing Officer. The addition of the entire purchase amount was upheld in first appeal, thereby sustaining the 100% disallowance of the alleged bogus purchases claimed from the said entities.

ITAT’s partial relief: restriction to 6% of purchases

Tribunal’s approach to bogus purchases

On further appeal, the assessee approached the Income Tax Appellate Tribunal (ITAT), Surat Bench. The Tribunal took a different approach from the Assessing Officer and the Commissioner (Appeals). It examined the pattern of cases involving the Bhanwarlal Jain Group and considered earlier coordinate bench decisions on similar facts.

The Tribunal noted that under the scheme of the Income Tax Act 1961, when purchases are treated as non-genuine or accommodation entries, and corresponding sales are not doubted, the appropriate course is generally to tax only the profit element or margin embedded in such purchases, instead of adding back the entire purchase value. This is to avoid an excessive or unrealistic estimation of income when some part of the transaction is already reflected on the sales side.

Reliance on earlier decisions

The ITAT relied on its earlier ruling in a comparable matter arising out of transactions with the Bhanwarlal Jain Group, where disallowance had been confined to a reasonable percentage of the purchase amount. Consistent with that reasoning, the Tribunal held that:

• The entire ₹1.31 crore could not be added as income.
• Only the income component (profit element) implicit in such alleged bogus purchases should be brought to tax.
• Estimation of that profit element at 6% of the disputed purchases would adequately protect the interests of the Revenue and address the possibility of revenue leakage.

ITAT’s conclusion

After evaluating the factual matrix, including the nature of the purchases and the background of the suppliers, the ITAT restricted the addition to 6% of ₹1.31 crore.