AI Structured Summary
Not yet generated for this judgment
Judgment
PER SANJAY AWASTHI, ACCOUNTANT MEMBER:
This is a batch of six appeals pertaining to the same assesse. The details of appeals under consideration may be captured as under: -
A. (i) ITA 5601 is assessee’s (Firm) appeal for AY 2019-20.
ITA 6753 is Revenue’s appeal (Firm) for AY 2019-20.
B. ITA 8215 is Revenue’s appeal (of assessee Firm) for AY 2020-21.
C. ITA 5602 is assessee’s (Firm) appeal for part of the year, April to September 2020 of AY 2021-22. This appeal arises from impugned order dated 25.07.2025.
D. (i) ITA 3458 is assessee’s (Company) appeal for part of the year – October, 2020 to March, 2021 for AY 2021-22.
ITA 4736 is Revenue’s appeal (Company) for part of the year – October, 2020 to March, 2021, for AY 2021-22. These two appeals arise from a common impugned order dated 17.04.2025.
These six appeals have certain similar facts and the grievances of both the Revenue and the assesse revolve around such common facts. Thus, these six appeals are being disposed of through a common order.
Some facts may be briefly recapitulated at this point. The assesse Firm was incorporated on 29.04.2017 and converted into a company with effect from 1.10.2020. This situation has led to two assessments for AY 2021-22, as a Firm for part of the year and as a company for the remaining part. In all the years under consideration, the Ld. AOs are seen to be in possession of certain information that, allegedly, the assesse had booked fictitious purchases ostensibly to suppress profits. The Ld. AOs have given a finding on facts regarding the non-verification of purchases from certain parties and even determined that some of the said parties were untraceable or had even denied having any business dealings with the assesse. Based on such findings, some of which have been arrived at in an ex parte manner, the additions were made in the respective years on the basis of alleged bogus purchases.
The assessees carried all these matters before the Ld. CIT(A), where some relief was afforded in the cases before him. We may at this juncture, discuss some issues through relevant entries from the first appellate order to better understand the facts: -
a)AY 2019-20 – Hence, it is held that disallowances of the entire purchase expenses as bogus is incorrect in this case. So additions of Rs.12,40,10,540 and corresponding notional commission of Rs.12,40,105 was unwarranted. The assesse submitted various details in respect of these purchases. As mentioned by the AO, on verification of the said details and the fact that the sale made by the assesse is not questioned, the purchases made from the said suppliers could not be entirely fictitious. Even though, there is reasonable doubt that the purchases may have been made from bogus parties, the purchases themselves are not bogus. The information received from investigation wing was that the appellant has made purchases amounting to Rs.35,27,62,027 from bogus/shell entities. Therefore, the profit on these purchases shall be computed at the rate of 5% considering the ratio laid down in the assessment order of assessee firm in subsequent Financial Year 2020-21. The appellant submitted that 5% is a very high profit margin for their line of business. But, the assessee could not produce comparable cases or related case laws about percentage addition in manufacturing of similar products. Hence, it shall be accepted that the percentage adopted by the AO is appropriate. The net profit at the rate of 5% of Rs.35,27,62,027 comes to Rs.1,76,38,101. Since the assessee has already shown the profit of Rs.59,59,020 in its books, therefore, the difference of Rs. 1,16,79,081 shall be added to total income under the head business of income of the assesse. As a result, grounds 5 and 6 are allowed and ground no.7 is dismissed.
AY 2020-21 During this year the addition was made by the Ld. AO on account of allegedly a mismatch between the figures of the trade creditors and that of the assesse. Eventually it transpired that the alleged differential was on account of reduction of GST from the purchases. The following finding is relevant: -
“6.2Ground no 4 is against addition of Rs.26,13,96,789/- under section 69C and ground no 5 is against addition of 2% of Rs.26,13,96,789/- under section 69A. As per Profit and Loss account, total purchases were shown as Rs.195,15,23,566/-. During assessment proceedings, the assessee submitted total purchases as Rs.221,29,20,355/-. This was due to the fact that purchases recorded in the P&L account is the value of the goods before GST. The appellant as a manufacturer get input tax credit. Excluding GST from the P&L account provides a clearer and more accurate picture of a business's operational performance because it properly reflects the cost of purchases and the revenue from sales, excluding GST that is merely passed through to the government. Including GST would overstate both purchases and sales, misrepresenting the business's actual profit margins. So GST payment is not recorded as an expense. However, payments to suppliers include GST payments, As per the submissions during appeal proceedings, the appellant has paid a total amount of Rs.230,15,30,501/- to 176 suppliers which includes GST component of Rs.35,09,56,185/-. From the submissions of the assessee as per para 4 above, it is clear that the shortfall in purchase amount is satisfactorily explained by the assessee. As a result, the addition of Rs.26,13,96,789/- under section 69C is held as unwarranted. Once it is proved that there are no accounted purchases, the notional addition of 2% of Rs.26,13,96,789/- under section 69A is also superfluous. As a result, grounds 4 and 5 are allowed.
AY 2021-22 [assessee as a Firm during April to September, 2020) – Assessee’s appeal [ITA 5602]. In this specific matter, the Ld. AO concluded that the allegedly bogus purchases were to the tune of Rs.54,64,45,846/- out of total turnover of business of Rs.78,06,47,550/-. The Ld. AO estimated net profit of 5% on the turnover of business, after reducing the declared income of Rs.83,84,483/- from the resultant figure. The Ld. CIT(A) upheld this action as under: -
“The assessing officer made some specific findings like It was noticed from GSTR3B that an amount of Rs.1,96,51,096/- tax liability has been shown for the month June 2020 and out of such GST liability of Rs. 1,87,65,692/- has claimed to have paid in cash and Rs.8,85,404/-has been claimed to have been paid by ITC. Whereas, return of GST filed for the month of June 2020, (as per GSTR3B), no outward supplies or inward supplies (Liable to reverse charges) has been disclosed. The appellant had no clear explanation for mismatches in GSTR1, GSTR3B and ITR. The reconciliation submitted by the appellant is clearly an afterthought. In spite of many notices issued during the assessment proceedings from 28.06.2022 onwards, the appellant submitted this reconciliation only on 15.12.2022, i.e at the fag end of assessment proceedings. 5.2 Regarding identity, creditworthiness and genuineness of creditors the appellant stated that it is beyond the control of the assessee that the supplier has completed its KYC or not under the GST. The assessee cannot be the auditor or the investigator to investigate the origin of the goods. In a general practice of business, a law compliant assessee checks the registration of the seller, take the tax invoice, verify the movement of goods and make payment to the seller. The assessee cannot be held responsible for the defaults committed by the other taxpayers. Department preserves the right to collect tax from the seller concerned for his sale tax liability, till the date of his cancellation of registration. In such a scenario it will be unfair to ask purchaser to pay, which is the primary liability of seller concerned to pay. The contention of the appellant is not acceptable. The assessing officer and verification unit has conducted extensive enquiries and established that many of the parties are not real suppliers. The appellant could not submit any documentary evidence to prove identity, creditworthiness and genuineness of such third parties. Instead a general explanation is given as above. In the same way, there was no clear explanation with documentary evidence regarding shortage of finished goods. Hence it is held that the rejection of books and estimation of profit percentage by the assessing officer is proper and valid. The appellant submitted that 5% is a very high profit margin for their line of business. But, the assessee could not produce comparable cases or related case laws about percentage addition in manufacturing of similar products. Hence, it shall be accepted that the percentage adopted by the AO is appropriate. As a result, ground no 3 is dismissed.”
In this appeal, it needs to be further mentioned that one supplier of “re-melted lead”, Shri Santosh Kumar Pandey of Shiv Bhagwati Traders/Narayan Traders has denied having supplied any material to the assesse (worth Rs.4,14,09,977), reference serial no.19 at page 6 of AO. Also, majority of parties mentioned in pages 5 & 6 of AO’s order had been suspended or cancelled for GST purposes. This fact would have some bearing on this adjudication and was thus required to be specifically mentioned.
AY 2021-22 (October, 2020 to March, 2021, in the status of a company): - These two appeals [ITA 3450 & 4736] involve ex parte order at the level of Ld. AO. Here the Ld. AO disallowed 25% of alleged bogus purchases of Rs.64.22 crores. Before the Ld. CIT(A), the assesse filed new evidences in his support under Rule 46A, but the same was rejected to be admitted. However, the Ld. CIT(A) called for information by himself and suo moto analyzed the documents. Thereafter the Ld. CIT(A) estimated a GP rate of 5% of alleged bogus purchases worth Rs.64.20 crores, and gave the benefit of GP of 3.7% already disclosed by the assesse. The following extract from the impugned order is relevant:
“15.Since, on the similar facts in the case of the appellant (assessed as firm for A. Y 2021-22) and for A.Y. 2023-24, the AO has made the addition on estimation basis@ 5% reduced by declared GP of respective year and 3:27% respectively as additional profit on the alleged non-genuine purchases, whereas in the impugned order, the AO has made addition @25% of the alleged bogus/non-genuine purchases. The assessment proceedings were completed u/s 144 of the Act and the appellant has provided relevant details in respect of impugned purchases from the 26 suppliers during the course of appellate proceedings to substantiate the impugned purchases. However, it is a matter of fact that the appellant has not filed any details before the AO and said 26 suppliers were non-filer for the A.Y. 2021-22 and also failed to respond to notice issued u/s 133(6) of the Act. Therefore, considering the different views taken by the AOs in the case of appellant (assessed as firm) in the same year as well as in the subsequent year (i.e. for A.Y. 2023-24 assessed as Pvt. Ltd.), I hereby held that estimated profit on the alleged non-genuine/bogus purchase should be taken @ 5%. However, as already discussed above that the G.P. ratio for the year under appeal is shown as 3.70% therefore, addition as 5-3.70=1.30% of alleged amount of bogus purchase of Rs.64,23,84,083/- which comes to Rs.83,50,993/- is sustained and rest of the addition is deleted. Thus, ground of appeal no. 6 is partly allowed.”
The six appeals before us contain grounds of appeal which may be briefly mentioned:
ITA 6753 [AY 2019-20 – Revenue’s appeal]: The grievance of Revenue is with regard to the relief given by Ld. CIT(A) whereas, it is averred that, the entire quantum of bogus purchased should be added, without subjecting them to any GP rate addition.
ITA 5601 [AY 2019-20 – Assessee’s appeal]: The assesse has challenged the action of Ld. CIT(A) in not adopting the GP rate figure of the assesse and has also challenged for not allowing proper opportunity to present the facts.
ITA 8215 [AY 2020-21 – Revenue’s appeal]: The grounds challenge the acceptance of additional evidence by the Ld. CIT(A) in spite of objections by the Ld. AO. Also the un-verifiability of purchases at the Ld. AO’s stage was not given due weightage.
ITA 4736 [AY 2021-22, Revenue’s appeal]: The Revenue has challenged the action of Ld. CIT(A) by questioning his action in restricting the disallowance to 5% of GP of alleged bogus purchases. It is averred that the entire allegedly bogus purchases should have been added.
ITA 3458 [AY 2021-22 – Assessee’s appeal]: The assesse has challenged the sustaining of addition of Rs.83,50,993/-.
ITA 5602 [AY 2021-22 – Assessee’s appeal]: The assesse has challenged the action of Ld. CIT(A) in upholding the determination of profit made by the Ld. AO at 5%.
Before us, the Ld. AR vehemently argued that the assessee’s book result did not deserve to be disturbed. Alternatively, through oral arguments and written submissions, the Ld. AR has stated as under for the years under consideration:
AY 2019-20 : To avoid litigation, the assesse agrees to offer GP @5% on alleged bogus purchases of Rs.35.21 crores, less GP already declared (@2.29%). This would result in an addition of Rs.95,43,591/- over and above the returned income.
AY 2020-21: For this year, the Ld. AR has pleaded that the action of Ld. CIT(A) deserved to be upheld since the Ld. CIT(A) has reconciled the GST figures in the turnover of business and has clearly demonstrated that there was no alleged suppression of profits once the GST figures were reconciled.
AY 2021-22 (Firm’s case – April to September, 2021) The Ld. AR has offered on behalf of the assesse that even though all number of documents were produced to justify the purchases, but still to avoid litigation, the assesse offers a GP of 5% on then alleged bogus purchases of Rs.54.64 crores, after reducing the GP of 3.31% already declared. This would lead to an additional income of Rs.92,34,935/- being brought to tax.
AY 2021-22 (company for the period October, 2020 to March, 2021): The assessee offers to accept the working done by the Ld. CIT(A) of applying a GP rate of 5% on alleged bogus purchases. Also, it was requested that the GP of 3.70% already disclosed should be allowed. This would lead to an addition of Rs.83.50 lacs over and above the returned income.
The Ld. DR, on the other hand, vehemently argued in support of the Ld. AO’s action. The Ld. DR filed written submissions for AY 2021-22. Through these submissions the Ld. DR relied on the case of Laxmi Narayan Madan Lal [86 ITR 439 (SC)] to canvass the point that business expenditure on account of payment to a non-existent entity deserved to be disallowed in full. The Ld. DR also relied on the case of La Medica [250 ITR 575 (Del)] to canvass the point that purchases shown from non-existent parties were to be disallowed in full. The Ld. DR read out from the head notes in the La Medica case (supra) as under: -
“Section 143 of the Income-tax Act, 1961 Assessment - Additions to Income Assessment year 1971-72 - Assessee having failed to produce evidence to prove bona fides of seller from whom it claimed to have purchased raw material, Assessing Officer treated value of raw material as assessee's income from undisclosed sources AAC was of view that though circumstances were unclear, fact remained that goods were pledged with bank after alleged purchase and, therefore, non-production of seller could not be a basis for doubting genuineness of purchases and/or to infer that there were fictitious purchases - Tribunal upheld deletion of addition - Whether once it was accepted that supplies were not made by said supplier to whom payments were alleged to have been made, question of purchases having been made from some other source could have weighed with Tribunal as a factor in assessee's favour - Held, no Whether since Tribunal acted on partly relevant and partly irrelevant materials and it was not possible to say as to what extent latter had influenced its mind, its order gave rise to a question of law Held, yes - Whether, therefore, Tribunal's order was unsustainable - Held, yes.”
The Ld. DR also pointed out that a considerable number of entities from which purchases were shown to be made, did not exist in the GST records or were not available at the given addresses. The Ld. DR especially pointed out in the specific case of Narayan Trading/Shiv Bhagwati Traders, Prop. Santosh Kumar Pandey, from whom purchases of Rs.4.14 crores have been shown (supra), and pointed out that Shri Santosh Pandey, proprietor had actually denied any transactions with the assessee. Here it needs to be mentioned that the Ld. AR placed on record a purportedly signed statement of account by the said proprietor in evidence of purchases made from him. The Ld. DR dismissed such documents as self-serving ones when the person concerned had denied the same. The Ld. DR also stated that for AY 2021-22, though the application under Rule 46A was rejected by the CIT(A), but thereafter he conducted enquiries without substantially involving the Ld. AO, leading to denial of opportunity to the ld. AO. The Ld. DR requested that the action of Ld. AO deserved to be upheld in full.
We have carefully considered the rival submissions and have gone through the documents before us. Considering the totality of facts and circumstances relevant for each of the years under consideration, it is felt that in principle the Ld. CIT(A)’s action deserves to be supported. Since the operative portions of each of the impugned orders have been extracted supra, there is no need to revisit the rationale behind the findings, which we support in principle. It is also felt that there is considerable strength in the assessee’s assertion that a broad estimation of enhanced GP rate (as discussed earlier while summarizing the Ld. AR’s arguments) on the quantum of allegedly bogus purchases, would meet the ends of justice. However, we also feel that there is considerable strength in the Ld. DR’s arguments that the specific case of Shri Santosh Kumar Pandey, as discussed earlier, where there is a bald denial of any transaction with the assesse during the AY 2021-22, would need to be re-examined in the light of confirmation from him filed before us.
In light of discussion above, the following decision is rendered for each year in appeal:
AY 2019-20 (Firm): The Ld. AO would work out a GP rate of 5% on the alleged bogus purchases of Rs.35.21 crores, after reducing the GP already declared @2.29% by the assessee and add the appropriate figure to the income of the assessee.
AY 2020-21 (Firm): For this year, the Ld. CIT(A) has clearly demonstrated that the so-called difference in figures arose only because the GST component was not taken into consideration. Accordingly, the impugned findings deserve to be supported in full, and we do so.
AY 2021-22 (Firm): The Ld. AO would work out an addition to the returned income by adopting a GP rate of 5% on alleged bogus purchases of Rs.54.64 crores and thereafter reducing the GP rate of 3.31% shown by the assesse, from the resultant figure. The caveat in this is that the transactions pertaining to proprietor Santosh Kumar Pandey would be re-verified in light of the confirmation of accounts filed by the assesse. The Ld. AO would independently verify the transport bills, etc. to conclusively prove, one way or another, about the veracity of the transaction, keeping in mind the fact that the denial of transaction is not on account of any business rivalry, etc. Thereafter, if the transaction is proved to be indeed bogus then such amount (Rs.4.14 crores) will be separately considered as per law and judicial pronouncements on the subject of bogus purchases.
AY 2021-22 (Company): The assesse has stated that he accepts the estimation of income by the Ld. CIT(A) by applying a GP rate of 5% on alleged bogus purchases. As before, the resultant figure would be reduced by the GP of 3.70% disclosed by the assessee.
Before parting with this issue, a short discussion is required on the applicability of the La Medica (supra) case to the facts of this case. Here we find a clear finding of Ld. CIT(A) that due to passage of time, etc. some business entities would genuinely not exist at the time of enquiries. On the other hand, the assessee has certain documentation to establish the transactions, at least from his side. Thus, on facts the bogus nature of purchases has not been conclusively proved. If it is proved that no purchases were made from him, then the principles laid down in various judicial pronouncements would certainly apply with full force.
In the result, ITA 8215 (Revenue’s appeal) for AY 2020-21 is dismissed. ITAs 5602 & 3458 (Assessee’s appeal), 4736 (Revenue’s appeal) are partly allowed. ITA 5601 (Assessee) and ITA 6753 (Revenue) are partly allowed.