SLP dismissed against 100 percent addition made by the High Court on account of bogus purchase
In a recent judgment Hon’ble Supreme Court dismissed SLP filed by the assessee against 100 percent addition made by the High Court on account of bogus purchase against three percent addition made by the Tribunal.
ABCAUS Case Law Citation:
4723 (2025) (08) abcaus.in SC
The appellant assessee was a private Ltd. Company engaged in trading in electronic items, toys, electronics, etc. The return of income filed for the relevant Assessment Year was accepted under Section 143(1) of the Income Tax Act, 1961 (the Act).
Subsequently, the case of the assessee was reopened on the ground that the purchases made from certain parties were non-genuine.
The Assessing Officer (AO) recorded that assessee had expressed its inability to produce regular books of accounts that were duly audited under the Act. It was also recorded that the assessee had confirmed that no incidental expenses relating to these purchases by way of octroi, transport, delivery expenses, etc. were incurred.
The AO also recorded the submissions made by the assessee during the assessment, that they are not able to locate the suppliers.
The Summons issued to the suppliers were returned unserved. The assessee also admitted during the assessment proceedings that they cannot submit the suppliers’ ledger since it was in the VAT department’s custody. It was also further stated that the portable hard disk containing all the accounts had been lost. The officer, in his order, has noted that no books of accounts were produced, no stock register was maintained, there was an outstanding liability on account of unpaid VAT, purchases had been inflated, suppliers and agents cannot be found at the addresses given by the assessee, and the assessee expressed its inability to provide new addresses or produce the parties.
Based on the above material and reasoning, the AO concluded that the assessee had not discharged its onus to establish the genuineness of the purchases from said suppliers.
As a result, the AO passed assessment order under Section 143(3) read with Section 147 of the Act wherein the peak of the purchases made from the alleged parties was added as bogus purchases.
The assessment order was challenged before the Commissioner (Appeal), who granted substantial relief to the assessee by confirming only 1% of the bogus purchase.
The Tribunal though convinced that the assessee had failed to discharge the primary onus of proving the purchases and it could not produce evidences to show actual delivery of material and also could not produce confirmatory letters from the alleged bogus suppliers and even the assessee failed to produce own books of accounts is in quantitative details. However, the assessee was in possession of purchases invoices and the payments were through banking channels as evident by ledger extracts of the various suppliers and bank statements. Also, sales turnover had not been disputed by the revenue.
The Tribunal opined that the trend of GP/NP rates did not show abnormal variations. Therefore, in such a situation, the addition, which could be made, was to account for profit element embedded in these purchase transactions to factorize profit earned by assessee against purchase of material in the grey market and undue benefit of VAT against bogus purchases.
With the above observations, the Tribunal increased the disallowance from 1% estimated by the Commissioner (Appeal) to 3% of the peak of the purchases.
The Hon’ble High Court observed that the assessee only placed reliance on the submissions made before the CIT (A) and did not challenge the Tribunal’s findings, thereby the assessee accepted findings of ITAT.
The Hon’ble High Court further noted that the justification given by the Tribunal for 3% addition as purchase from the grey market, was never the case put forward by the assessee and the justification was perverse and erroneous.
The Hon’ble High Court opined that the issue before the Tribunal was whether the purchases from the concerned suppliers were bogus and, if the answer was yes, whether the whole of the purchases should have been added. The Tribunal had concluded that the purchases were bogus and, therefore, was not justified in estimating, after giving such a finding, to confirm the disallowance of only 3% of the bogus purchases.
The Hon’ble High Court further observed that the AO and Tribunal had concluded that the assessee had not established the genuineness of the purchases, the assessee has failed to provide correct address of the suppliers, payment by account payee cheque is not sacrosanct, no proof by way of documentary evidence is filed, an enquiry made through ward inspector revealed that such suppliers do not exist at the relevant places and further, there was no correlation between the purchase and sales.
Before the Hon’ble High Court the assessee submitted that there was no material on record of any flowback of cash and, therefore, this transaction cannot be treated as bogus. However, the Hon’ble High Court opined that the AO had not based the disallowance on the said ground. In any case, whether there was any flowback of cash to the Respondent-Assessee could have been ascertained only if the bank statement of the suppliers had been furnished.
Further, the Hon’ble High Court rejected the submissions of the assessee that provisions of Section 69C of the Act were not invoked by any of the authorities and therefore no addition could be made is to be rejected. The Court stated that the provisions of Section 69C of the Act are enabling provisions and therefore, even in the absence of invocation of such provision, the addition could have been made. In any case, the ingredients of the provisions of Section 69C which deals with unexplained expenditure and non-allowability of unexplained such spending was in essence the subject matter of adjudication right from the assessment stage and merely because this provision was not specifically quoted, the assessee could not contend that no addition could be made.
The Hon’ble High Court opined that merely because the notices may not have explicitly referred to Section 69 C, no prejudice was caused, and this cannot be grounds to urge that the provision or the principles underlying the provision were never invoked. The failure to quote a legal provision or even quoting an incorrect provision would not vitiate an action if the power and authority are to be otherwise found in the Statute.
The Hon’ble High Court held that Tribunal erred by estimating only 3% of the alleged purchases as bogus to justify disallowance. There was a clear error of law, and the ITAT’s approach contradicted several decisions on the subject and by indulging in speculative reasoning that was never urged by or on behalf of the assessee, the Tribunal should not have estimated only 3% instead of confirming the disallowance of all the purchases.
The Hon’ble High Court also held that Revenue was also justified in placing reliance on the decisions of the Delhi High Court and the Allahabad High wherein, in very similar fact situations, if not identical, the addition of all the bogus purchases had been confirmed.
As a result, the High Court reversed the orders passed by the CIT(A) and the Tribunal and restored the addition made by the Assessing Officer.
Aggrieved, the assessee challenged the order of the High Court before the Hon’ble Supreme Court by filing a Special Leave Petition (SLP).
However, the said SLP was dismissed by the Hon’ble Apex Court with the following observations,
“Having heard the learned counsel appearing for the petitioner and having gone through the materials on record, we find no good reason to interfere with the impugned orders passed by the High Court. The Special Leave Petitions are, accordingly, dismissed.”
Download Full Judgment Click Here >>
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