Bogus Purchase Addition: Assessee gave no input & so there was no way to determine a gross profit – Entire amount deemed unexplained
Non Participation during assessment proceeding could be costlier. Here is one such case before Bombay HC.
Let us have a Short Overview of the case:
This Bombay High Court judgment in Pr. Commissioner of Income Tax-5, Mumbai vs. Kanak Impex (India) Ltd. highlights the severe consequences of non-participation in tax assessment proceedings, especially in cases involving alleged bogus purchases. Here’s a summary:
The Issue:
– The assessee was reassessed under Section 147 for alleged bogus purchases of ₹20.06 crores.
– The assessee did not respond to any notices, leading to an ex-parte assessment under Section 144 read with Section 147, where the entire amount was disallowed.
CIT(A) and ITAT Decisions:
– The CIT(A) reduced the addition to 12.5% of the purchases (as gross profit), relying on a Gujarat High Court precedent.
– The ITAT upheld the CIT(A)’s decision, citing another precedent.
– The problem is that the CIT(A) and ITAT came to a gross profit percentage without any input from the assessee.
Bombay High Court’s Decision:
– The Bombay High Court overturned the lower authorities’ decisions.
– The court disallowed the entire amount of the alleged bogus purchases as unexplained expenditure under Section 69C.
– The court’s primary reason was the assessee’s complete lack of participation throughout the assessment and appeal processes.
– The High Court determined that because the assessee gave no input, there was no way to determine a gross profit, and thus the entire amount was deemed unexplained.
Key Points:
The key reason behind this ruling was the assessee’s complete non-participation in the assessment proceedings. In past cases where GP addition was applied, the assessee had actively participated and had provided evidence and explanations to substantiate its purchases. In contrast, in this case, the assessee failed to engage at any stage, neither before the AO nor before CIT(A) or ITAT.
This judgment highlights the critical importance of hiring competent tax consultants. The assessee’s representatives failed to raise a crucial argument-requesting the remand of the case back to the AO to submit additional evidence and explanations regarding the alleged bogus purchases. Due to this oversight, the ruling under Section 69C, read with Section 115BBE, along with penalties under Section 271AAC, could result in severe tax consequences-unless the judgment is overturned by the Supreme Court.
The Copy Of the judgment is as under:
