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Facts
The assessee, an individual running a proprietorship firm dealing in metals, faced additions to his income due to alleged non-genuine purchases based on information from the Sales Tax Department. The AO treated 12.5% of the purchases as income.
Held
The Tribunal held that the AO erred in making additions based solely on the Sales Tax Department's information without independent inquiry, especially when the assessee provided substantial evidence like purchase bills, bank statements, and stock registers.
Key Issues
Whether additions based on alleged bogus purchases are justified when the assessee has provided supporting evidence and the AO has not conducted independent verification?
Sections Cited
147, 250, 143(3), 145(3), 133(6)
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Income Tax Appellate Tribunal, “SMC” BENCH, MUMBAI
Before: SHRI SANDEEP GOSAIN
Date of Hearing 04.09.2025 Date of Pronouncement 12.09.2025 ORDER Per: SHRI. SANDEEP GOSAIN, J.M.:
The present appeals have been filed by the revenue challenging the impugned order dt. 06.05.2025 passed under section 250 of the Income Tax Act, 1961 (‘the Act’), by the National Faceless Appeal Centre (NFAC) / CIT(A) for the assessment year 2011-12. The assessee has raised the following grounds of appeal:
1. The Ld. Commissioner of Income Tax (Appeals) has erred in law and facts in passing an order without complying with the principles of natural justice.
2. The Ld. Commissioner of Income Tax (Appeals) ought to have appreciated that the reopening of assessment u/s 147 of the Act was invalid and bad in Law.
3. The Ld. Commissioner of Income Tax (Appeals) has erred in law and in facts in confirming the disallowance of 12.5% of purchase amounting to Rs. 23,06,220/-.
4. Your Petitioner humbly submits that all the documents and evidences such as copies of purchase bill, copies of ledger accounts of various parties in the books of your petitioner, copy of bank statements confirming the payment made, the quantitative statement in respect of purchase and corresponding sales were furnished to the learned Income Tax Officer during the assessment proceeding and to the Learned CIT (Appeal) during hearing.
5. Your Petitioner prays that the disallowance of Rs 23,06,220/- made by the Learned Income Tax Officer and Confirmed by CIT (Appeals) be deleted.
6. Your Petitioner humbly submits that the case laws cities by the Learned Income Tax Officer and the Learned CIT (Appeals) are distinguishable on facts.
7. The Appellant craves leave of Your Honour to add to, alter, amend and/or delete all or any of the foregoing grounds of appeal.
2. The brief facts of the case are that Assessee is an individual and having business income from proprietorship firm Mahima Steels carrying business of trading in Ferrous and Non Ferrous Metal. The case was reopened on the basis of information received from DGIT (Inv.) Wing of Sales Tax Department that there is issue of hawala bills / accommodation entries by several parties, which was availed by several assessee. Therefore the assessment u/s.143(3) r.w.s. 147 dated 27-01-2016, was passed by the AO, thereby making additions of Rs 23,06,220/- to the total income of the Assessee on 12.5% of the Total Non Genuine Purchase by invoking the provisions of section 145 (3) of the Act.
4. Aggrieved by the said order, the assessee preferred appeal and filed submissions, but the same was dismissed by Ld. CIT(A).
5. Aggrieved by the said order the assessee preferred present appeal before us, on the grounds mentioned herein above.
6. First of all assessee contested the additions on merits by pressing ground No. 3 to 5. All these grounds are interrelated and interconnected and relates to challenging the order of Ld. CIT(A) in upholding the additions therefore I have decided to adjudicate the same through the present consolidated order.
I have heard the counsels for both the parties, perused the material placed on record, judgments cited before me and also the orders passed by the revenue authorities. From the records, I noticed that during the year under consideration, the Assessee made purchases worth Rs. 1,84,49,761/-, the party- wise details of which are reproduced in para 2 of the assessment order. In the assessment order, the AO had observed that the names of these parties appeared in some list published by the Sales Tax Department and that this party has issued fictitious bills to the Assessee without actually supplying goods.
In order to support its contentions, the assessee had produced the following evidence to substantiate the genuineness of its purchases:
a. Copies of purchase bills; b. Copies of sale bills evidencing sale of goods regarded by AO as fictitious; c. Stock register i. e inward and outward of material; d. Bank statement evidencing payment by account payee cheques; and Mohanlal Chunilal Mutta., Mumbai. e. Ledgers of purchase parties in Assessee's books.
Even after having gone through the voluminous evidences furnished by the Assessee, I noticed that the AO did not find any discrepancy in the evidence so furnished. However without citing any reason and by mere ipse dixit the AO summarily observed "after analysis of facts of the given case as discussed above...", the AO simply considered 12.5% of the amount of purchases as the profit element therein and made the addition of Rs. 23,06,220/-.
10. After having considered the material placed on record and also hearing the parties at length, I find that the assessee had proved by placing on record all the evidences to substantiate the genuineness of its purchases. In this regard, I have evaluated the following documents: i. Copies of purchase bills ii. Stock register Copies of sale bills iv. Bank statement evidencing payment by account payee cheques V. Ledgers of purchase parties in Assessee's and vi. Corresponding sales made from purchase parties.
The copies of purchase bills, demonstrates that the impugned purchases of the Assessee are supported by third party invoices. This also demonstrates that the Assessee has not merely claimed the purchases as expenditure without there being proper evidence of the same. This shows the genuineness of Assessee's purchases. The factum of third party vouchers having been issued demonstrates that the purchases are genuine.
The documents regarding Stock register/ Quantity tally clearly shows entries of the doubted purchases being recorded. This shows that the items of which purchase have been doubted were actually received by the Assessee and duly recorded in the books of accounts. The purchases have even been sold and accounted for as "sales" and offered as income. The quantity tally shows the movement of goods and reconciliation as called for by the AO.
The copies of sale bills, under which those very items whose purchases have been doubted are sold only further demonstrate the genuineness of the Assessee's purchases. The sales have not been doubted by the AO. Therefore, unless first there is a purchase of the items (which is shown by the purchase invoices), unless there is receipt of those goods (which is shown by stock register), there cannot be any sales.
If the purchases were bogus, the Assessee could not have sold the impugned goods. The fact that the Assessee has made sales and offered the same to tax itself demonstrates why the addition of any amount of purchases/ peak addition etc. is not justified. Also, if the purchases were bogus, the Assessee would not have been shown the unsold part as closing stock leading to higher income, thereby defeating the very purpose of the making the alleged "bogus purchases". Therefore, in my view the AO has grossly erred in making addition in respect of purchases.
The Bank statement evidencing payment by account payee cheques, proves that the payment to the suppliers for purchases made from them also demonstrate that the purchases had in fact been actually made. Thus no prudent businessman would pay for purchases unless the same have actually been made and goods received.
The Ledgers of purchase parties in Assessee's books – shows a corollary to business expenditure (i.e. purchases) is that the same is recorded in the books of accounts in the ledger of the party from whom purchases have been made. These ledger accounts demonstrate that all purchases from suppliers and payments made to them are recorded properly and shown in their respective accounts.
After having considered the aforementioned evidence, the Assessee had demonstrated the complete cycle of the transaction and led the evidence to its logical end. In so far as the AO is concerned, he had found no defect/ discrepancy in the above details/ evidence furnished by the Assessee. Even the gross profit rate on sales from these alleged bogus purchases is comparable to the gross profit on other sales. Thus, there were no reasons to doubt the genuineness of the transactions more so when sales out of these very purchases have not been doubted and taxed as income.
Thus, it can be seen that the Assessee had adduced all evidence before the AO as called for by him to substantiate the genuineness of its purchases.
On the contrary, the AO had summarily rejected the submissions and did not even conducted any enquiry of his own and merely relied on the purported findings of the Sales Tax Department. The AO did not even confront the Assessee with such findings during the course of assessment proceedings and directly referred to the same in the assessment order thereby even violating the principles of natural justice. Moreover the AO did not find any discrepancy in the evidence furnished by the Assessee and directly made the impugned addition without giving any reasons. In this regard reliance is being placed upon the decision in the following case laws:
CIT v. Nikunj Eximp Enterprises (P.) Ltd. [2013] 216 Taxman 171 (Bom.) (HC) Where sales were supported by purchase and payment was made through banks, merely because suppliers had not appeared before Assessing Officer purchase could not be rejected as bogus.
CIT v. Nangalia Fabrics (P) Ltd. [2014] 220 Taxman 17 (Guj.) (HC) (MAG.) Where purchases were supported by bills, entries were made in books of account and payment was made by cheque, said purchases could not be held as bogus purchases.
DCIT v. Shri Rajeev G. Kalathil, dated 20/8/2014 ITAT, Addition on the ground that one of the suppliers was declared a hawala dealer by the VAT Department was not justified. It was a good starting point for making further investigation and take it to logical end. But, the AO left the job at initial point itself. Suspicion of highest degree cannot take place of evidence. When the assessee filed all evidence purchases bills, payment details, evidence of purchase being recorded no addition can be made only because notices u/s 133(6) could not be served.
Ramesh Kumar and Co v. ACIT, dated 28/11/2014 Mumbai ITAT, In a case where the assessee has discharged the primary onus of showing books of account, payment by way of account payee cheque and producing vouchers for sale of good, addition on the allegation of bogus purchases cannot be made.
Shri Ganpatraj A. Sanghavi v. ACIT, dated 5/11/2014 Mumbai ITAT, It was not the case of the AO that purchases were bogus. AO's contention that assessee would have purchased material from grey market is based on surmises. Payments were made by account payee cheques and identity of parties was not in doubt. No addition can be made.
ITO v. Shri Deepak Popatlal Gala, dated 27/3/2015 Mumbai ITAT, No sales can be effected without purchases and merely because purchases were made from parties whose names are listed in the list of alleged hawala entry providers of the Sales Tax Department, purchases cannot be added once sales are accepted.
7. ITO ν. Nikhil A Jhaveri, dated 14/10/2015 Mumbai, The AO had ignored the documentary and corroborative evidences produced by the assessee in form of bank statements, declaration made under MVAT Act, TIN No., stock register containing quantitative details. Except for referring to the information received from the sales tax department the AO had not carried out any independent inquiry. If the evidences produced by the assessee are weighed against the information of the Sales tax department, it becomes clear that piece of the information was too light. Maximum it was a starting point for further investigation. But, the AO stopped at the beginning and made an addition though the assessee had produced reliable evidence in his favour. Secondly, in our opinion the CIT (A) had rightly opined that without purchases there cannot be any sale. Considering the facts and circumstances of the case, we are of the opinion that the order of the CIT (A) does not suffer from any legal or factual infirmity. So, confirming his order, we decide the effective ground of appeal against the AO.
8. ITO v. Premanand [2007] 107 TTJ 395 (Jd.), Since the AO had made addition merely on the basis of observations made by Sales-tax Department and had not conducted any independent enquiries, addition was to be deleted when the assessee had discharged primary onus cast on him by showing purchase in books of account, payment by way of account payee cheque, and producing vouchers of sales of goods
9. Cannon Industries (P) Ltd. v. DCIT [2015] 59 taxmann.com 65 (Mum.), When sales and all other quantitative details and figure regarding stock were accepted by the AO then in absence of any direct evidence showing non- genuineness of purchases, addition would not be sustainable on basis of assumption and conjectures relying on third party statements and that too without affording an opportunity to cross-examine to assessee.
10.Omkar Metal & Alloys Vs ITO (2020) to 1116 /Mum/2018 dated 03/03/2020-ITAT Mumbai, In case of bogus purchases where sales are accepted, quantitative details of purchases, sales and stock was filed with copy of delivery challans, the addition is required to be made only to the extent of lower GP declared by the assessee on bogus purchases as compared to G.P. on normal purchases. As per the G.P. statement chart placed on record we found that the GROSS PROFIT declared by assessee in respect of alleged bogus purchases was more than the GROSS PROFIT declared in the normal purchases. Under these facts circumstances, applying the judicial pronouncement laid down by Hon'ble Jurisdictional High Court as discussed above, we do not find any merits for the addition so upheld by CIT(A).
Facts and circumstances in all the three years are same, therefore, following the reasoning given hereinabove for A.Y.2008-09, we direct the AO to delete additions in all the years under consideration.
As per the facts of the present case also the sales of doubted purchases were accepted by the AO and the evidence of payment by account payee cheques and stock reconciliation statement, although placed on record, but not doubted and even the books of accounts were not rejected. The AO has not doubted the actual payment made though cheque and recorded in the books in respect of bills placed on recorded by the assessee. The AO has failed to brought on record any evidence of cash being received back by the assessee. Even no independent verification was carried out by the AO. Although AO had accepted the sales but on the contrary had made additions by merely relying upon the observations of sales tax department without conducting independent enquiries.
Therefore considering the totality of facts and circumstances as discussed by me above and also considering the voluminous detailed documentary evidences which was Mohanlal Chunilal Mutta., Mumbai. never rejected by the AO and also keeping in view the decisions of Hon’ble High Court and Coordinate Benches of ITAT and also while considering my findings recorded in the preceding paras, I am of the considered view that additions made by the AO are unsustainable in the eyes of law and deserve to be deleted. It is ordered accordingly.
In the result, the appeal filed by the assessee stands allowed.