If assessee fails to explain source of purchases, estimating profit rate contrary to Section 69C

When assessee failed to explain source of purchases expenditure, estimating profit rate was contrary to provision of Section 69C which calls for addition of the entire amount.

In a recent judgment, Hon’ble Supreme Court dismissed SLP against the judgment of the Bombay High Court which held that when assessee had not offered explanation of the source of the expenditure incurred on account of purchases, Appellate Authorities were not justified in estimating the profit rate which is contrary to the express provision of Section 69C of the Act.

ABCAUS Case Law Citation:
4877 (2025) (11) abcaus.in SC

The case of the Petitioner assessee was reopened under Section 147 of the Income Tax Act, 1961 (the Act) on the basis of an intimation received from Director General of Income Tax (Investigation) regarding bogus purchases made from havala operators.

The notice under section 148 was also served by affixture by the Ward Inspector. Thereafter, the AO made various unsuccessful attempts to serve a notice under sub-section (1) of Section 142 of the Act and ultimately the said notice was affixed on the front door of the office premises.

The Assessing Officer (AO) issued notices under Section 133(6) of the Act at the address of the persons from whom the assessee had purchased the goods but same were returned “unserved”. Since the assessee despite notices either sent by email or by affixture, did not appear before the AO during the course of the reassessment proceedings and failed to prove genuineness of the purchases, the AO made the additions of Rs. 20 crores on account of bogus purchases.

The CIT(A) relying upon the decision of the Gujarat High Court estimated 12.5.% of the bogus purchases as the additions to be made instead of confirming entire bogus purchases.

The Tribunal relied upon the decision of the Co-ordinate Bench of the Bombay High Court and dismissed the revenue’s appeal. It directed the AO to restrict the additions to the extent of bringing the GP rate of disputed purchases to the same rate as that of other genuine purchasers.

The Hon’ble High Court observed that the genuineness of the purchases would inter alia also include explanation with regard to the source for paying for such purchases. Explaining the source of purchases would be one of the prime considerations for concluding whether the purchases have been made from accounted or unaccounted sources and to test the veracity of transaction being only accommodation entry. It is well settled and undisputed that the onus of proving any genuineness of the expenditure claimed as deduction is on the assessee. The primary onus is on the assessee to discharge his burden to prove the purchases, which an assessee has claimed as a deduction under the Income Tax Act for arriving at the taxable income.

The Hon’ble High Court opined that there was no justification for nonappearance before the AO to establish the purchases.  The plea of the assessee that they were not served with the notices had been negatived by the Appellate Authority and the same had not been challenged. Therefore, the assessee had failed to prove the purchases of which the claim for deduction was made before the AO

The Hon’ble High Court opined that the Appellate Authorities did not appreciate that the issue before them was whether the assessee had proved the purchases of which the claim for deduction was made. The 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.

The Hon’ble High Court further observed that 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 assessee had failed to prove its claim of deduction of purchases, still by estimating profit, impliedly deduction of purchases was given. This approach would not be correct since it was nobody’s case that the assessee had made sales out of books by purchasing the goods out of books.

The Hon’ble High Court noted that the Gujarat High Court had observed that estimating a certain percentage of the bogus claim is against the principles of Sections 68 and 69C of the Act, and if the purchases are bogus, then it is not incumbent upon the Tribunal to restrict the disallowance only to confirm certain percentage of such purchases.

The Hon’ble High Court further noted that the Revenue was justified in relying upon the decision of the Calcutta High Court wherein a specific question was raised on the provisions of Section 69C of the Act as to whether the addition on account of bogus purchases should have been made of the entire expenses or only a certain percentage of the bogus purchases. It was observed that in spite of the AO having allowed the assessee to explain the transaction the assessee did not produce any document but stated that 2% of the bogus purchases may be added to the total income. Based on this, the High Court held that the purport of this admission would be that the assessee had accepted the allegation against them and precisely for that reason, they offered that 2% of the bogus purchases may be added to the total income. The High Court further observed if that was the factual position it was incumbent upon the AO to take the proceedings to their logical end and having not done so, the PCIT was fully justified in exercising jurisdiction under Section 263 of the Act by which the entire expenses was to be disallowed as bogus purchases. Similar view was taken by the Allahabad High Court.

The Hon’ble High Court observed that the assessee had not made any submissions on the provisions of Section 69C of the Act, although the same were explicitly framed in the admission order and relied upon by the revenue in the course of the hearing. Therefore, the only conclusion that can be arrived at is that the assessee did not dispute the applicability of the provisions of Section 69C of the Act to its facts.

The Hon’ble High Court held that assessee had not proved the genuineness of the purchases, which inter alia included the source of making the payment for such purchases.

Accordingly, the Hon’ble High Court allowed the appeal of the revenue by answering the question in favour of the revenue and against the assessee.

Not satisfied with the judgment of the High Court, the Department challenged it before the Hon’ble Supreme Court by way of filing a Special Leave Petition. However, the Apex Court dismissed the SLP with the following observations,

“Having heard the learned counsel appearing for the petitioner and having gone through the materials on record, we see no reason to interfere with the impugned order passed by the High Court.”

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