Bogus purchases from hawala dealers - Entire addition warranted - Estimation theory does not apply in such cases.

ITAT Restores Disallowance for Bogus Purchases, Partly Allows Revenue Appeal Tribunal Overrules CIT(A)'s Decision, Upholds Entire Disallowance for Non-Genuine Transactions from Hawala Dealers

In a significant ruling, the Income Tax Appellate Tribunal (ITAT), Mumbai, has sided with the Revenue by reversing the decision of the Commissioner of Income Tax (Appeals) [CIT(A)] and restoring the full disallowance of bogus purchases made by Deepak Shah, the respondent. The tribunal's decision came after examining the appeal filed by the Deputy Commissioner of Income Tax (DCIT) against the partial relief granted by the CIT(A) to the assessee for the assessment year 2010-11.

The dispute arose after the Assessing Officer (AO) reopened the assessment based on information from the Investigation Wing and the Maharashtra Sales Tax Department, which identified five parties as hawala dealers-entities involved in fraudulent transactions. Summons and notices issued to these parties were returned unserved, and Deepak Shah, who is engaged in the business of building and developing properties, failed to produce evidence of genuine transactions. Consequently, the AO treated the purchases as entirely bogus and made a 100% disallowance amounting to Rs. 26,49,280 under Section 37(1) of the Income Tax Act, 1961.

The CIT(A), however, had previously restricted this disallowance to 15% of the bogus purchases, asserting that the sales were not in doubt. This partial relief was challenged by the Revenue, leading to the current appeal before the ITAT.

Upon review, the ITAT bench, comprising Smt. Beena Pillai (Judicial Member) and Shri. Omkareshwar Chidara (Accountant Member), found that the CIT(A) had erred in applying the estimation theory without adequate evidence to support the genuineness of the purchases. The tribunal noted that the assessee had admitted to the non-existence of transactions with one of the parties, S.K. Trading Co., and failed to establish the authenticity of the remaining transactions.

The tribunal emphasized that when purchases are found to be sham and not merely unverifiable, the entire addition is warranted, and the estimation theory does not apply. Citing precedents from the Bombay High Court, including the cases of Pr. Commissioner of Income Tax v. Kanak Impex (India) Ltd. and Pr. Commissioner of Income Tax v. M/s. Drisha Impex Pvt. Ltd., the ITAT upheld the AO's original findings, reinforcing the complete disallowance for the four identified hawala dealers: V3 Enterprises, Ace International, Liberty Trading Corporation, and Deep Enterprises.

In conclusion, the ITAT has effectively restored the addition made by the AO, partly allowing the Revenue's appeal and reinforcing the stance against bogus purchases in income tax assessments.

Bottom Line:

Income Tax - Bogus purchases from hawala dealers - Entire addition warranted when purchases are sham and not merely unverifiable - Estimation theory does not apply in such cases.

Statutory provision(s): Section 37(1), Section 131, Section 133(6), Section 147 of the Income Tax Act, 1961

DCIT v. Deepak Shah, (ITAT)("K" Bench, Mumbai) : Law Finder Doc Id # 2812483