ITAT Mumbai Restricts "Bogus Purchase" Addition to 3% Profit Margin, Upholds Principle of Consistency in Bhanwarlal Jain Group Case

Background

The Mumbai “D” Bench of the Income Tax Appellate Tribunal has partly allowed the appeal filed by D.G. Exports for Assessment Year 2011–12, holding that where corresponding sales are accepted and stock records are not disputed, disallowance on account of alleged bogus purchases cannot be made in entirety and must be restricted to the profit element embedded in such transactions.

Entire purchases cannot be added when sales are accepted

The assessee, engaged in the business of trading in cut and polished diamonds, had its assessment reopened on the basis of information from the Investigation Wing alleging accommodation entries from the Bhanwarlal Jain Group. The Assessing Officer treated purchases amounting to ₹4.06 crore as bogus and added the entire amount to income under sections 147 read with 143(3). This action was affirmed by the NFAC Commissioner (Appeals), primarily relying on the investigation findings regarding the supplier entities being shell concerns.

Before the Tribunal, the assessee contended that the Assessing Officer had accepted corresponding sales, stock registers, and trading results, and had not recorded any adverse finding regarding availability of stock or suppression of sales. It was argued that in such circumstances, taxing the entire purchase value would lead to absurd results and only the profit component, if any, could be brought to tax.

The Tribunal's Decision

The ITAT Bench, comprising Judicial Member Shri Amit Shukla and Accountant Member Shri Vikram Singh Yadav, ruled in favor of the assessee.

The Tribunal noted that the Revenue Department could not dispute that the facts of the current case were pari-materia (identical) to the assessee’s other assessment years where only a 3% profit margin was taxed.

The Bench held that since the AO had not disputed the corresponding sales or the stock register, there was no justifiable reason to deviate from the position taken in other years for the same suppliers. Applying the Principle of Consistency, the Tribunal stated:

"...we find no justifiable reason in the findings of the AO which force him to deviate from his own position in other assessment years... more so where in terms of the availability of stock and corresponding sales, no adverse finding has been recorded by him."

The ITAT directed the AO to tax only 3% of the value of the impugned purchase transactions as the embedded profit margin and deleted the remaining addition of the entire purchase value.