Facts of the Case

The assessee, Rainbow Vanijya Pvt. Ltd., filed its return of income for Assessment Year 2020-21 on 24.03.2021 declaring a loss of ₹1,97,88,455. The case was selected for scrutiny on issues relating to high liabilities, identification as a beneficiary of high-risk billers, and substantial investments and advances. During assessment proceedings, the assessee furnished complete books of accounts, GST returns, purchase invoices, sales invoices, e-way bills, transport documents, stock registers and confirmations. The Assessing Officer accepted that goods were shipped directly from suppliers to buyers but treated the assessee as an accommodation entry provider and made an addition of ₹1,33,61,982 by estimating commission at 1% of total purchases, sales and loans. On appeal, the CIT(A) not only confirmed the addition but enhanced the assessment by ₹66,12,43,517 by treating the entire purchases as bogus, leading to the present appeal.

Issues Involved

Whether estimation of income by applying 1% commission on aggregate purchases, sales and loans was permissible without rejection of books of account under Section 145(3), whether enhancement by the CIT(A) by treating entire purchases as bogus was within jurisdiction and sustainable in law, and whether purchases supported by e-way bills and GST records could be treated as non-genuine.

Petitioner’s Arguments

The assessee contended that it is a “Pacca Arahitya” engaged in trading of steel, directly facilitating delivery of goods from suppliers to customers, earning a margin of approximately 1%. It was argued that the books of account were duly audited under the Companies Act and Section 44AB and were never rejected by the Assessing Officer. The assessee emphasized that purchases and sales were fully supported by e-way bills, GST returns and transport documents, and that neither the Assessing Officer nor the CIT(A) doubted the sales or loans. It was submitted that estimation of income without rejection of books is impermissible and that enhancement by CIT(A) based solely on suspicion and reliance on an inapplicable High Court decision was bad in law.

Respondent’s Arguments

The Revenue supported the orders of the Assessing Officer and the CIT(A), contending that the assessee was an accommodation entry provider and that enhancement of income by treating purchases as bogus was justified.

Court Order / Findings

The ITAT Kolkata held that the Assessing Officer had not rejected the books of account under Section 145(3) and had, in fact, acknowledged that goods were genuinely shipped to third parties based on invoices and e-way bills. The Tribunal held that estimation of income at 1% of purchases, sales and loans without rejection of books was unsustainable, relying on the Delhi High Court decision in PCIT vs Forum Sales Pvt. Ltd. and coordinate bench rulings. The Tribunal further held that the enhancement made by the CIT(A) by adding entire purchases was without jurisdiction, unsupported by any fresh material or enquiry, and based on a decision distinguishable on facts. It was observed that treating purchases as bogus while accepting corresponding sales is inherently contradictory. Accordingly, both the estimated addition and the enhancement were held to be untenable.

Important Clarification

The Tribunal clarified that where books of account are audited and not rejected, income cannot be estimated on an ad-hoc basis. Purchases supported by e-way bills, GST returns and transport documents cannot be treated as non-genuine merely on suspicion. Enhancement by the appellate authority must be based on cogent material and within the scope of law.

Final Outcome

The appeal filed by the assessee was allowed. The addition of ₹1,33,61,982 made on estimated commission basis and the enhancement of ₹66,12,43,517 made by the CIT(A) were deleted in full, and the assessment order was set aside to that extent.

Source Link- https://itat.gov.in/public/files/upload/1767169801-VdAtk4-1-TO.pdf

Disclaimer
This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.