If it is proved that goods are actually purchased (even though the parties are bogus), only resultant profit is taxable – Guj HC


CIT v Bholanath Poly Fab (P.) Ltd [2013] 40 taxmann.com 494 (Gujarat)

Background:

Assessee is engaged in the business of trading in finished fabrics. For the assessment year 2005-06, the Assessing Officer held that the purchases worth Rs. 40,69,546 were unexplained. Assessing Officer had issued notice to all parties from whom such purchases were allegedly made. Such notices were returned unserved by the postal authorities with the remark that the address was incomplete. He, therefore, disallowed such expenditure claimed by the assessee and computed the total income of Rs. 41,10,187. The Commissioner rejected the appeal, upon which the assessee went in further appeal before the Tribunal. The Tribunal, substantially allowed the assessee’s appeal.

ITAT’s Ruling:

  • The Tribunal concurred with the Revenue’s views that such purchases were made from bogus parties.
  • The assessee was unable to produce any confirmation from any of the parties. Though the assessee had claimed to have made payment by account payee cheques, upon verification, it was found that the cheques were encashed by some other parties and not by the supposed sellers.
  • However, the Tribunal was of the opinion that the purchases may have been made from bogus parties, nevertheless, the purchases themselves were not bogus
  • Entire quantity of opening stock, purchases and the quantity manufactured during the year under consideration were sold by the assessee. Therefore, the purchases of the entire 1,02,514 metres of cloth were sold during the year under consideration. The Tribunal, therefore, accepted the assessee’s contention that the finished goods were purchased by the assessee, may be not from the parties shown in the accounts, but from other sources. 
  • In that view of the matter, the Tribunal was of the opinion that not the entire amount, but the profit margin embedded in such amount would be subjected to tax. The Tribunal relied on its earlier decision in the case of Sanket Steel Traders v. ITO [IT Appeal Nos. 2801 & 2937 (Ahd.) of 2008, dated 20-5-2011] and also made reference to the Tribunal’s decision in the case of Vijay Proteins Ltd. v. Asstt. CIT [1996] 58 ITD 428 (Ahd).

HELD:

  • Tribunal committed no error. Whether the purchases themselves were bogus or whether the parties from whom such purchases were allegedly made were bogus is essentially a question of fact
  • The Tribunal having examined the evidence on record came to the conclusion that the assessee did purchase the cloth and sell the finished goods. 
  • In that view of the matter, as natural corollary, not the entire amount covered under such purchase, but the profit element embedded therein would be subject to tax. This was the view of this court in the case of Sanjay Oilcake Industries v. CIT [2009] 316 ITR 274 (Guj). Such decision is also followed by this court in a judgment dated August 16, 2011, in Tax Appeal No. 679 of 2010 in the case of CIT v. Kishor Amrutlal Patel. In the result, tax appeal is dismissed.

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