“bogus purchases”
The decision most relied on for bogus purchases is CIT v. Bholanath Poly Fab. Pvt. Ltd. (355 ITR 290), cited in 712 judgments on BharatTax.
Leading authorities on bogus purchases
If an assessee makes purchases from bogus parties, but the underlying goods are genuinely acquired and sold, only the profit margin embedded in such purchases, and not the entire value of the bogus purchases, should be added to the assessee's income.
In cases of alleged bogus or unverifiable purchases, rather than disallowing the entire purchase value, a reasonable profit element or a proportionate percentage of the purchases should be added back to the assessee's income.
Where purchases are found to be non-genuine or fictitious, a reasonable disallowance of 25% of such purchases or the peak credit, whichever is higher, can be made. This is applied to address unexplained expenditure under Section 69C when actual goods are likely procured from the grey market.
Income tax additions cannot be sustained merely on the basis of uncorroborated statements or allegations. The Revenue must bring on record sufficient material and allow the assessee to produce evidence to prove such additions.
Purchases may be treated as genuine even if the purchase parties are untraceable or not available for verification, as long as there is no specific evidence from the parties themselves denying the transactions or proving them to be bogus.
Transactions involving the purchase and sale of shares cannot be considered bogus where the assessee provides documentary evidence, unless the revenue brings substantial evidence on record to reject such proof. This principle is consistently applied in cases concerning claims of bogus long-term capital gains arising from penny stock transactions.
When an assessee obtains accommodation bills for purchases but the corresponding sales are genuine, the addition to income is limited to the gross profit margin embedded in such purchases. This principle acknowledges that the underlying sales were real, but profit was suppressed through bogus invoices.
In cases of alleged bogus or hawala purchases where the existence of transactions is not entirely denied, only the profit element embedded in such purchases, and not the entire purchase price, can be added to the assessee's income. The focus is on determining a reasonable profit percentage for such additions.
