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Facts
The appeals by the Revenue concern assessment years 2018-19 to 2021-22, arising from CIT(A)'s orders partly allowing the assessee's appeals against additions made for bogus purchases. The Assessing Officer (AO) had disallowed purchases amounting to Rs. 2,21,26,177/- based on GST flagging of vendors and statements from entry providers. The CIT(A) restricted the disallowance to a 25% GP addition.
Held
The Tribunal held that while the GST findings and entry provider statements cast doubt on the genuineness of some purchases, the appellant provided partial corroboration for a significant portion. Given the business nature and partial corroboration, taxing only the profit element was appropriate, aligning with judicial precedents.
Key Issues
Whether the CIT(A) erred in restricting the disallowance of bogus purchases to a 25% GP addition instead of the AO's disallowance, and whether the grounds of appeal are substantive grievances.
Sections Cited
153A, 143(3)
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Income Tax Appellate Tribunal, DELHI BENCH: ‘B’ NEW DELHI
Before: SHRI SATBEER SINGH GODARA & SHRI MANISH AGARWAL
1. 1. Whether on the facts and in the circumstances of the case and in the provisions of the law, the Ld. CIT(A) is correct in allowing the appeal of the assessee without appreciating the facts of the case? 2. Whether on the facts and in the circumstances of the case and in the provisions of the law, the Ld. CIT(A) is correct in applying the GP ratio @ 25% on the bogus purchases on the basis of which the addition to the tune of Rs. 75,01,359/- was sustained.
3. Whether on the facts and in the circumstances of the case and in the provisions of the law, the Ld. CIT(A) is correct in allowing the 75% of the bogus purchase ignoring the facts that the addition of Rs. 3,00,05,434/- was made on the basis of the statements of the entry provider Sh. Sanjay Jain.
4. Whether on the facts and in the circumstances of the case and in the provisions of the law, the Ld. CIT(A) is correct in allowing the 75% of the bogus purchase ignoring the fact that as per the decision given by the Hon'ble Supreme Court in the case of Dayawanti Vs. Commissioner of Income Tax [2017] 84 taxmann.com 296 (SC), the addition can be made on the basis of statement of assessee and also the estimation of sales & gross profit rates can be done by the AO by rejection of books of accounts.
5. The grounds of appeal are without prejudice to each other.
6. The appellant craves to add, alter, or amend any/ all of the grounds of appeal before or during the course of hearing of appeal.
3. Learned CIT(DR) next invites our attention to the CIT(A)’s lower appellate discussion restricting the Assessing Officer’s action 2 | P a g e disallowing the assessee’s alleged bogus purchases @ 30% in assessment order dated 21.03.2022 to that @ of 25%; reading as under:
“9. Ground nos. 3, 4 and 5: In these grounds the appellant challenged the addition made by the AO amounting to Rs.2,21,26,177/- on the basis of un-explained and bogus purchase. The case began with information received from the GST Department, which flagged certain vendors as non-genuine entities issuing invoices without actual supply of goods. Acting on this information, the Assessing Officer (AO) disallowed the purchase amount of Rs.2,21,26,177/-as bogus, alleging that the transactions were sham and intended to inflate expenses, thereby reducing the appellant's taxable income. The AO's observations included:
1. 1. Incomplete Documentation: The appellant did not provide complete records substantiating the purchases.
2. Mismatch with GST Data: The appellant's submissions did not align with the data received from the GST Department.
3. Non-submission of E-Way Bills: The appellant failed to provide e- way bills to corroborate the movement of goods.
4. Statements of Accommodation Entry Providers: Statements from Mr. Sanjay Jain and Mr. Bhushan, known entry providers, confirmed that the flagged vendors were involved in issuing fake invoices without the supply of goods. 9.1 The appellant contested this conclusion and submitted extensive documentation during the assessment and appellate proceedings, including: 1. Non-applicability of E-Way Bills: Argued that the e-way bill system was not mandatory during the initial period of AY 2018-19.
2. Partial Corroboration: Submitted purchase registers signed by company officials and counter-signed by government authorities during site inspections, along with delivery challans, GST filings etc. which supported the genuineness of 70% (approx.) of the purchases.
Exclusive Nature of Business: Emphasized that the materials were essential for the appellant's construction activities, and no alternate use of such materials was evident. Despite the submissions, the AO disallowed the purchase amount of Rs.3,00,05,434/-, citing inconsistencies in the purchase registers, lack of robust evidence for 30% (approx.) of the purchases, and reliance on vendors flagged in the GST report. Furthermore, the AO contended that even the verified purchases exhibited discrepancies that cast doubt on their genuineness. 9.2 Discussion on Bogus Purchases 1. GST Findings and Flagged Vendors: The GST Department's report flagged certain vendors as issuing invoices without supplying goods. This information was the starting point for the AO's scrutiny. The GST findings, corroborated by the recorded statements of Mr. Sanjay Jain and Mr. Bhushan, established the dubious nature of these vendors and raised legitimate concerns about the genuineness of the transactions. However, the GST report alone cannot be the sole basis for disallowance unless supported by independent evidence. In the present case, while the flagged vendors are suspect, the appellant has provided partial corroboration for a significant portion of the purchases. 2. Incomplete Documentation: The AO noted that the appellant failed to provide complete records, particularly linking invoices with material delivery and GST filings. This gap adds to the doubts about the transactions' authenticity. The appellant's defence that 70% (approx.) of the purchases were corroborated through site inspections lends partial support to its claim but does not eliminate doubts about the remaining 30% (approx.), for which no independent evidence was provided. 3. Non-submission of E-Way Bills: The AO contended that the absence of e-way bills undermined the appellant's claim. However, the appellant's argument that e-way bills were not mandatory during the initial phase of AY 2018-19 is valid and supported by the timeline of the GST framework implementation. While the absence of e-way bills does not conclusively prove the purchases were bogus, it leaves an evidentiary gap that contributes to the AO's skepticism.
Accommodation Entry Providers' Statements: The recorded statements of Mr. Sanjay Jain and Mr. Bhushan, who admitted to issuing fake invoices, provide direct evidence against the flagged vendors. Their admissions strengthen the AO's case for doubting the 4 | P a g e
genuineness of the transactions and suggest that a portion of the purchase value could be inflated. 9.3 Discussion on the application of GP: - The appellant operates solely in the construction business, and its reported sales and project activities have not been questioned. Further, in this case, the AO has not given any explanation for this purchase being for non-business purpose and also there is no finding of any other business in assessment order. Thus, in given situation these purchase transactions may be covered under the hands of business transactions only. This strongly indicates that the materials were utilized for business purposes, even if the purchase prices were inflated or routed through flagged vendors. On careful perusal of case, it is evident that Judicial precedents have consistently held that when purchases are suspected to be bogus but linked to business activities, only the profit element embedded in the transactions should be taxed. In the case of CIT vs. Simit P. Sheth (2013) (356 ITR 451 (Guj)), Held that only the profit element in suspected bogus purchases should be added to income, with a GP addition of 12.5%. Further, in the case of CIT vs. Nikunj Eximp Enterprises Pvt. Ltd. (2015) [372 ITR 619 (Bom)], stated that when sales are not questioned, disallowing the entire purchase amount is inappropriate, and taxing a reasonable GP margin is sufficient. Similarly, in the case of PCIT vs. Paradise Inland Shipping Pvt. Ltd. (2017) (250 Taxman 106 (Bom)), reiterated that only the profit element should be taxed in cases of suspected inflated purchases, These principles recognize that materials might have been used in business, but their purchase costs could be inflated due to routing through suspicious vendors. In this case, Cement, a primary input in construction, is taxed at the highest GST slab of 28%. This high tax rate reflects the premium nature of the product and its significant contribution to the cost structure. Inflated invoices for cement likely include higher profit margins retained by entry providers. Thus 25% GP addition aligns with the higher costs and potential inflation embedded in such transactions. 9.4 In view of the above observation based upon assessment order and written submission with supporting documents filed by the appellant and 1 consider, while 70% of the purchases were partially corroborated, discrepancies in documentation and vendor credentials justify treating the purchase value with uniform skepticism. Applying a 25% GP rate ensures that the profit element in alleged bogus purchases is taxed, addressing the AO's concerns while acknowledging the appellant's business reality. The flagged vendors, corroborated by statements from accommodation entry providers, establish the dubious nature of the transactions. However, the exclusive nature of the appellant's business and partial corroboration 5 | P a g e for 70% (approx.) of purchases indicate that materials were likely utilized in business. Applying a GP rate of 25% on the purchase value of *3,00,05,434 results in an addition of ₹75,01,359/- to the appellant's income as the profit element embedded in the transactions. Therefore, out of addition of ₹3,00,05,434/- made on account of bogus purchase the addition of ₹75,01,359/- sustained.”
4. Learned CIT(DR) vehemently argues in this factual backdrop that the Assessing Officer herein had rightly relied upon the information and inputs coming from the GST department after finding certain vendors as non-genuine entities issuing invoices without actual supply of the corresponding good, so as to disallow the assessee’s purchases herein pertaining to the relevant financial year, amounting to Rs.2,21,26,177/-in question. Mr. Chandra seeks to buttress the point in this factual backdrop that the Assessing Officer himself had shown considerable leniency in the assessee’s cases whilst disallowing its purchases herein @ 30% which deserves to be restored in the instant “lead” appeal.
We have given our thoughtful consideration to the Revenue’s foregoing vehement contentions and the assessee’s stand all along reiterating their respective pleas. We make it clear at the cost of repetition that what all is in dispute herein is 5% of the assessee’s alleged bogus purchases component since the Assessing Officer had disallowed the same @ 30% which has been restricted to 25% 6 | P a g e only in the lower appellate discussion. Learned CIT(DR) could hardly dispute that the CIT(A) herein has already quoted a catena of case-law (supra) wherein similar purchase disallowance has already been restricted to GP component of 12.5% only (supra). Be that as it may, we are of the considered view that no interference on our part is warranted in the learned CIT(A)’s well-reasoned findings in the peculiar facts of the instant case. The Revenue fails in its instant sole substantive grievances as well as in the “lead” appeal .
Same order to follow in the Revenue’s remaining three latter appeals 624 & 633/Del/2025 since involving identical set of facts and issue(s) raised therein. 7. These Revenue’s four appeals 632, 624 & 633/Del/2025 are dismissed in above terms. A copy of this common order be placed in the respect case files. Order pronounced in the open court on 12th August, 2025 Sd/- Sd/- (MANISH AGARWAL) (SATBEER SINGH GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 12th August, 2025. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 7 | P a g e