Income Tax Assessment in case of fictitious or bogus transactions

Income Tax Assessments have become quite common nowadays due increase in the number of taxpayers in the country. Tax assessments can be imposed by the income tax authorities on that has filed Income Tax returns. There can be so many reasons for getting notice from Income Tax Department and one such reasons is to get notice for tax assessment for bogus transactions or purchases. Here we have discussed about assessments in case of bogus transactions in detail.   

What is bogus transaction or purchase?

In the accounts related to trading business or manufacturing business, entries are made in the books for both debit and the credit side. In the debit side the entries related to opening stock, gross profits, purchases and manufacturing expenses are to be entered. In the credit side sales and closing stock related entries are put in. A manufacturer or a trader can easily reduce the gross profit by inflating the manufacturing expenses or purchases or by reducing the sales or even by under valuing the closing stock. Such transactions that are manipulated for personal gains or profits are called bogus transactions or bogus purchases. For the purpose of the tax assessment for bogus transactions, the fictitious manipulations can be done by one of the following ways-

  • By not making any purchases. But still the documentation is arranged regarding the fake purchases.
  • By substituting the actual purchases with any purchases made from the grey markets or the black market. Then using these for the purpose of manufacturing or for selling. In such scenarios the documents related to such purchases are obtained through malicious ways and the bills are made for higher values or rates. These bills are obtained from bill providers who are registered dealers with a cancelled registration and are not dealing in the business genuinely but issuing fake bills of purchases to initiate bogus transactions.
  • Certain suppliers practice an activity of selling the goods and items but not entering the transaction in the books of accounts or sales register. Any such transaction where assesses for the purpose of tax assessment for bogus transactions, fails to prove its authenticity with the help of receipts, invoices etc. are bogus or fictitious.

In the recent years the taxation authority has carried on so many cases of tax assessment for bogus transactions. There are so many cases and events that show how such transactions were treated as fictitious or bogus by the authorities while the assessment took place.

When an Assessing Officer is likely to find out about bogus transactions?

The Assessing Officer may develop suspicion about the true and genuineness of the purchases made by the trader or manufacturer. Such transactions are found out during the examination of the accounts and the following situation has arisen-

  • Tax assessment for bogus transactions can be initiated, when turnover in comparison with the low profit margins, the turnover is quiet high. In such a case it cannot be conducive to run a business with such high turnovers in return.
  • Where in the balance sheet the creditors for purchases have been standing for a very long time substantially.
  • When the seller shown in the registers are not regular dealers with assesses.
  • Where the purchases have been made through cash as mode of payments.
  • When the profit margin trends are reducing but the turnover has remained constant over the years, then tax assessment for bogus transactions can take place.
  • Where the vouchers or the books of accounts does not clarify the mode of transportation for trading or manufacturing items.
  • Where while examining the purchase vouchers during tax assessment, the assessing officer finds out about scanty details or doubtful information or material about the seller.
  • Where the vouchers does not show any bank details for making payments through banking channels or RTGS.
  • Where the voucher of purchase does not show or inspire any confidence or personal details related to seller emanating from them.

In all these cases a tax assessment for bogus transactions made by the taxpayer or assesses can be initiated by the tax authority.

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    Author: Anil Agrawal
    EZYBIZ India Consulting LLP, New Delhi. The firm is business and tax consultancy firm providing consultancy in Taxation, Regulatory, Transfer pricing, Valuation, Corporate funding and Business set up matters. He may be reached at 9899217778 or anil@ezybizindia.in.