Delhi ITAT rules only profit margin on bogus purchases can be taxed, not full amount

The Delhi Income Tax Appellate Tribunal has clarified that when alleged bogus transactions are matched by sales, only the embedded profit, not the entire purchase value, should be taxed, setting a new precedent in tax assessment practices.

The Delhi Income Tax Appellate Tribunal has held that where alleged bogus purchases are matched by corresponding sales, the tax officer cannot simply add the full purchase amount to income. In the case of HSB Home Solutions Ltd, the tribunal said the correct approach was to tax the profit element built into the transactions, not the entire value of the purchases.

According to the tribunal’s order, Judicial Member Anubhav Sharma and Accountant Member Sanjay Awasthi partly allowed the company’s appeal for assessment year 2012-13. The bench upheld the reopening of the assessment, but told the assessing officer to apply a gross profit rate of 5% to turnover of Rs 5,94,91,966 and to give credit for the Rs 13.34 lakh profit already disclosed by the company. LiveLaw Biz also reported that the tribunal found fault with the revenue’s attempt to treat only the purchases as suspect while leaving the sales untouched, saying the embedded profit had to be considered.

The dispute arose from survey material linked to Ashok Kumar Gupta and others, in which Gupta was said to have admitted providing accommodation entries through his firm, Gayatri Maa Enterprise. HSB Home Solutions was named among the entities alleged to have received such entries. The tribunal said the original scrutiny assessment completed on 29 March 2014 had not examined the transactions in sufficient depth, so the later reopening was justified and could not be treated as a mere change of opinion.

At the same time, the bench rejected the company’s argument that banking trails alone proved the purchases were genuine. It said HSB Home Solutions had not established the movement of goods or the bona fides of the suppliers, and that an assessee must prove the genuineness of transactions affecting taxable income. Even so, the tribunal said the tax department’s method was inconsistent because it treated both purchases and sales as bogus while taxing only the full purchase value. The order referred to the Gujarat High Court’s ruling in Prathana Gems as support for restricting such additions to a percentage of the disputed transactions. The TaxCorp summary said the tribunal also indicated that GST included in purchase bills should be excluded when working out the profit element.