AGNELO GUSTAVO EUGENIO RODRIGUES,MUMBAI vs. DY COMMISSIONER OF INCOME TAX CIRCLE 24 1 MUMBAI , MUMBAI

The Ld. CIT(A) erred in upholding the disallowance of purchases of Rs. 1,35,66,404/-, without appreciating that the assessee had furnished bank statement, invoices copy showing VAT registration of the parties, consumption chart vis a vis sales, therefore the disallowance is unjustified.

The Ld.CIT(A) failed to appreciate that the parties are registered dealers with Sales tax authorities and are not in the list of suspected dealers on the portal of Sales tax Department, therefore to treat the said parties as non-genuine is unjustified.

The Ld.CIT(A) failed to appreciate that the Gross Profit of the assessee was consistence for last 3 years, the material consumption was also consistence and therefore the disallowance is unjustified liable to be deleted. II. Ad hoc disallowance of expenditure:

The Ld. CIT(A) erred in upholding the Assessment Order upholding the ad-hoc disallowance of genuine business expenditure ranging between 10% to 20% without any proper reasons.

The Ld. CIT(A) failed to appreciate that the expenditure incurred were wholly and exclusively for business purpose and supported by necessary voucher/ bills, therefore the disallowance is unjustified. Assessment time barred:

The Assessment Order is undated and therefore the order passed is not accordance with law liable to be quashed.

The Ld. CIT(A) erred in passing the impugned order after 15 years from date of institution, thus unreasonable delay in passing order

In ground no.1 to 3, the assessee has contested the addition in respect of certain purchases stated to be bogus by the authorities below. Facts of the case are that the assessee is the Proprietor of the firm M/s Weather Cool Sales, engaged in the business of trading and services, reseller in air conditioner and parts, labour job for air conditioners, repairing works and A.C. installation since many years.He filed return declaring total income at Rs.30,16,250/-. During assessment proceedings, notices u/s. 133(6) of the Act, were issued to certain parties to verify the genuineness of the purchases i.e Maruti Metals, Bhavna Enterprises, S.L.Enterprises, Metal Impex and Arich Metal. In cases of Maruti Metals, Metal Impex and Arich Metal, the notices were received back unserved which were again sent on the addresses provided by the assessee but they were again received back unserved. The assessee provided new addresses of such parties but they could not be located at the given new addresses. The assessee sent his employee, Shri Sunil Dawa to assist the Inspector of this office to find out the whereabouts of the given parties. Even this effort could not produce any result as parties could not be located. It was observed by the AO that the assessee was not maintaining any quality-wise, quantity-wise stock register, making it impossible to compare the items purchased and its corresponding consumption which strengthened the case that assessee had, in fact inflated purchases by debiting bogus purchase bills. On verification of P&L account, it was seen that the opening stock of Rs.16,10,666/- and closing stock is of Rs.18,43,542/-. Since the assessee was having trading and services business at least at any point of time there would be any stock of Rs. 16 lakhs. On verification of monthly sales and purchase statement, it was found that in the first two months, the gross profit worked out very high. Against the purchase of Rs.12.88 lakh sales made was Rs.42.61 lakh i.e. gross profit of Rs.29.73 lakh in first month and Rs.13.04 lakh in 2nd month. From this pattern of sales and purchases, it was evident that gross profit in first month was 69.7% and in second month, it was 34.78% whereas the assessee was showing the gross profit of 23% only. In first two months assessee was having higher profit and in later month the gross profit reduced. This could only be done by making bogus purchases and inflating purchases in the end of the year. This observation also strengthened the fact that the assessee was showing bogus purchases from certain parties mentioned in the order which were not traceable even by the assessee himself. In view of the above facts, it was held that purchases of Rs.1,35,66,404/- made from the parties mentioned above were not genuine and added back to the income of the assessee u/s Section 68 of the Act.

Aggrieved, the assessee filed appeal. Before the ld.CIT(A),it was claimed that the impugned purchases were genuine, evidenced by valid commercial invoices from parties registered with the Sales Tax Department, whose TINs were on the bills. The material was consumed, enabling the declared turnover, and it was argued that the Sales Tax Department had not declared these parties as bogus. The assessee attributed the untraceability of parties to the passage of over two years since the purchases. It was also emphasized that balance confirmations and Income Tax Returns of these parties were submitted and payments were made through crossed account payee cheques, relying on bank KYC norms. The ld.CIT(A) held that the onus to prove the genuineness of transactions, including identity, creditworthiness of the supplier, and the genuineness of the transaction itself, lay squarely with the assessee. The Hon'ble Delhi High Court in CIT v. Sophia Enterprises (2012) 343 ITR 366 (Delhi HC) and the Hon'ble Bombay High Court in CIT v. Shamim M. Bharwani (2014) 362 ITR 143 (Bom HC) had consistently held that if suppliers are untraceable, the assessee had a heavy burden to prove the genuineness of the transactions. In the present case, the AO undertook reasonable steps to verify the purchases by issuing notices under section 133(6) of the Act. The fact that these notices were unserved at both old and newly provided addresses, and that the assessee's own employee confirmed the untraceability of these parties, created a strong prima facie case for doubting the genuineness of these purchases. While the assessee argued that untraceability after two years was not their fault, the department's inquiry revealed that these suppliers were not existing entities at the time of verification, raising serious questions about the authenticity of the transactions. The reliance on Sales Tax registration and the absence of these parties from a "bogus dealer" list prepared by the Sales Tax Department was not conclusive for Income tax purposes. The scope and verification procedures under Sales Tax laws could differ from those under Income Tax laws. Furthermore, while payments made through account payee cheques were a necessary condition for certain deductions and often indicated a genuine transaction, they were not, by themselves, conclusive proof of genuineness, especially when the existence or genuineness of the supplier itself was in doubt. He observed that the Hon'ble Gujarat High Court in M/s. N. K. Proteins Ltd. vs. DCIT (2017) 81 taxmann.com 161 (Gujarat HC) and the Hon'ble Rajasthan High Court in CIT v. R. N. Bagrodia (2012) 347 ITR 148 (Raj HC) had held that mere payment through banking channels was insufficient, if the genuineness of the supplier or transaction cannot be established. The AO's findings regarding the absence of a quantity-wise stock register further weakened its claim of material consumption. The significant disparity in the Gross Profit ratios in the initial months (69.7% and 34.78%) compared to the overall declared GP of 23% strongly suggested manipulation of purchases to reduce profits. The assessee's revised GP calculation was self-serving and appeared to be an attempt to reconcile figures retrospectively without verifiable primary evidence. The AO's analysis, based on the records and inquiries, reasonably pointed to inflation of purchases. Given the cumulative evidence i.e.untraceability of suppliers despite diligent efforts by the department and lack of quantity-wise stock records, and significant discrepancies in profit margins, the ld.CIT(A) held that the AO was justified in concluding that the purchases were not genuine and adding them back to the assessee's income.

Before us, the ld.AR has contended that all relevant details were furnished in support of the genuineness of the impugned purchases.The assessee submitted sales and purchase summary, copy of bank statement, balance confirmation from three parties, ITR of two parties along with comparative details of Sales, Purchases, Gross Profit & Net Profit for last 3 years, ledger accounts of parties and new address of these parties. The assessee further filed their VAT TIN no. alongwith Invoices and cheque payment details, delivery challans and ledger accounts. The assessee further stated that parties are not declared to be bogus or hawala parties by the Sales tax department as per list available at the relevant period.

1 The ld.AR further submitted that in view of the details furnished, the existence of the parties ought not to have been doubted merely on the basis that the notices u/s 133(6) of the Act returned unserved. Merely because parties not traceable subsequently purchase could not be treated as non genuine.The correct gross profit for the first two months was 24% and 23.15% annual Gross profit was at 19.56%. Therefore, the AO had come to incorrect conclusion. Further, considering April and May summer months in assessee line of business the sales and services would always be higher. He contended that once sell/consumption were accepted, purchase could not be disallowed merely because parties were not traceable as this proposition law is settled. Further, the cheques were cleared in the name of the parties sample copies of cheques are also placed on record alongwith bank statement. The assessee had, thus produced all the primary evidence to prove the purchases, the onus is on the department to disprove the facts, thus considering the totality of facts it could not be conclusively proved that the purchase made by assessee are non-genuine.

2 It is further stated that the decision in the case of Kanak Impex (India) Ltd Vs. PCIT [2025] 474 ITR 175 (Bom)(HC)is not applicable to the fact of the case primarily as the present case is not on sales tax information as was the case before it. Further, there the assessee had failed to file details before Assessing officer to prove its purchases. Therefore, in case of Kanak Impex (India) Ltd, hon'ble High Court was of the view that the purchase had been proved to be bogus as per the sale tax information. However in the facts of the present case are distinguishable.

3 The ld.AR has placed on several other judicial decisions i.e Arham Star Vs, ITO, [2025] 180 taxmann.com 44 (Mum-Trib.),Chinar Gems vs. ITO, ITA NO. 1439 & 1440/M/2025 & 2240 & 2236/M/2025, dated 14/08/2025 (Mum)(Trib),J Kumar Infraprojects Ltd. vs. DCIT [2025] 176 taxmann.com 193 (Mumbai - Trib.).M/s Mohommad Haji Adam and Co [2019] 103 taxmann.com 459 (Bombay) and M/s Paramshakti Distributors Pvt Ltd | ITA no. 413 of 2017, dtd 15/07/2019],PCIT v. Vaman International Pvt. Ltd (2020)422 ITR 520 /118 taxmann.com 406 (Bom) (HC)Commissioner Trade and Tax Delhi v. Shanti Kiran India (P.) Ltd. [2025] 179 taxmann.com 665 (SC) [09-10-2025] etc.

The ld.DR relied on the orders of the authorities below submitting that the assessee failed to prove the genuineness of the impugned purchases. The decision of the hon'ble High Court in Kanak Impex was squarely applicable to the facts of the case.

We have carefully considered all the relevant facts of the case, perused the records and heard rival submissions. It is a settled law that onus is on the assessee to prove the genuineness of any expense, including purchase which has a bearing on the taxability of its income. The assessee failed to prove the said purchases as despite best efforts of the AO, they could not be traced though surprisingly, the assessee submitted their tax details, sales tax orders etc. to prove the genuineness of the transactions. However, once the said parties were found non traceable, the AO was prevented from making any further inquiry or investigation into the reality of purchases as is being claimed. Onus is all the more on the assessee since it has been admitted that he transacted with the said concerns in other years as well. Therefore, their untraceablity at the given addresses raises serious doubts about the impugned transactions.

1 Moreover, he failed to make any observation or made any attempt to distinguish the landmark decision of hon'ble Supreme Court in the case of N.K. Protein P.Ltd (supra). Rather, in a series of recent judgements, the hon'ble Bombay High Court in similar cases of purchases has come down heavily on such dubious transactions and held categorically that entire non genuine purchases, if not proved are liable to be treated as bogus and added to the income and no addition was justified on estimate basis, once there is a finding by the authorities that the purchases could not be proved by the assessees. The hon'ble High Court has also been critical of appellate authorities restricting the addition to certain percentage implying thereby that any such transaction would be either genuine or bogus and needs to be allowed/disallowed in toto, depending upon the facts and the circumstances of the case although in the present case, the ld.CIT(A) has upheld the entire unproved purchases and has not applied any percentage.

2 In this regard, we refer to the landmark decision in the case of Kanak Impex in Income Tax Appeal No. 791 of 2021 dated 03.03.2025. In this case Rs.20,06,80,150/- was added on account of bogus purchases since the genuineness of the purchases could not be verified. Relevant paras are extracted as below for ready reference: "The CIT(A) further observed that the activities of the accommodation entries in the trading community are not unheard of and further stated that the investigation by the Sales Tax Department concerning VAT violations cannot be lost sight of more particularly since the names of the bogus sellers supplied by the Sales Tax Department are appearing in the books of respondent-assessee and, therefore, the link of involvement of the respondent-assessee in getting bogus bills is established. However, after giving the findings on the bogus purchases, the CIT (A), without any further reasoning, straight away referred to the decision of the Gujarat High Court in the case of CIT Vs. Simit P. Shethi and estimated 12.5.% of the bogus purchases as the additions to be made instead of confirming entire bogus purchases.

The CIT(A) has also given a finding against the respondent- assessee in paragraph 5.2.1, stating that the respondent-assessee failed to prove the genuineness and source of the purchases and confirmed its involvement in the modus operandi. In our view, CIT(A) was not justified after giving such a finding that the additions should be restricted only to 12.5% of such purchases and not entire purchases. The issue before the CIT(A) was not whether the profit disclosed by the respondent-assessee was low so as to justify the estimation of the profit of 12.5%. The issue before CIT(A) was whether the purchases had been proved and the CIT(A), having observed against the respondent-assessee on this issue, ought to have confirmed the additions of the entire purchases. In our view, the CIT(A) mi irected himself by estimating a profit of 12.5%.

It was nobody's case that both the sales and purchases are unaccounted. If that be so and the purchases have been recorded in books of account by accommodation entry, then same gets automatically reflected in the books of account. In the instant case, since the purchases are recorded by accommodation entry in the books of account and sales have not been disputed, the CIT(A) was not justified in estimating the profit, when the basis of addition was not low profit.

In our view, both the Appellate Authorities ought to have appreciated that the issue before them was whether the respondent-assessee had proved the purchases of which the claim for deduction was made. The respondent-assessee, having failed to discharge its onus on this issue before all three authorities, in our view, the additions made in the assessment order by the AO was justified.

If the approach of the Appellate Authorities of estimating the profit on such purchases is to be accepted, then, in effect, the consequence would be that even if respondent-assessee has failed to prove its claim of deduction of purchases, still by estimating profit, impliedly deduction of purchases is given. For example, if the purchases by accommodation entries are Rs.100/- and a profit of 10% is estimated, then to the extent of Rs.90/- deduction on account of purchases is deemed to have been given by the Appellate Authorities. This approach would not be correct since it is nobody's case that the respondent-assessee has made sales out of books by purchasing the goods out of books.

If the approach of the Appellate Authorities is accepted, then the provision of Section 69C, which is an enabling provision, would become redundant. Section 69C provides that where an assessee has incurred any expenditure and offers no explanation about the source of expenditure or the explanation offered is not in the opinion of the AO satisfactory, then the amount of expenditure may be deemed to be the income of the assessee and such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income. In our view, if the approach of the CIT(A) and the Tribunal is accepted, then it would amount to endorsing outright conduct of illegality, contrary to the express provisions of Section 69C of the Act, which the Appellate Authorities have entirely ignored. In the above example, by estimating 10% and thereby impliedly giving a deduction of Rs.90/-, in the teeth of the provisions of Section 69C of the Act, which expressly bars the allowability of unexplained expenditure.

We may also observe that the views expressed by us in the present appeal is also supported by the decision of the Co-ordinate Bench of this Court in the case Shoreline Hotel (P.). In that case based on information received from the Sales Tax Department, the purchases made by the assessee were held to be non-genuine purchases even though the assessee had filed the documentary evidence. However, the AO based on the submissions made by the assessee added only 15% of such purchases as income. The CIT invoked revisional juri iction under Section 263 of the Act and observed that the entire purchases ought to have been added and not only 15%. This finding and the revisional order of the CIT was confirmed by the Tribunal. On an appeal by the assessee before this Court, the Co-ordinate Bench of this Court observed that the reasons assigned by the CIT are cogent and satisfactory. The Court further observed that once the assessee could not produce any material nor he could ensure the presence of the suppliers before the AO, citing difficulties and agreeing to the additions of gross profit of the purchases would mean that the AO was expected to complete the exercise in accordance with law and there was no reason for the AO to accommodate the assessee in the manner done. The Hon'ble High Court therefore approved the reasoning of the CIT that in case where the purchases are not proved, the entire purchases should have been added and not certain percentage of such purchases. In our view, in the instant case also, the respondent-assessee as observed above has failed to prove the purchases and therefore there was no justification for CIT(A) and the Tribunal to confirm the additions only to the extent of 12.5%. In our view, both the Appellate Authorities ought to have confirmed the entire purchases in line with the decision of this (2018) 98 taxmann.com.

We may observe that CIT(A) in paragraph 5.2.1 has given a clear finding of fact that the respondent-assessee was involved in getting bogus bills. This finding has not been challenged by the respondent-assessee before the Tribunal, and only submission made before the Tribunal was on the estimation of gross profit by relying upon the decision in the case of Mohammad Haji Adam & Co. (supra).

In our view, in the instant case, the respondent-assessee has offered no explanation of the source of the expenditure incurred on account of purchases of Rs.20,06,80,150/- and, therefore, the AO was justified in making an addition of the said amount and the Appellate Authorities were not justified in estimating the profit rate and thereby impliedly grant deduction of such unexplained expenditure which is contrary to the express provision of Section 69C of the Act.

3 In another case of Shree Ganesh Constructionin ITA No.719/2028(Bom) dated 05.03.2025 and also in Drisha Impex in ITA no.1240 and 2087/2018 dated 7.4.2025, similar decisions have been rendered by the hon'ble juri ictional High Court in respect of such bogus/unproved purchases after taking into consideration the ratio laid down in the case of Kanak Impex(supra).

4 The ld.AR has placed reliance on various decisions of coordinate bench of ITAT, Mumbai. However, ratio laid down by the juri ictional High Court which has also duly considered its earlier decisions such as Md. Haji Adam etc.

5 The ld.AR has also submitted that names of these parties was not mentioned in the list of "bogus dealer" list prepared by the Sales Tax Department. However, such a contention would not make the impugned purchases sacrosanct. The arguments defies any logic and is therefore, not acceptable.

In view of the above discussion, we do not find any infirmity in the appellate order which is in consonance with above decisions of hon'ble Bombay High Court and the ratio of the decision in the case of N.K.Protein(supra). In the light of the legal position emerging from the above cited decisions and the facts of the instant case being identical, we are of the considered view that the assessee has failed to discharge the primary onus in proving the impugned purchases as genuine. The grounds in this regard are accordingly dismissed.

The ground no.4 and 5 pertain to ad hoc disallowance of certain expenses. The AO in respect of expenses debited to the profit and loss account in respect of Conveyance Expenses, Office expenses, Staff Welfare Expenses, Business promotion expenses, Motor car expenses and Depreciation on Car and Telephone expenses.

Before the ld.CIT(A) the assessee challenged the ad hoc disallowances of various expenses, arguing that they represented a small percentage of the total turnover (1% to 1.5%), thus implying immateriality. It claims that detailed books of accounts were maintained and audited, all expenses were vouched and verified, and self-made vouchers were prepared and signed by payees. The AO made these disallowances summarily without pointing out specific disallowable items. The ld.CIT(A) observed that the disallowances made by the AO were not merely "ad hoc" but were reasoned estimates based on the lack of proper documentation and the inherent nature of the expenses, which often involve a personal element or were difficult to verify. The AO provided specific reasons for each category of disallowance, such as reliance on self-made cash vouchers for conveyance, non-verifiable cash expenses for office, and the absence of a log book for motor car expenses. It is a well-established principle that while expenses incurred wholly and exclusively for business purposes are allowable, the burden to substantiate these expenses rests with the assessee. Where proper vouchers, log books, or verifiable details are not maintained, and a personal element cannot be ruled out, the AO is justified in making a reasonable estimated disallowance. The Hon'ble Calcutta High Court in CIT v. P.D. Agarwal (2007) 293 ITR 339 (Calcutta HC) upheld estimated disallowances when expenses were not fully verifiable. Similarly, the Hon'ble Delhi High Court in CIT v. B.D. Gupta (2003) 263 ITR 544 (Delhi HC) sustained a percentage disallowance for personal elements when log books were not maintained. He further observed that the fact that books were audited confirms the recording of transactions, but the auditor's role was not to certify that every expense allowable under the Act, particularly concerning aspects like "wholly and exclusively for business" or the absence of a personal element. Accordingly, he upheld the disallowance.

The ld.AR in this regard reiterated the same contentions as made before the appellate authority. Claiming that the AO made ad hoc disallowance of without pointing out even a single item of unvouched or unverifiable in nature. The assessee submits that the detailed books of accounts were maintained in the regular business and are audited. All the expenses are fully vouched and verifiable, all the details related to expenses were submitted during the assessment proceedings.

1 The ld.DR has placed reliance on the orders of authorities below.

We have carefully considered all the relevant facts of the case.The AO has made the disallowances after mentioning specific short comings in the accounts stating that the expenses were not fully proved to have been wholly and exclusively for the purposes of the business. The invoices/bills were stated to be self made and self serving. Therefore, personal element of the expenses cannot be ruled out altogether especially when the assessee is running a Proprietorship business. The ld.CIT(A) has affirmed the findings to which we also agree to a great extent .However, we opine that the quantum of disallowance appears to be on higher side and the interest of justice would be served, if we restrict the disallowance to 10% in place of 20% adopted by the AO.The AO would work out the actual amount to be disallowed accordingly and restrict the disallowance to that extent only and the balance would stand deleted. The ground in this regard is therefore, partly allowed.

In ground no.6 and 7 the assessee claimed that the assessment order was time barred. However, in the course of hearing before us, the ld.AR has preferred not to press these grounds. Accordingly, the same being not pressed are dismissed.

In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on 19/02/2026. SANDEEP GOSAIN (न्यायिक सदस्य /JUDICIAL MEMBER) Place: मुंबई/Mumbai दिनांक / Date 19.02.2026 Lubhna Shaikh / Steno PRABHASH SHANKAR (लेखाकार सदस्य/ACCOUNTANT MEMBER) आदेश की प्रतिलिपि अग्रेषित/Copy of the Order forwarded to : 1. अपीलार्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आयुक्त / CIT 4. विभागीय प्रतिनिधि, आयकर अपीलीय अधिकरण DR, ITAT, Mumbai 5. गार्ड फाईल / Guard file. सत्यापित प्रति //// आदेशानुसार / BY ORDER, उप/सहायक पंजीकार (Dy./Asstt.