VAT Hawala Data Insufficient for 100% Disallowance: Bombay High Court Affirms Restriction to Profit Element in Bogus Purchase Cases
Pr. CIT-3, Pune v. Ramelex Pvt. Ltd. (ITA No. 14 of 2022)
Facts:
1. Assessee’s case was reopened under section 147 based on information from the DG (Investigation), Pune, citing that the assessee had made bogus purchases (hawala transactions) aggregating to ₹2.05 crore from 12 parties listed by the Maharashtra Sales Tax Department.
2. The assessee responded that all purchases were genuine and supported by Purchase bills, ledger accounts, and bank statements. All payments were made through account payee cheques. The assessee pointed out a clerical error in the Sales Tax data—actual purchases from M/s Entech Enterprises were only ₹11.63 lakh (not ₹1.16 crore), supported by a VAT auditor’s certificate. The assessee also contended that the VAT assessment was still pending, and hence income tax proceedings relying solely on Sales Tax information were premature.
3. The Assessing Officer rejected the explanation and added the full ₹2.05 crore as bogus purchases. CIT(A) and ITAT restricted addition to 15% of the alleged bogus purchases.
Hon Bombay HC held as below:
1. The reopening and addition were solely based on third-party information from the Sales Tax Department, without giving the assessee an opportunity to cross-examine the alleged hawala suppliers. The information relied upon was never furnished to the assessee, violating principles of natural justice.
2. When VAT assessment was still pending, Income Tax additions on the same basis were premature and unsustainable.
3. Only profit embedded in alleged bogus purchases can be added, absent clear proof of bogus transactions. The CIT(A) and ITAT findings were concurrent findings of fact, and no substantial question of law arose.
The copy of order is as follows:
