Chander Bhan Yogesh Kumar vs Principal Commissioner of Income Tax, Delhi-10

PER VIKAS AWASTHY, JM:

This appeal by the assessee is directed against the order of Principal Commissioner of Income Tax, Delhi-10 [in short 'the PCIT'] passed u/s. 263 of the Income Tax Act,1961(hereinafter referred to as 'the Act') dated 29.03.2025, for AY 2018-19.

The assessee in appeal has assailed the order of PCIT on merits as well as, validity of revisional powers u/s. 263 of the Act exercised by the PCIT in the facts and circumstances of the case.

The facts of the case in brief as emanating from records are: The assessment for AY 2018-19 in the case of assessee was reopened on the basis of information received that the assessee was one of the beneficiaries of fake claim of input tax credit in lieu of commission. The case of Revenue is that the assessee has obtained bogus purchase entries to the tune of Rs.42,50,404/- from M/s. Jai Bhagwati Sales during FY 2017-18 i.e. relevant to AY 2018-19. During the course of reassessment proceedings, the assessee in order to prove genuineness of the transaction of purchases furnished various documents viz:-

The Assessing Officer (AO) after examining the aforesaid documents held that the assessee has made claim of Rs.42,50,404/- bogus purchases. The AO following the decision rendered in the case of PCIT vs. Mohommad Haji Adam & Company, 103 taxmann.com 459 (Bom.) and PCIT vs. Paramshakti Distributor (P) Ltd. in ITA No.413 of 2014 decided on 15.07.2010 by the Hon’ble Bombay High Court, restricted the addition to 12.5% of the alleged bogus purchases. The AO accepted assessee’s closing stock and the sales declared by the assessee. The assessee accepted the addition made by the AO.

Shri Raja Ram Gupta, appearing on behalf of the assessee submits that a bare perusal of the impugned order would show that the PCIT has exercised its revisional powers on mere suspicion. The AO has held the entire purchases from M/s. Jai Bhagwati Sales as bogus and has thereafter made addition by applying GP rate of 12.5%. The PCIT in the impugned order has disallowed entire purchases made by the assessee from M/s. Jai Bhagwati Sales. The PCIT is trying to substitute his view by making total disallowance of such purchases instead of GP addition made by the AO on purchases from Jai Bhagwati Sales. The reason given by the PCIT for making total disallowance of the alleged bogus purchases from M/s. Jai Bhagwati Sales is that the payments for transportation were made in cash. The ld. AR submits that the reasons given by the PCIT for invoking revisional power u/s. 263 of the Act are merely based on surmises and conjectures. The PCIT has failed to take note of the fact that the sales declared by the assessee have been accepted by the AO. The Assessing Officer has not rejected books of account and no infirmity was found by the AO in the stock register. The ld. AR submits that where the closing stock and the sales declared by the assessee have not been disputed by the revenue, entire alleged bogus purchases cannot be added. It is only the profit element in the bogus purchases that can be added back. In support of his submissions, he placed reliance on following decisions: -

Per contra, Rajesh Chandra representing the department vehemently defended the order of PCIT and prayed for dismissing appeal of the assessee. The ld. DR submits that the assessee has obtained bogus entries from M/s. Jai Bhagwati Sales a proprietorship firm managed by Vikas Jain, a declared entry provider. The ld. DR reiterated findings of the PCIT and prayed for dismissing appeal of assessee.

We have heard the submissions made by rival sides and have examined the orders of authorities below. A perusal of the assessment order dated 25.03.2023 passed u/s.147 r.w.s. 144B of the Act shows that the assessment in case of the assessee for AY 2018-19 was made u/s.147 of the Act as the assessee was held to be one of the beneficiary of fake claim of input tax credit in lieu of commission. It is alleged that the assessee has obtained bogus purchase bills from M/s. Jai Bhagwati Sales to the tune of Rs.42,50,404/- during FY 2017-18. Though, the assessee in order to discharge its onus to prove genuineness of purchase transaction from M/s. Jai Bhagwati Sales furnished various documents viz. Sales invoices issued by M/s. Jai Bhagati Sales; Bank account statement highlighting payments made to M/s. Jai Bhagwati Sales; Month wise details of sales and purchases, etc. The AO held that the purchases made by the assessee amounting to Rs.42,50,404/- from M/s. Jai Bhagwati Sales are bogus. The AO made addition of 12.5% of alleged total bogus purchases i.e. to the extent of profit element embedded in the bogus purchases. The said addition was made by the AO, after considering various decisions rendered by Hon’ble Bombay High Court. The PCIT in exercise of revisional powers u/s.263 of the Act added back entire amount of bogus purchases. After examining the impugned order passed by the PCIT in exercise of revisional powers u/s.263 of the Act, we are of the opinion that the PCIT has invoked the revisional powers only to substitute his opinion in place of the AO. It is not a case where the AO has accepted bogus purchases as genuine. The AO has held entire purchases made by the assessee from M/s. Jai Bhagwati Sales as bogus but has made addition only to the extent of GP rate i.e. 12.5% following the decisions rendered by Hon’ble High Court.

In the case of PCIT vs. Mohommad Haji Adam & Company (supra), the Hon’ble Bombay High Court held that there was no discrepancy between purchases shown by the assessee and sales declared, the entire bogus purchases cannot be added and it is only the gross profit rate on such purchases that can be applied for making the addition. Expressing similar view in the case of PCIT vs. Paramshakti Distributor (P) Ltd. (supra), the Hon’ble Bombay High Court held that where the sales declared by the assessee have been accepted by the Department, the entire alleged bogus purchases cannot be added back as the sales are made from the purchases. Therefore, it is only the profit element embedded in such bogus purchases that has to be brought to tax. Similar view has been expressed by the Hon’ble Bombay High Court in the case of PCIT vs. Batliboi Environment Engineering Ltd. (supra).

In the instant case, the assessee had furnished various documents to discharge its onus in proving the genuineness of the purchases made from M/s. Jai Bhagwati Sales. Still, the AO held the purchases made from M/s. Jai Bhagwati Sales as non-genuine and has made addition of only element of GP embedded on such bogus purchases. The assessee has declared GP of 3.81% against the said GP rate the AO has made addition of 12.50%.

The PCIT has held the findings of AO erroneous and prejudicial only for the reason that the assessee has made payments for transportation bills in cash and not through banking channels. The PCIT with reference to such cash payments observed, “this raises serious doubts regarding the genuineness of the transactions, as payments made via banking channels serve as crucial evidence to substantiate the actual movement of good”. This clearly shows that the findings of the PCIT are based on suspicion. It is a well settled law that suspicion howsoever strong cannot partake the character of documentary evidence. The PCIT failed to take note of the fact that the AO has accepted the sales. No discrepancy was found by the AO in the stock register as well. There is not even a single observation by the PCIT with regard to rejection of books and stock register. The AO has held purchases made by the assessee from M/s. Jai Bhagwati Sales as bogus so are findings of the PCIT. The only difference is that the AO has made addition to the extent of profit element embedded in such bogus purchases which is line with the judicial precedent and the PCIT intends to make addition of the entire bogus purchases. Thus, the PCIT wants to substitute his opinion for making entire addition with that of the AO. The provisions of section 263 of the Act does not allow the PCIT to substitute his opinion with that of the AO, if the view taken by the AO is in accordance with law. The Hon’ble Delhi High Court in the case of CIT vs. Sunbeam Auto Ltd., 332 ITR 167 has held:

Thus, in light of facts of the case and decision discussed above, we find merit in appeal of the assessee.

In the result, impugned order is set aside and appeal of the assessee is allowed.