Bogus Purchase: Compilation of few cases wherein addition is restricted to the GP Ratio

 

The issue of bogus purchase is a recent phenomenon mostly in view of the GST Investigation and bogus ITC Claims. One must note that the treatment that should be given by the tax administrator in such a case need to be different by the GST Authorities vis a vis Income Tax Authorities. The aim of GST authorities is to disallow the ITC on such purchases. However, the information is thereafter further shared by the GST Authorities with the income tax authorities as well as. After receiving information by income tax authorities, there are many cases wherein the addition of the entire amount of purchase is done by the income tax officer in the hands of the buyer treating it as bogus. However, in my view, this is not at all correct.

Here is a compilation of few cases wherein it has been held that addition should be only be there to the extent of the GP Ratio. Tax professional and taxpayers may just make all below cases as part of the submission in reply to the show cause notice wherein addition of entire amount is proposed by the Assessing Officer.

a) Bombay High Court in the case of PCIT Vs Mohommad Haji Adam & Co. [Income Tax Appeal No. 1004 of 2016, Date of Judgement/Order : 11/02/2019] has held that  No purchases can be rejected without disturbing the sales in case of a trader. In this case, the court further observed that the additions limited to the extent of bringing the G.P. rate on purchases at the same rate of other genuine purchases

b) ITAT Raipur in the case of ITO Vs Satyanarayan Nathulal Gandhi Chowk [Appeal Number : ITA No. 178/RPR/2018, Order Dated 31/05/2022] has held that the entire purchase amount of such bogus purchase cannot be added at best the addition limited to the extent of G. P. Rate on purchases at the same rate of the genuine purchase.

c) Delhi ITAT in the case of Lata Garg Vs DCIT [ITA Nos. 9145 & 7187/Del./2019] has held that entire purchases cannot be considered as bogus since the sales have not been disturbed and some of the parties to whom letters were issued are existing in the given address and no discrepancy was found in the stock and the stock register was tallying with quantitative details.

d) Bombay High Court in the case of Pr. CIT v. Nitin Ramdeoji Lohia [2022] 145 com546 held that Where Assessing Officer made addition by disallowing expenses on purchases on ground that an information was received from sales tax department that assessee was beneficiary of accommodation entries on account of bogus purchases, since Assessing Officer had not disputed corresponding sales transactions, purchases also could not be bogus and, thus, impugned addition made on account of bogus purchases to be deleted.

e) There are few more cases wherein almost same principle as dicsused above has been laid donw. Few of such cases are as under:

1	M/s Andaman Timber industries Vs Commissioner of Central Excise, CIVIL APPEAL NO. 4228 OF 2006 (Supreme Court)
2	CITvs. Indrajit Singh Suri [2013] 33 taxmann.com 281 (Gujarat)
3	Albers Diamonds Pvt. Ltd. Vs ITO 1(1)(1), Surat I. T.A. No. 776 &1180/AHD/2017
4	The PCIT-5 vs. M/s. Shodiman Investments Pvt. Ltd. TTANO. 1297 OF 2015 (Bombay High Court)
5	Shilpi Jewellers Pvt. Ltd. vs. Union of India & Ors. WRIT PETITION NO. 3540 OF 2018 (Bombay High Court)
6	CIT in Vs. Mohmed Juned Dadani 35 5ITR 172 (Gujarat)
7	Micro Inks Pvt. Ltd. Vs. ACIT [2017] 79 taxmann.com 153 (Gujarat)
8	Shakti Karnawat Vs. ITO – 2(3)(8), Surat ITA 1504/Ahd/2017 and 1381 /Ahd/2017
9	Asian Paints Ltd. Vs. DCIT, [2008] 296 ITR 90 (Bombay)
10	PCIT, Surat 1 Vs. Tejua Rohit kumar Kapadia [2018] 94 taxmann.com 325 (SC)
11	Pankaj Kanwarlal Jain HUF Vs. ITO 2(3)(8) Surat ITA.No.269/SRT/2017