Your purchases are called bogus but your sales were accepted. How much can be added?
Only the gross profit difference. Without purchases there cannot be sales, so where the department accepts the sales it cannot add the whole purchase amount — the addition is restricted to the GP rate on those purchases at the rate applied to genuine ones.
Decided by the High Court (Bombay High Court - B.P. Colabawalla and Akil Kureshi, JJ.) on 2019-02-11, reported as [2019] 103 taxmann.com 459 (Bombay); Income-tax Appeal Nos. 1004, 1012, 1013, 1059, 1064, 1075, 1095 and 1204 of 2016. It bears on section 69C of the Income Tax Act 1961, in Evidence & Burden of Proof and Cash Credits & Unexplained Money matters.
Bogus purchase additions are among the most common in trading assessments, and the difference between a 100% addition and a GP-rate addition is usually the whole case. The pivot is simple: were the sales accepted?
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee was a trader of fabrics. Survey operations at three concerns - M/s. Manoj Mills, M/s. Astha Silk Industries and M/s. Shri Ram Sales & Synthetics - produced material suggesting they supplied accommodation bills only. The Assessing Officer held purchases of about Rs. 29.41 lakhs shown from those three concerns to be bogus and added the entire sum as additional income. The Commissioner (Appeals) accepted that the purchases were bogus but, comparing the purchase and sales statements, held that as the department had accepted the sales the whole amount could not be added; he restricted the addition to 10 per cent of the purchases and additionally directed an addition equal to the difference between the gross profit rate on undisputed purchases and that on sales relating to the three parties. On cross appeals the Tribunal deleted the 10 per cent ad hoc addition, for which the Commissioner (Appeals) had given no reasons, and retained only the gross profit differential. The revenue appealed to the High Court under s.260A. The judgment does not state the assessment year.
The revenue's appeals were dismissed on the footing that no question of law arose (para 9). The Court proceeded on the Assessing Officer's finding that the purchases were bogus as a finding of fact, and held that since the department had not disputed the assessee's sales and there was no discrepancy between the purchases shown and the sales declared, the Tribunal was correct that in the case of a trader the purchases cannot be rejected without disturbing the sales, and correct in restricting the addition to bringing the gross profit rate on those purchases to the same rate as on other genuine purchases (para 8).
The Court took the Assessing Officer's finding that the purchases were bogus as a finding of fact and proceeded on that basis (para 8). The question that remained was whether the whole purchase figure could be added. On the concurrent findings of the Commissioner (Appeals) and the Tribunal, the department had not disputed the sales and there was no discrepancy between purchases shown and sales declared; in a trader's case the purchases therefore could not be rejected without disturbing the sales, and confining the addition to the gross profit differential was the correct course. The proposition that without purchases there can be no sales belongs to the Commissioner (Appeals), whose reasoning the Court records at para 3; the High Court did not restate it in its own words. N.K. Industries Ltd. v. Dy. CIT [2016] 72 taxmann.com 289 (Guj.), on which the revenue relied and against which counsel said the Supreme Court had dismissed an SLP, was held not to be applicable without reference to the facts, the Court pointing to para 8 of that very judgment, where the Gujarat High Court had itself held that an assessee cannot be punished where the sale price is accepted by the revenue and had allowed a deduction of the corresponding cost price.
the Tribunal was correct in coming to the conclusion that the purchases cannot be rejected without disturbing the sales in case of a trader. The Tribunal, therefore, correctly restricted the additions limited to the extent of bringing the G.P. rate on purchases at the same rate of other genuine purchases.
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Handle my notice → Ask a CA on WhatsAppOnly the gross profit difference. Without purchases there cannot be sales, so where the department accepts the sales it cannot add the whole purchase amount — the addition is restricted to the GP rate on those purchases at the rate applied to genuine ones. This was decided by the High Court (Bombay High Court - B.P. Colabawalla and Akil Kureshi, JJ.) and bears on section 69C of the Income Tax Act 1961. It is reported as [2019] 103 taxmann.com 459 (Bombay); Income-tax Appeal Nos. 1004, 1012, 1013, 1059, 1064, 1075, 1095 and 1204 of 2016. Bogus purchase additions are among the most common in trading assessments, and the difference between a 100% addition and a GP-rate addition is usually the whole case. The pivot is simple: were the sales accepted? If it applies to you, the first step is this: Establish that the sales were accepted and are reflected in the books and returns — that is the foundation.
The assessee was a trader of fabrics. Survey operations at three concerns - M/s. Manoj Mills, M/s. Astha Silk Industries and M/s. Shri Ram Sales & Synthetics - produced material suggesting they supplied accommodation bills only. The Assessing Officer held purchases of about Rs. 29.41 lakhs shown from those three concerns to be bogus and added the entire sum as additional income. The Commissioner (Appeals) accepted that the purchases were bogus but, comparing the purchase and sales statements, held that as the department had accepted the sales the whole amount could not be added; he restricted the addition to 10 per cent of the purchases and additionally directed an addition equal to the difference between the gross profit rate on undisputed purchases and that on sales relating to the three parties. On cross appeals the Tribunal deleted the 10 per cent ad hoc addition, for which the Commissioner (Appeals) had given no reasons, and retained only the gross profit differential. The revenue appealed to the High Court under s.260A. The judgment does not state the assessment year. The matter was decided on 2019-02-11 by the High Court (Bombay High Court - B.P. Colabawalla and Akil Kureshi, JJ.). On those facts the High Court held as follows. The revenue's appeals were dismissed on the footing that no question of law arose (para 9). The Court proceeded on the Assessing Officer's finding that the purchases were bogus as a finding of fact, and held that since the department had not disputed the assessee's sales and there was no discrepancy between the purchases shown and the sales declared, the Tribunal was correct that in the case of a trader the purchases cannot be rejected without disturbing the sales, and correct in restricting the addition to bringing the gross profit rate on those purchases to the same rate as on other genuine purchases (para 8).
The Court took the Assessing Officer's finding that the purchases were bogus as a finding of fact and proceeded on that basis (para 8). The question that remained was whether the whole purchase figure could be added. On the concurrent findings of the Commissioner (Appeals) and the Tribunal, the department had not disputed the sales and there was no discrepancy between purchases shown and sales declared; in a trader's case the purchases therefore could not be rejected without disturbing the sales, and confining the addition to the gross profit differential was the correct course. The proposition that without purchases there can be no sales belongs to the Commissioner (Appeals), whose reasoning the Court records at para 3; the High Court did not restate it in its own words. N.K. Industries Ltd. v. Dy. CIT [2016] 72 taxmann.com 289 (Guj.), on which the revenue relied and against which counsel said the Supreme Court had dismissed an SLP, was held not to be applicable without reference to the facts, the Court pointing to para 8 of that very judgment, where the Gujarat High Court had itself held that an assessee cannot be punished where the sale price is accepted by the revenue and had allowed a deduction of the corresponding cost price. In the words reproduced by the source cited on this page: "the Tribunal was correct in coming to the conclusion that the purchases cannot be rejected without disturbing the sales in case of a trader. The Tribunal, therefore, correctly restricted the additions limited to the extent of bringing the G.P. rate on purchases at the same rate of other genuine purchases."
It was decided by the High Court on 2019-02-11 and is reported as [2019] 103 taxmann.com 459 (Bombay); Income-tax Appeal Nos. 1004, 1012, 1013, 1059, 1064, 1075, 1095 and 1204 of 2016. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 69C, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The revenue's appeals were dismissed on the footing that no question of law arose (para 9). The Court proceeded on the Assessing Officer's finding that the purchases were bogus as a finding of fact, and held that since the department had not disputed the assessee's sales and there was no discrepancy between the purchases shown and the sales declared, the Tribunal was correct that in the case of a trader the purchases cannot be rejected without disturbing the sales, and correct in restricting the addition to bringing the gross profit rate on those purchases to the same rate as on other genuine purchases (para 8). It arises in Evidence & Burden of Proof and Cash Credits & Unexplained Money matters, on section 69C of the Income Tax Act 1961, and was decided by Bombay High Court - B.P. Colabawalla and Akil Kureshi, JJ.. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Produce a quantitative reconciliation of purchases to sales, and the GP rate on genuine purchases for comparison. Expect the department to cite N.K. Proteins; be ready to distinguish it on the sales-accepted point.
Still good law. The full report carries no citator entry recording an SLP, a stay or a reversal. The decision distinguishes N.K. Industries Ltd. v. Dy. CIT [2016] 72 taxmann.com 289 (Guj.) rather than departing from it, and it is applied by the Mumbai benches to restrict additions on bogus purchases to the profit element where declared sales are undisputed - for example B Narayan Associates. Note the limit built into the ratio: the relief follows from the sales being accepted and reconciled with the purchases, so the decision does not help where the revenue disputes the sales or the quantitative reconciliation fails. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
This is a s.260A dismissal for want of a question of law (para 9), not a reasoned appellate ruling on how bogus purchases must be taxed, and the Court expressly proceeded on the Assessing Officer's finding of bogus purchases as a finding of fact. Cite it for the narrow proposition it decides: where the department has accepted the sales and there is no discrepancy between purchases shown and sales declared, a trader's purchases cannot be rejected without disturbing the sales, so the addition is confined to the gross profit differential. Two attributions to watch. The much-quoted reasoning that 'without purchases there cannot be sales' is the Commissioner (Appeals)'s, recorded by the Court at para 3, not the High Court's own words. And N.K. Industries was distinguished, not disapproved - the Court relied on para 8 of that judgment, where the Gujarat High Court had itself allowed the cost price to be deducted because the sale price was accepted. Counsel for the revenue stated that the Supreme Court had dismissed an SLP against N.K. Industries (para 6); the judgment records that as a submission and does not verify it. The judgment does not state the assessment year or years, and gives no reported ITR citation. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The revenue's appeals were dismissed on the footing that no question of law arose (para 9). The Court proceeded on the Assessing Officer's finding that the purchases were bogus as a finding of fact, and held that since the department had not disputed the assessee's sales and there was no discrepancy between the purchases shown and the sales declared, the Tribunal was correct that in the case of a trader the purchases cannot be rejected without disturbing the sales, and correct in restricting the addition to bringing the gross profit rate on those purchases to the same rate as on other genuine purchases (para 8).
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