SHITAL VIPULKUMAR DHOLAKIA,AHMEDABAD vs. THE INCOME TAX OFFICER, WARD-1(1)(3), AHMEDABAD

(Applicant) (Responent) : Assessee by Shri Tushar Hemani, Sr. Advocate and Parimalsinh B. Parmar, AR Revenue by : Shri Sher Singh, CIT-DR सुनवाई क� तारीख/Date of Hearing : 23/07/2025 घोषणा क� तारीख /Date of Pronouncement: /07/2025 आदेश आदेश/O R D E R आदेश आदेश PER MAKARAND V. MAHADEOKAR, AM: This appeal by the assessee is directed against the order dated 21.12.2023 passed by the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre [NFAC], Delhi [hereinafter referred to as “ CIT(A)”] under section 250 of the Income-tax Act, 1961 [hereinafter referred to as “the Act”], in relation to the assessment framed under section 143(3) read with section 144B by the Assessing Officer (“AO”) vide order dated 22.12.2022 for the Assessment Year 2021–22.

2.2 During the assessment, the AO observed that the assessee had claimed to have made purchases aggregating to Rs.1,45,77,00,806/- from the following three parties:

Sr. Party Name GSTIN Purchase Amount No. (Rs.) 1 Shree Laxmi Gold 24AATHA9372A1ZA 20,28,63,268/- (Prop: Amit Soni, HUF) 2 Parvati Gold (Prop: 24BSXPS5754H1ZX 1,02,99,71,264/- Rajkumar D. Soni) 3 Dhanadeepa Gold 24JRQPS9808L2ZL 22,48,66,274/- (Prop: Kenil N. Soni) Total 1,45,77,00,806/- 2.3 The AO issued notices under section 133(6) to the above parties, seeking confirmation of transactions. No response was received from Shree Laxmi Gold and Dhanadeepa Gold. From Parvati Gold, the proprietor Shri Rajkumar Dilipbhai Soni responded denying having undertaken any transactions with the assessee. He alleged that his identity documents had been misused and also stated that he was unaware of the said GST registration.

The AO also noted from GST portal records that all three entities were registered and cancelled on the same date, raising suspicion about the genuineness of transactions. Further, the AO observed that no transportation bills, delivery challans, or proof of movement of goods were furnished. Consequently, the AO held that the purchases shown were not genuine and inferred that the actual purchases were made from unidentified parties by cash payments, which attracted the bar under section 40A(3). Accordingly, the entire amount of Rs.1,45,77,00,806/- was disallowed and added to the total income.

2.4 The assessee preferred an appeal before the Ld. CIT(A), NFAC, raising multiple grounds that all purchases were supported by invoices, ledgers, GST returns and payments made through account payee cheques. It was also argued that no payment was made in cash and hence section 40A(3) had no application. The assessee also took a stand that reliance on third- party statements was made without furnishing copy or granting opportunity of cross-examination and that no show cause notice was issued in respect of purchases from Shree Laxmi Gold and Dhanadeepa Gold amounting to Rs.42.77 crores, resulting in violation of principles of natural justice.

2.5 The Ld. CIT(A) dismissed the appeal filed by the assessee and upheld the disallowance made by the Assessing Officer under section 40A(3) of the Act. In doing so, the Ld. CIT(A) observed, inter alia, that the purchases in question were shown from entities whose GST registrations appeared suspicious, as all three suppliers were found to have been registered and cancelled on the very same date, which raised serious doubts regarding their operational genuineness. It was further noted that despite issuance of notices under section 133(6) of the Act, no response was received from two parties, namely Shree Laxmi Gold and Dhanadeepa Gold, while in the case of Parvati Gold, the proprietor Shri Rajkumar Dilipbhai Soni denied having entered into any transactions with the assessee, thereby disowning the billing attributed to his entity.

2.6 The Ld. CIT(A) also recorded that the ledger confirmations filed by the assessee in support of these purchases reflected transactions carried out even after the date of cancellation of GST registration, which further eroded their credibility. Additionally, the absence of delivery challans, transportation bills, e-way bills, or any evidence of physical movement of goods led to the conclusion that the alleged transactions lacked commercial substance and were in the nature of fictitious billing. On the issue of payment method, although the assessee had made payments through banking channels, the Ld. CIT(A) held that the assessee failed to establish the identity and genuineness of the suppliers, and consequently, it could be reasonably inferred that actual cash payments were made to unidentified parties, thereby attracting the rigor of section 40A(3). In light of these findings, the Ld. CIT(A) upheld the disallowance of the entire purchase amount of Rs.1,45,77,00,806/- made by the Assessing Officer.

2.7 Aggrieved by the order of CIT(A), the assessee is in appeal before us raising following grounds of appeal:

2. The Ld. CIT(A) has erred in law and on facts of the case in confirming disallowance of purchases made by Ld. AO solely on the basis of assumptions, surmises and conjectures. Section 40A(3) has no application in the present case where payment for impugned purchases has been made only through banking channels.

3. The Ld. CIT(A) has erred in law and on facts in confirming disallowance of aggregate purchases of Rs. 42,77,29,542/- made from M/s. Shree Laxmi Gold and M/s. Dhanadeepa Gold which was made by Ld. AO directly in the assessment order without mentioning the same in the show cause notice, thus resulting in gross violation of principles of natural justice. 4. Both the lower authorities have erred in law and on facts of the case in not providing the statements recorded and opportunity of cross- examination which is in gross violation of principles of natural justice. 5. Alternatively, and without prejudice, the addition on account of impugned purchases shall be restricted to the profit earned by the appellant on sales made therefrom. 6. Both the lower authorities have passed the orders without properly appreciating the facts and they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. The action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed.

2.9 It was argued that the disallowance was made purely on suspicion without the Assessing Officer bringing on record any cogent material to prove either the factum or quantum of cash payment. It was further pointed out that the AO did not identify (i) the party to whom cash was paid, (ii) the date on which such cash payment was made, or (iii) the amount paid in cash on any particular day. In this backdrop, it was submitted that the initial onus to establish violation of section 40A(3) lay on the Revenue, and the same had not been discharged. Mere suspicion, however strong, cannot substitute for evidence, and therefore, the disallowance based solely on presumptions deserves to be struck down.

2.10 The AR submitted that the purchases made from the three parties, namely, Shree Laxmi Gold, Shri Parvati Gold, and Dhanadeepa Gold, were duly supported by proper bills, confirmations, bank statements evidencing payment through account payee cheques, audited accounts, tax audit report, and stock and purchase registers. Specific reference was made to the following documentary evidences forming part of the paper book:

- Confirmations from the said three parties (pages 51–61 of P/B); - Bank statements (pages 17–34 of P/B); - Sample purchase bills (pages 35–50 and 264–279 of P/B); - Sales and stock register (pages 62–75 of P/B); - Ledger accounts and GST returns of suppliers (pages 149–263 of P/B); - Tax audit report and annual accounts (pages 104–132 of P/B).

2.11 The AR highlighted that no defect had been pointed out in these documentary evidences, and despite multiple submissions, the AO failed to rebut the material on record. It was also pointed out that the show cause notice issued by the AO did not contain any reference to the proposed disallowance in respect of purchases from Shree Laxmi Gold and Dhanadeepa Gold, and yet the AO made additions in respect of those parties straightaway in the assessment order, thereby violating the principles of natural justice. Accordingly, the AR submitted that the disallowance of Rs.42,77,29,542/- in respect of these two parties alone deserves to be deleted on this ground.

2.12 Without prejudice, it was alternatively submitted that even assuming some irregularity in documentation or identity of parties, the entire purchases could not be disallowed, and at most, only the profit element embedded in such purchases could have been brought to tax, in line with settled judicial precedents.

2.13 In support, the AR placed reliance on the decisions in:

Sharma Associates v. ACIT (1995) 55 ITD 171 (Pune) (TM); i. Rajmal Lakhichand v. ACIT (2001) 79 ITD 84 (Pune); ii.

Western India Bakers Pvt. Ltd. v. DCIT (2003) 87 ITD 607 (Mumbai); iii. Free India Assurance Services Ltd. v. DCIT (2011) 132 ITD 60 iv. (Mumbai). Where it was decided that the provisions of section 40A(3) can be applied only in cases where an assessee in fact incurs an expenditure but violates the mandate of section 40A(3). However, the genuineness of the expenditure had never been in doubt.

The AR accordingly prayed that the entire disallowance be deleted in the interest of justice.

3.1 In response, the learned Authorised Representative (AR) submitted that the cancellation of GST registration with retrospective effect from the date of registration does not render the purchases void or fictitious in the eyes of the Act. The AR pointed out that there is no statutory embargo under the Act against effecting purchases from unregistered dealers, and in any case, the disallowance made in the present case was not on account of bogus purchases but was specifically made by invoking the provisions of section 40A(3). It was argued that such disallowance is impermissible, as all payments were made through normal banking channels and the Assessing Officer has neither recorded any finding nor brought any evidence to show that payments were made otherwise than by account payee cheque or electronic transfer.

3.2 The AR further referred to the ledger account of M/s. Dhanadeepa Gold placed at page 285 of the paper book and submitted that while the Assessing Officer questioned the purchase transactions with the said party, he did not dispute the sales made by the assessee to the very same party. This asymmetric approach, whereby the AO accepts one leg of the transaction while disbelieving the other, is factually inconsistent and legally untenable. It was also contended that the assessee had furnished confirmations, purchase bills, bank statements, sales records, stock registers, and audited accounts to substantiate the genuineness of the transactions, and that the impugned disallowance rests entirely on suspicion and presumption, unsupported by any cogent material.

3.3 During the course of hearing, we specifically inquired from the learned AR as to whether the input tax credit (ITC) claimed under the GST regime in respect of purchases made from the said parties—Shree Laxmi Gold, Shri Parvati Gold, and Dhanadeepa Gold—has been allowed or disallowed by the GST authorities. In response, the AR submitted that no notice or communication has been received by the assessee from the GST Department disputing the claim of input tax credit in respect of the said transactions. It was thus submitted that in the absence of any adverse action or disallowance under the GST framework, the presumption of fictitious or bogus transactions is misplaced and cannot form the sole basis for invoking disallowance under section 40A(3) of the Act.

3.4 Having heard the rival contentions and upon a careful examination of the assessment order and the appellate order passed by the learned CIT(A), it emerges that the core issue in controversy pertains to the assessee’s failure to substantiate the genuineness of purchases aggregating to Rs. 1,45,77,00,806/-, and not the mode of payment. The disallowance has been made in light of serious concerns regarding the identity of the suppliers, the credibility of supporting documentation, and the absence of evidence establishing actual delivery of goods or the commercial substance of the transactions.

3.5 At this juncture, we find it necessary to record certain key observations which arise from the record and the manner in which the lower authorities have proceeded. These aspects, in our considered view, go to the root of the matter and expose significant gaps in factual enquiry, legal reasoning, and inter-departmental verification. In the presence of such material gaps, we cannot afford to simply close our eyes or proceed on assumptions. A fair and lawful adjudication requires that these aspects be duly addressed and resolved through proper enquiry. Our observations are as under:

3.5.1 We find that the AO has applied section 40A(3) without identifying any specific instance of cash payment on a single day exceeding Rs.10,000/- to a single party. The entire disallowance appears to be based on inference that the payments made through banking channels are not genuine and, therefore, cash must have been paid to some other parties. Such presumption, in the absence of tangible evidence, vitiates the conclusion. The logic employed is circuitous and devoid of conclusive enquiry, making the order incomplete in nature, both in reasoning and outcome.

3.5.2 The record suggests that the impugned purchases of Rs.147 crores involved a GST component of approximately 3%, translating to a substantial sum of around Rs.4.41 crore. It remains unexamined whether this GST credit was claimed, and if so, whether it has been accepted or rejected by the GST authorities. This is a material aspect which has direct bearing on the genuineness of the underlying transaction. This issue casts serious doubt both ways either the credit was wrongly allowed by GST authorities (requiring their verification) or the cancellation is backdated and not in public domain during the transaction. In either case, the inter- departmental communication and reconciliation has not been examined by the AO or CIT(A), despite the present regime of automatic exchange of digital information between departments. This fact is crucial from the standpoint of commercial rationality. If the entire transaction was fictitious as alleged, how has the assessee reconciled or sustained the economic burden of ITC loss? Specific enquiry or analysis has not been made in this regard.

3.5.3 Merely issuing notices u/s 133(6), and that too unanswered or denied in one case, does not satisfy the requirement of "proper enquiry" as laid down in several judicial precedents. The AO has not placed on record any conclusive finding or assessment of the said parties, nor correlated their returns or filings. In the absence of such efforts, the basis for invoking section 40A(3) becomes questionable. As observed in decisions relied upon by the assessee, section 40A(3) is a rule of evidence and applies only where actual cash payments exceed Rs.10,000/- are demonstrably made to a person on a day. In those cases the controversy was limited to mode of payment along, in the present case the controversy extends to the core genuineness of the transaction. The impugned order is silent on this core requirement.

3.5.4 Given the power of inquiry vested in the CIT(A) under section 250(4), and the electronic access to GST data through ITBA and departmental interface, the failure to requisition the GST verification report or call for status of these vendors from the GST Department reflects a mechanical confirmation of the AO’s findings, rather than an independent judicial scrutiny.

3.5.5 The AR has placed on record ledger extracts (PB Page 285) showing that the assessee has also made sales to Dhanadeepa Gold, the very party from whom purchases are alleged to be fictitious. This aspect merits verification, as it could imply circularity or commercial settlement of entries, thereby affecting the real income and flow of funds. No such reconciliation has been undertaken by the AO.

3.5.6 The assessee, in his Ground No. 5, has taken an alternative plea for restricting the addition to profit margin on sale, if entire purchase is held non-genuine. This aspect raises not only a legal point, but also a contextual inference. Where the purchases are found to be from non-existent or unverifiable sources, the consistent view of the Courts is that the entire purchase amount need not be disallowed, and instead, only the profit element embedded in such purchases may be brought to tax as held by many judicial forums. However, the invocation of such an alternative plea by the assessee namely, that the addition, if any, be restricted to profit margin, when seen in conjunction with inadequate documentation, failure to furnish transportation records, and non-confrontation of supplier denial or GST irregularities, lends credence to AO’s suspicion that the purchases may not be fully genuine. Such a fallback position, while legally permissible and often invoked to mitigate litigation exposure, may also be read as a tactical concession, suggesting that the assessee’s primary explanation may not withstand scrutiny. It reflects an attempt to settle the dispute on an estimated basis rather than pursue complete deletion of the addition. In this backdrop, the alternative plea assumes significance and reinforces the need for restoring the matter to the AO for proper estimation, factual verification, and reconciliation, particularly if the assessee is unable to fully substantiate the identity and credibility of the claimed suppliers.

3.5.7 The Assessing Officer has proceeded to disallow the entire purchase value under section 40A(3) on the presumption that the banking channel used for making payments was mere accommodation and that actual payments were made in cash to unidentified third parties. However, the AO should have brought on record any evidence such as bank statements of the alleged supplier parties, cash withdrawal patterns, or flow of funds into and out of their accounts to establish the existence of a cash trail. In absence of such verification, the foundational requirement for invoking section 40A(3), namely, actual cash payment to a person in a day exceeding the prescribed limit, remains unsubstantiated. It is well settled that section 40A(3) is triggered by actual cash movement, and not by assumption or presumption. Without tracing cash withdrawals from the recipients or showing diversion of funds in cash, the presumption drawn by the AO is premature and factually incomplete. This, in our view, constitutes a critical omission in the enquiry process.

3.6 In view of the foregoing discussion and the material infirmities noted in the assessment as well as the appellate proceedings, we are of the considered view that the impugned disallowance of Rs. 1,45,77,00,806/- under section 40A(3) of the Act has been made without conducting adequate investigation, without establishing the foundational facts necessary to invoke the said provision, and in disregard of the principles of natural justice. In our opinion the absence of enquiry into the banking trail and financial transactions of the alleged suppliers make the enquiry incomplete. In such circumstances, the matter cannot be allowed to rest on incomplete inquiry, and it is therefore considered appropriate to restore the issue to the file of the Assessing Officer for a fresh, comprehensive examination in accordance with law.

3.7 The Assessing Officer has neither examined the actual mode and dates of payments nor traced the flow of funds or established any cash trail to suggest that payments were made in contravention of section 40A(3). No meaningful verification was conducted with the concerned vendors or with the GST authorities to ascertain the authenticity of the transactions. Likewise, the learned CIT(A) has confirmed the disallowance in a mechanical manner, without invoking his powers under section 250(4) of the Act to call for further reports, seek clarification from other departments, or direct an independent enquiry. In such circumstances, where the very genuineness of the purchases is seriously questioned, we cannot decide the matter by simply relying on judicial precedents that dealt with cases where the genuineness of purchases was not in dispute. The factual matrix here requires foundational verification before any legal consequence can be drawn as the genuineness of purchases depends on various evidences which have not been inquired by the Assessing Officer as well as the assessee has not fully discharged its onus. Hence, the disallowance cannot be either sustained or deleted in its present form and the issue warrants fresh adjudication after a proper and comprehensive enquiry. 3.8 We accordingly deem it fit and proper to restore the matter to the file of the Assessing Officer with a direction to conduct a de novo assessment on this issue after carrying out: - Proper verification of the identity and existence of the supplier parties; - Reconciliation of input tax credit (ITC) claimed under the GST law and status of such credit; - Enquiry regarding sale to and purchase from the same parties, if any; - Independent examination of the mode and manner of payment vis-à- vis section 40A(3); - Consideration of the alternative plea of restricting disallowance to the profit element, if applicable; - Correlation with assessments or proceedings, if any, in the case of the suppliers. The assessee shall be afforded reasonable opportunity to file evidences and explanations, and the Assessing Officer shall pass a speaking and reasoned order in accordance with law.