HC Upholds restricting disallowance to 6% instead of 100% in Bogus Purchase Case

HC Upholds restricting disallowance to 6% instead of 100% in Bogus Purchase Case

The High Court of Gujarat has dismissed a tax appeal filed by the tax authorities against a taxpayer for Assessment Year 2012-13. The case related to alleged bogus purchases of Rs. 4.10 crore.

The Principal Commissioner of Income Tax (PCIT) had filed a writ petition against a taxpayer named Rohit Lodha in the Gujarat High Court, challenging an order dated July 02, 2024, passed by the Income Tax Appellate Tribunal (ITAT) Surat in ITA No. 854/SRT/2023 for Assessment Year 2012-13.

As per the initial investigation, the assessee had made bogus purchases amounting to Rs. 4.10 crore. The AO completed the assessment by disallowing the entirety (100%) of the bogus purchases and made an addition of the same to the assessee’s income. When the assessee approached the ITAT Surat, the tribunal partially ruled in favour of the assessee by restricting the disallowance to 6% instead of 100%, as made by the Assessing Officer (AO).

The Revenue, dissatisfied with the ruling of the tribunal, thereafter filed an appeal before the Gujarat High Court, accepting that the issue had already been covered by the same court’s earlier ruling in the case titled Principal Commissioner of Income Tax v. Keshri Exports. In which the court sustained the tribunal’s decision that only the profit element in such disputed purchases should be taxed, not the entire purchase amount.

The Court referred to earlier judgements where it was held that in cases involving accommodation entries or bogus bills, tax authorities can only tax the income component embedded in such transactions to prevent revenue leakage. The Tribunal had examined the facts, including the assessee’s gross profit rate, and found that a 6% disallowance was reasonable.

Since a similar issue had already been settled by the same court in an earlier judgement and no new substantial question of law arose, the high court did not find any valid reason to interfere in the tribunal’s ruling. Accordingly, the appeal filed by the revenue was dismissed, and the court decided in favour of the assessee.