12.5% addition on alleged bogus purchases u/s69C r/w s.115BBE upheld; assessee's appeal dismissed

ITAT dismissed the assessee's appeal and upheld the order of CIT(A) restricting addition on alleged bogus purchases to 12.5% under s.69C r/w s.115BBE. The Tribunal noted that the assessee failed to conclusively establish the identity of suppliers and genuineness of purchases and labour charges, which were supported only by self-serving documents, despite adequate opportunities and detailed investigation by AO, including virtual hearings. GST compliance documents, ITC details and TDS evidence were held insufficient to prove actual delivery of goods and services. No infirmity was found in the estimation made by CIT(A).

---

---

1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the purchases and labour expenses claimed, treated by the Assessing Officer as unexplained expenditure under section 69C read with section 115BBE, were proved as genuine by the assessee.

1.2 Whether, on the facts found, the entire amount of such purchases/expenses was liable to be added as bogus, or only the profit element embedded therein could be brought to tax, and whether the restriction of addition to 12.5% of the impugned purchases by the appellate authority was justified.

1.3 Whether the assessee's reliance on GST compliances (GST returns, e-way bills, ITC, TDS, balance confirmations, etc.) was sufficient to discharge the onus of proving identity and genuineness of the parties and transactions in the face of adverse verification and non-response under section 133(6).

1.4 Whether the Assessing Officer's enquiry was deficient so as to attract the ratio of the decision relied upon by the assessee regarding "half-hearted" enquiry in bogus purchase cases, or whether, on the contrary, the assessment was based on adequate investigation.

1.5 Whether the appellate authority correctly applied the precedent limiting addition on bogus purchases to 12.5% and whether such restriction was arbitrary, as contended by the revenue.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Genuineness of purchases and labour expenses; applicability of section 69C read with section 115BBE

Interpretation and reasoning

2.1 The case was selected for scrutiny on the basis that substantial purchases were made from suppliers who were either non-filers, had filed non-business Income Tax Returns, or had declared substantially lower turnover in their ITRs vis-à-vis GSTR-1.

2.2 The assessee produced ledger accounts, invoices, delivery challans, e-way bills, balance confirmations, GST portal tax credit details, and evidence of payments through banking channels and TDS, and demonstrated that for 19 out of 28 parties, ITRs had been filed; however, for 9 parties no ITRs were filed.

2.3 The Assessing Officer issued notices under section 133(6) to 28 parties; none responded. A Verification Unit physically inspected three key parties and found either wrong addresses, no business activity at the stated addresses, or mismatch between GST registration description (e.g. "retailer of garments") and the nature of supplies (paints for painting).

2.4 The appellate authority recorded that the assessee failed to furnish ITRs of all parties or to produce them for verification, and thus failed to discharge the primary onus of proving identity and genuineness; mere existence of a paper trail and banking channel payments was held insufficient when the sellers were found non-existent or unverifiable.

2.5 The Tribunal accepted that the Assessing Officer had conducted a thorough enquiry via section 133(6), Verification Unit reports, and opportunity through virtual hearings, and that the identity of the parties remained unestablished despite these efforts.

Conclusions

2.6 The purchases and labour payments, as claimed, were not fully established as genuine; the adverse verification and non-compliance with section 133(6) justified treating the transactions as relating to non-genuine/bogus parties and invoking section 69C.

2.7 However, on the facts, it was not concluded that the entire cash was siphoned off; rather, the situation was viewed as involving inflation of purchases/expenses, warranting only partial, not full, disallowance.

Issue 2: Quantum of addition on alleged bogus purchases/expenses; justification for restricting addition to 12.5%

Legal framework (as discussed)

2.8 The appellate authority applied the principle laid down by the High Court in the case where addition on bogus purchases was confined to the profit element at 12.5% by following the judgment in Simit P. Sheth (356 ITR 451), and noted that the jurisdictional High Court had recently affirmed such an approach in a similar bogus purchases context.

Interpretation and reasoning

2.9 The appellate authority expressly held that the case was not one of complete bogus debits siphoning off cash, but one where purchases/expenses "might have been inflated", and therefore only the profit embedded in such purchases should be brought to tax.

2.10 Relying on the Gujarat High Court decision in Simit P. Sheth, and on the jurisdictional High Court decision affirming restriction of addition to 12.5% on bogus purchases, the appellate authority directed that the addition be restricted to 12.5% of the impugned purchases (Rs. 17,31,43,257), confirming Rs. 2,16,42,907 and deleting the balance.

2.11 The Tribunal found that this approach was consistent with the factual findings (that transactions were not convincingly genuine, yet entire purchases could not be treated as non-existent) and with binding/judicially accepted precedent on estimating the profit element in bogus purchase cases.

Conclusions

2.12 The restriction of addition to 12.5% of the impugned purchases was held to be justified and not arbitrary; the appellate authority correctly applied the principle of taxing only the profit element where sales or business activity is otherwise accepted.

2.13 The Tribunal upheld the partial addition of Rs. 2,16,42,907 and confirmed deletion of the balance Rs. 15,15,00,350.

Issue 3: Evidentiary value of GST compliances, ITC, e-way bills and TDS versus direct income-tax verification

Interpretation and reasoning

2.14 The assessee argued that GST returns of vendors, reflection of transactions in the GST system, availability of ITC, e-way bills and TDS on payments, taken together, established genuineness; reliance was placed on a Tribunal decision where purchases were accepted on the strength of indirect tax documentation.

2.15 The revenue contended that despite such GST trail, the assessee could not establish the parties' identity, since notices under section 133(6) went unanswered and the Verification Unit reported non-existence or mismatch in activities; further, some parties had not filed ITRs or had filed non-business ITRs, and there was substantial mismatch between turnover reported in ITRs and GSTR-1.

2.16 The Tribunal accepted the revenue's contention that mere presence of transactions in the indirect tax system and associated documentation is insufficient, by itself, to prove identity, creditworthiness or genuineness under the Income-tax Act where direct verification fails or reveals discrepancies.

Conclusions

2.17 GST compliances, ITC and e-way bills were treated as supporting, but not conclusive, evidence; in the face of non-compliance with section 133(6), adverse physical verification and absence of ITRs/credible business disclosure by several parties, the assessee was held not to have discharged its primary onus.

Issue 4: Adequacy of enquiry by the Assessing Officer and relevance of precedent on "half-hearted enquiry"

Interpretation and reasoning

2.18 The assessee relied on a High Court decision which cautioned against "half-hearted" or superficial enquiries in bogus purchase cases and stressed the need for cohesive enquiry, including coordination with sales tax authorities, before making full additions for bogus purchases.

2.19 The Tribunal distinguished that decision on facts, noting that in the present case the Assessing Officer had: (i) issued notices under section 133(6) to all relevant parties; (ii) used the Verification Unit for on-site verification of selected parties; and (iii) afforded multiple opportunities, including virtual hearings, to the assessee to explain and substantiate the transactions.

2.20 It was noted that the adverse findings of the Verification Unit and the non-response of the parties constituted substantive material, unlike the scenario contemplated in the relied-upon decision where the addition was made on the basis of general information without proper, case-specific enquiry.

Conclusions

2.21 The enquiry conducted by the Assessing Officer was held to be adequate and not "half-hearted"; therefore, the ratio of the decision cited by the assessee to invalidate additions on the ground of inadequate enquiry was found inapplicable.

2.22 In light of the adequate enquiry and the appellate authority's reasoned estimation following binding precedent, the Tribunal found no infirmity in the impugned order and dismissed both the assessee's and the revenue's appeals.

---