DHARMESSH SHAH,AHMEDABAD V. THE ITO, WARD-1, PATAN

ITA 439/AHD/2025

AI Insights

The case involves Dharmessh Shah, an individual engaged in trading gold, silver, and loose diamonds, who appealed against the order of the Commissioner of Income Tax (Appeals), which upheld the reassessment made by the Assessing Officer. The reassessment was based on information that the assessee had availed bogus input tax credit on purchases from M/s. Vishnu Gold, a vendor flagged as high-risk by GST authorities. The Tribunal examined the validity of the reassessment proceedings and the addition made under section 69C, which was initially the entire purchase amount but later reduced by the CIT(A) to 10% of the purchase value.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 313931 (ITAT-AHMEDABAD)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-05-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: SMC
• Assessment Year: 2019-2020
• Other Referred Cases: N.K. Industries Ltd. v. DCIT, PCIT v. Jigisha Satishkumar Mehta
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PRATHVIJ RAJ MEENA
• Assessee Lawyers: KUNAL T. SANGHAVI
• Keywords: Reassessment proceedings; Unexplained expenditure; Rejection of books of accounts; Bogus purchase; Accommodation entries; Bogus
• Section: 147; 148; 143(3); 69C

Judgement Text

"आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण,अहमदाबाद \bयायपीठ अहमदाबाद \bयायपीठ अहमदाबाद \bयायपीठ अहमदाबाद \bयायपीठ ‘SMC’ अहमदाबाद। अहमदाबाद। अहमदाबाद। अहमदाबाद। IN THE INCOME TAX APPELLATE TRIBUNAL “SMC” BENCH, AHMEDABAD ] ] BEFORE S/SHRI T.R. SENTHIL KUMAR, JUDICIAL MEMBER AND MAKARAND V.MAHADEOKAR, ACCOUNTANT MEMBER ITA No.439/Ahd/2025 Asstt.Year : 2019-20 Dharmessh Shah A-301, Vasantkunj Garden Residency Sanjivan Road Paldi, Ahmedabad. PAN : AELPS 5203 A Vs The ITO, Ward-1 Patan. (Applicant) (Responent) Assessee by : Shri Kunal T. Sanghavi, AR Revenue by : Shri Prathvij Raj Meena, CIT-DR सुनवाई क तारीख/Date of Hearing : 30/04/2025 घोषणा क तारीख /Date of Pronouncement: 05/05/2025 आदेश आदेश आदेश आदेश/O R D E R PER MAKARAND V.MAHADEOKAR, AM: This appeal has been filed by the assessee against the order passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “CIT(A)”], dated 14.01.2025, for the assessment year 2019–20, arising out of the reassessment order passed under section 147 r.w.s. 144B of the Income-tax Act, 1961 [hereinafter referred to as “the Act”] by the Assessing Officer [hereinafter referred to as “AO”] dated 15.03.2024. ITA No.439/Ahd/2025 2 Facts of the Case 2. The assessee is an individual engaged in the business of trading in gold, silver, and loose diamonds under the proprietorship concern “Gloriana Jewels”. The return of income for A.Y. 2019–20 was originally filed on 26.10.2019 declaring income of Rs. 5,40,360/-. Subsequently, the case was reopened on the basis of information flagged on the Insight Portal under the High-Risk CRIU/VRU category, indicating that the assessee had allegedly availed bogus input tax credit on purchases of Rs. 20,14,258/- from M/s. Vishnu Gold, an entity flagged by the CBIC and GST authorities as a non-genuine biller involved in accommodation entries. Notice u/s 148A(b) was issued on 17.03.2023, and after considering the reply of the assessee, order u/s 148A(d) was passed on 27.03.2023. A notice u/s 148 was issued on 28.03.2023. The assessee refiled its return on 17.04.2023 declaring income of Rs.5,45,850/-. 3. During the reassessment proceedings, the AO observed that the assessee had allegedly made purchases of Rs.20,14,258/- from M/s. Vishnu Gold, flagged as a high-risk entity issuing fake invoices. The AO treated the purchases as unverifiable and unsupported by actual movement of goods. The AO relied upon the judgment of the Hon’ble Gujarat High Court in N.K. Industries Ltd. v. DCIT [2016] 72 taxmann.com 289 and added the entire purchase amount u/s 69C r.w.s. 115BBE as unexplained expenditure and concluded the reassessment by ITA No.439/Ahd/2025 3 determining the total income at Rs. 25,60,108/-. Penalty proceedings u/s 271AAC were separately initiated. 4. The assessee preferred an appeal before the CIT(A) raising various grounds including challenging the reopening. The assessee submitted following documents and contentions in support of the genuineness of the purchases: • Copies of purchase invoices issued by M/s. Vishnu Gold, evidencing the purchase of loose diamonds and not gold, as alleged by the AO. • Bank statements showing payments made to M/s. Vishnu Gold through banking channels. • Ledger account of the supplier in the books of the appellant. • Stock register indicating quantitative details of goods received and sold. • Screenshot of GSTR-3B returns showing the reporting of these purchases in regular returns. • Income Tax Return, audit report, and audited financial statements. • Copies of GSTR filings and balance sheet of M/s. Vishnu Gold to corroborate that the said party was active at the relevant time and had filed returns. • It was also highlighted that the GST registration of the vendor was cancelled much later in January 2023, which cannot retroactively invalidate the purchases made during the year under consideration. 5. The assessee further submitted that the purchase value was in fact Rs.18,00,000/-, not Rs.20,14,258/- as adopted by the AO, and that the same stock was sold during the year generating a reported a gross profit of 13.31%. The assessee relied upon various judicial precedents including the decision of ITA No.439/Ahd/2025 4 the Hon'ble Gujarat High Court in the case of PCIT v. Jigisha Satishkumar Mehta [2023] 155 taxmann.com 279, wherein the Court held that if sales are not doubted, disallowance of entire purchases is unjustified. 6. The Ld. CIT(A) upheld the validity of the reassessment by relying upon Explanation 1(i) to Section 148, holding that flagged information under Risk Management Strategy constitutes valid \"information\" for reopening under the amended law w.e.f. 01.04.2021. On merits, the CIT(A) after considering the facts of the case and submissions of the appellant, recorded that the appellant had filed evidence in the form of purchase bills, bank payment details, and stock records to demonstrate that the purchase transaction had actually taken place. It was noted that the purchase bills were in the name of the appellant and pertained to loose diamonds, and that the corresponding sales had also been declared and accepted by the department. The appellant had shown gross profit on such sales. However, the CIT(A) observed that the supplier, M/s. Vishnu Gold, was found by the GST Department to be engaged in providing accommodation entries without actual movement of goods, and its GST registration was subsequently cancelled. The CIT(A) further observed that the appellant had not requested cross- examination of the said party. In view of these facts, the CIT(A) concluded that the possibility of inflation in the purchase price or the transaction being in the nature of accommodation entries could not be ruled out. Therefore, while holding that disallowance of the entire purchase amount was not warranted, ITA No.439/Ahd/2025 5 the CIT(A) held that an estimate of income embedded in the said purchases was required to be made. Accordingly, the CIT(A) sustained an addition at the rate of 10% of the purchase value to account for the possible inflation or accommodation nature of the transaction and directed the Assessing Officer to verify the actual purchase amount—whether it was Rs.18,00,000/- or Rs.20,14,258/- and compute the addition accordingly. 7. Aggrieved by the order of CIT(A) the assessee is in appeal before us raising following grounds: 1) The Ld. CIT(A), NFAC, Delhi was grievously erred in upholding the validity of the re-assessment made by the Ld. A.O. u/s. 143(3) r.w.s. 147 of the IT Act, 1961 although the Ld. AO has failed to record his own satisfaction about the correctness of the information received by the Ld. AO and although the judgment relied on as per the case of N. K. Industries v. DCIT [2016] 72 taxmann.com. 289 (Gujarat) entire purchases of Rs. 20,14,258/- has been added to the income u/s. 69C to be bad in law. 2) In the Appellate Order, the Ld. CIT(A) has grievously erred in confirming the addition to restrict 10% GP addition on the correct transaction value. The GP addition is bad in law as there is no rejection of books of accounts by the Ld. AO and also GP percentage addition is not matched with GP of the year and also the transactions are as per the market rate. 3) The appellant therefore requests that the additions made by the Ld. A.O. of Rs. 20,14,258/- should be deleted looking to the merits of the case. 4) The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal. 8. During the course of hearing before us the Ld. Authorised Representative (AR) for the assessee reiterated the facts and contended that the entire quantity of loose diamonds purchased was subsequently sold during the year and the sale proceeds were duly offered to tax. In support of this, the AR highlighted that the assessee had disclosed a gross profit of 13.31% which ITA No.439/Ahd/2025 6 subsumed the income element from the said transaction. It was submitted that the books of account were never rejected either u/s 145(3) or otherwise, and the Assessing Officer did not dispute the sales side of the transaction. Hence, the purchases being integrally linked to the accepted sales, the disallowance of the entire purchase value or even part thereof, resulted in double taxation of the same income. The AR further submitted that the purchase value considered by the AO was incorrect, as the figure of Rs.20,14,258/- represented the alleged ITC mismatch flagged on the GST portal, whereas the actual value of the transaction was Rs.18,00,000/-, which could be verified from the tax invoices and bank statements. A crucial contention raised by the AR during the hearing was that in the assessee’s own case for A.Y. 2021–22, the return was selected for complete scrutiny under CASS, specifically for the reason of “Purchase from High Risk Biller (CBIC)”, covering vendors similarly flagged as in the current case. The AR submitted that in that scrutiny proceeding, the AO thoroughly examined the genuineness of purchases, verified the books of account and related documents, and accepted the returned income without making any adverse inference or disallowance. It was strongly urged that this consistent stand of the Department in a subsequent scrutiny year directly undermines the Revenue’s allegation of bogus purchase in the year under appeal and supports the assessee’s bona fides. 9. The Ld. Departmental Representative (DR), on the other hand, supported the assessment order and relied upon the ITA No.439/Ahd/2025 7 detailed findings recorded by the Assessing Officer, particularly the reliance placed on information from the Insight Portal, the status of the vendor as an accommodation entry provider, and the case law of N.K. Industries Ltd. v. DCIT [2016] 72 taxmann.com 289 (Gujarat), affirmed by the Hon’ble Supreme Court. 10. We have carefully considered the rival contentions, perused the assessment order, the order of the Ld. CIT(A), the documents placed on record, and the judicial precedents relied upon by both parties. The appeal challenges two substantive issues: (i) the validity of the reassessment proceedings initiated under section 147 of the Act, and (ii) the addition of Rs.20,14,258/- made by the Assessing Officer under section 69C, which was subsequently restricted by the CIT(A) to 10% of the transaction value on an estimated basis. 11. As regards the first issue pertaining to reassessment, it is evident from the record that the case was reopened based on information flagged under the Risk Management Strategy of the CBDT through the Insight Portal, identifying purchases from M/s. Vishnu Gold as high-risk, allegedly involving bogus Input Tax Credit. The AO issued notice under section 148A(b), duly considered the assessee's response, and passed an order under section 148A(d), followed by issue of notice under section 148. The Ld. CIT(A) has upheld the validity of such reopening by relying on Explanation 1(i) to Section 148 of the Act, which was inserted by the Finance Act, 2021 and deems information flagged ITA No.439/Ahd/2025 8 under the prescribed strategy as \"information\" suggesting escapement of income. We are in agreement with the view of the CIT(A) in this regard. The procedure followed by the AO complies with the amended framework of law and, therefore, the ground challenging the validity of the reassessment is liable to be rejected. Accordingly, Ground No. 1 of the appeal is dismissed. 12. Turning to the merits of the addition, we have considered the rival contentions, examined the orders of the lower authorities, and carefully perused the material placed on record including the judicial precedents relied upon. The issue for adjudication is whether the addition of Rs.20,14,258/- made by the Assessing Officer under section 69C of the Act, which was later restricted by the CIT(A) to 10% of the purchase value, is sustainable in light of the facts and the law. 13. The assessee had declared total purchases of Rs.18,00,000/- from M/s. Vishnu Gold, supported by tax invoices (paper book No.58-59), ledger accounts, banking records reflecting payment through normal channels, GSTR-3B returns, and quantitative stock register. These purchases were reflected in the audited books of account, and the corresponding sales have been accepted by the department. The books have not been rejected under section 145(3), and the assessee has disclosed gross profit of Rs.19,26,317/- (as disclosed in clause 40 of the annexure to tax audit report in form 3CD at paper book page No.35) on turnover of Rs. 1.44 crore, resulting in a GP rate of 13.32% and net profit of Rs.3.04 lakh (NP rate 2.10%). The ITA No.439/Ahd/2025 9 Assessing Officer disallowed the entire purchase by treating it as unexplained expenditure u/s 69C solely on the basis that the vendor was flagged by GST authorities as a high-risk entity. The Ld. CIT(A), while accepting the genuineness of sales and the documentation submitted by the assessee, noted that the vendor’s GST registration was subsequently cancelled, and the assessee did not seek cross-examination. 14. On that basis, he observed that the possibility of accommodation entries or inflated purchases could not be ruled out and sustained an addition @10% of the purchase value to reflect embedded income. 15. We find that the facts of the case do not warrant full disallowance of the purchases under section 69C, particularly where books are not rejected, sales are accepted, and payments are made through banking channels. However, the nature of the vendor and the failure of the assessee to establish with certainty that the transaction was at arm’s length do justify a modest estimation of embedded profit, to account for the possibility of inflation or indirect benefit derived. 16. The AO’s reliance on N.K. Industries Ltd. v. DCIT [(2016) 72 taxmann.com 289 (Guj.)] to support full disallowance is misplaced. While the High Court did disapprove partial disallowance in that case, the decision was based on facts established through search, including seizure of blank cheque books and fictitious documents, and admission under section 132(4) that the purchases were sham. Even then, the High Court ITA No.439/Ahd/2025 10 in its concluding observations (para 8) held that where sales are accepted, tax cannot be levied on the same sale price, and it ultimately directed the revenue to tax only the profit element of Rs.20.98 lakhs, being 5.66% of sales, and not the entire purchases. Therefore, N.K. Industries Ltd. supports the principle that only the income component in such cases is to be brought to tax, not the full transaction value. 17. Further, in PCIT v. Jigisha Satishkumar Mehta [(2023) 155 taxmann.com 279 (Guj.)], the Hon’ble Gujarat High Court upheld the findings of both the CIT(A) and the Tribunal, which sustained an addition of 5% of the alleged bogus purchases in light of documentary evidence and the possibility of billing through non- genuine parties, even though there was no conclusive proof of bogus purchases. 18. We find that the facts of the present case are nearly identical. While the supplier may have been flagged as high risk, the assessee has produced primary evidence in support of the transaction, and no enquiry has been conducted by the AO to controvert the same. Further, in the assessee’s own case for A.Y. 2021–22, scrutiny was conducted for purchases from high-risk billers under the CBIC’s risk classification, and no adverse inference was drawn; the returned income was accepted. 19. Considering the totality of circumstances, the declared net profit rate of 2.10% appears inadequate in light of the flagged risk and warrants an estimation. At the same time, the ITA No.439/Ahd/2025 11 evidentiary record and pattern of conduct suggest that the transaction cannot be rejected outright. 20. In line with the principle laid down in Jigisha Satishkumar Mehta (supra), and the ultimate ratio of N.K. Industries Ltd. (supra), we consider it just and reasonable to restrict the disallowance to 5% of the purchase value, i.e., 5% of Rs.18,00,000/-, resulting in an addition of Rs.90,000/-. This estimation safeguards the interest of revenue while preventing double taxation and undue hardship to the assessee. 21. Accordingly, the addition of Rs.20,14,258/- made by the AO under section 69C is deleted. The addition sustained by the CIT(A) @10% is modified and restricted to Rs.90,000/-, being 5% of Rs.18,00,000/-. The AO is directed to give effect accordingly. Ground Nos. 2 and 3 of the appeal are partly allowed. 22. In the result the appeal of the assessee is partly allowed. Order pronounced in the Court on 5th May, 2025 at Ahmedabad. Sd/- Sd/- (T.R. SENTHIL KUMAR) JUDICIAL MEMBER (MAKARAND V. MAHADEOKAR) ACCOUNTANT MEMBER Ahmedabad, dated 05/05/2025 vk* ITA No.439/Ahd/2025 12 आदेश क\u0007 \bितिलिप अ\u000eेिषत आदेश क\u0007 \bितिलिप अ\u000eेिषत आदेश क\u0007 \bितिलिप अ\u000eेिषत आदेश क\u0007 \bितिलिप अ\u000eेिषत/Copy of the Order forwarded to : 1. अपीलाथ\u0016 / The Appellant 2. \u0017\u0018यथ\u0016 / The Respondent. 3. संबंिधत आयकर आयु / Concerned CIT 4. आयकर आयु (अपील) / The CIT(A) 5. िवभागीय \u0017ितिनिध, आयकर अपीलीय अिधकरण / DR, ITAT, 6. गाड# फाईल /Guard file. आदेशानुसार आदेशानुसार आदेशानुसार आदेशानुसार/BY ORDER, उप उप उप उप/सहायक पंजीकार सहायक पंजीकार सहायक पंजीकार सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण, अहमदाबाद अहमदाबाद अहमदाबाद अहमदाबाद / ITAT, Ahmedabad 1. Date of dictation- 02-5-2025 2. Date on which the typed draft is placed before the Dictating Member 3. Date on which the approved draft comes to the Sr.P.S./P.S. - 4. Date on which the fair order is placed before the Dictating Member for Pronouncement ……………….. 5. Date on which the file goes to the Bench Clerk . 05/05/2025 6. Date on which the file goes to the Head Clerk……………………………. 7. The date on which the file goes to the Assistant Registrar for signature on the order…………………….. Date of Despatch of the Order……………… "