100 Percent Addition for Bogus Purchases Is Sustainable Only at 6 Percent Based on Precedent
Issue
Whether the revenue is justified in making a 100% addition for bogus purchases from the Bhanwarlal Jain Group when the appellate authorities and High Courts have consistently restricted such disallowances to 6% in similar matters.
Facts
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The assessee-company recorded purchases from the Bhanwarlal Jain Group during the Assessment Year 2010-11.
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The Investigation Wing, Mumbai, provided information indicating that the Bhanwarlal Jain Group was a known provider of accommodation entries (bogus purchases and unsecured loans).
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Based on this data, the Assessing Officer (AO) treated the entire purchase amount as bogus and made a 100% addition to the assessee’s taxable income.
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The CIT(A) reduced the addition to 6% of the alleged bogus purchases, a decision later affirmed by the ITAT.
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The High Court upheld the 6% disallowance, noting that similar appeals by the Department regarding the same group had been dismissed previously.
Decision
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The Supreme Court found no grounds for interference with the High Court’s ruling.
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It was noted that a connected Special Leave Petition (SLP) involving the same group and the same 6% disallowance rate (Surya Impex) had already been dismissed.
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Consequently, the Revenue’s SLP was dismissed, and the 6% disallowance was sustained.
Key Takeaways
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Reasonable Disallowance: In cases of bogus purchases where the sales are not doubted, courts often reject 100% additions, opting instead to tax the potential “profit element” or “savings” saved by the assessee (here, fixed at 6%).
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Consistency in Precedent: Once a specific percentage of disallowance (e.g., 6% for the Bhanwarlal Jain Group) is accepted by the High Court and the Supreme Court in one case, it becomes a binding benchmark for other assessees linked to the same entry provider.
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Burden of Proof: While the Revenue can identify “accommodation entries,” the quantum of addition must be realistic rather than punitive if the underlying business activity exists.