Appeal allowed: additions for alleged bogus purchases disallowed; imputed 12.5% profit on purchases overturned under section 133(6) principles

ITAT CHANDIGARH allowed the appeal of the assessee, holding that additions for alleged bogus purchases could not be sustained. The Tribunal found sales undisputed, stock records and books not rejected, purchase rates comparable with other suppliers, and payments and GST records genuine; mere non-response to AO notices u/s 133(6) did not render suppliers non-existent. Reliance on precedents led to the conclusion that the CIT(A)'s imputed profit disallowance of 12.5% on purchases from questionable parties was unjustified, and the revenue failed to bring proof to justify rejection of those purchases.

---

---

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal and cross-appeal relate to the following issues:

(a) Whether the addition of Rs. 1,32,34,287/- made on an estimated basis by applying a profit rate of 12.5% on purchases from certain parties was justified.

(b) Whether the Assessing Officer and the CIT(A) were correct in doubting the genuineness of purchases made from certain parties who either denied transactions or did not respond to notices under section 133(6) of the Income Tax Act.

(c) Whether the documentary evidence submitted by the assessee, including tax invoices, e-way bills, banking channel payments, GST returns, and stock records, sufficiently established the genuineness of the purchases.

(d) Whether the non-filing of income tax returns or non-response by suppliers to notices under section 133(6) could be a basis for disallowing purchases or making additions.

(e) Whether the application of an estimated profit margin embedded in purchases is sustainable when the purchase prices are comparable or lower than those from regular parties.

(f) Whether the legal precedents relied upon by the assessee and the Revenue support the respective contentions regarding bogus purchases and additions.

(g) Whether the CIT(A) erred in rejecting the applicability of certain Supreme Court decisions relied upon by the Revenue in the context of bogus purchases.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (e): Validity of addition of Rs. 1,32,34,287/- by applying 12.5% profit embedded in purchases

Relevant legal framework and precedents: The principle that additions on estimated basis must be supported by cogent evidence is well established. The Hon'ble Supreme Court and various High Courts have held that when books of accounts are not rejected and the purchase prices are at par or less than regular parties, the presumption of bogus purchases or inflated profits embedded in purchases is not sustainable. Cases such as CIT vs Century Plyboards (SC), CIT vs Leaders Valves (P&H HC), and others have been cited.

Court's interpretation and reasoning: The Court noted that the CIT(A) had estimated profit embedded in purchases at 12.5% and sustained the addition. However, the Court examined the actual purchase rates and found them comparable or lower than those from regular parties, negating the basis for estimating profit embedded in purchases.

Key evidence and findings: The assessee submitted ledger accounts, bank statements evidencing payments through banking channels, invoices, e-way bills, GST registration status, and stock tally records. The purchases were supported by valid GST returns (GSTR-1 and GSTR-2A) and transportation documents. The Court found no discrepancy in stock maintenance or sales records.

Application of law to facts: Since the books of accounts were not rejected and the purchase prices were not inflated, the Court held that the basis for estimating profit embedded in purchases at 12.5% was flawed. It relied on the judgment in Prime Steel Industries Pvt. Ltd. vs DCIT, where similar facts led to disallowing such additions.

Treatment of competing arguments: The Revenue argued that the non-response of suppliers to notices and inactive GST status raised doubts. The Court rejected this, emphasizing that the GST registration was valid at the time of transactions and that non-response alone cannot lead to adverse conclusions.

Conclusions: The Court allowed the assessee's appeal on this ground and held that the addition of Rs. 1,32,34,287/- on estimated profit embedded in purchases cannot be sustained.

Issue (b), (c), and (d): Genuineness of purchases from parties denying transactions or not responding to notices under section 133(6)

Relevant legal framework and precedents: The principle that purchases cannot be disallowed merely because suppliers do not respond to notices or have not filed returns was emphasized in judgments such as Orissa Trading Corporation (SC) and various High Court rulings. The validity of purchases supported by documentary evidence including GST returns and e-way bills has been upheld in cases like M/s LGW Industries Ltd. (Calcutta HC) and Sanchita Kundu vs Assistant Commissioner of State Tax.

Court's interpretation and reasoning: The Court observed that the assessee had submitted comprehensive documentary evidence including invoices, e-way bills, bank payments, transportation documents, and GST returns confirming the transactions. The Court noted that the suppliers had valid GST registrations at the time of transactions and that the sales made by the assessee were not doubted by the Assessing Officer.

Key evidence and findings: The Court highlighted that the parties who denied transactions accounted for purchases amounting to Rs. 5,37,21,989/-, and other parties with doubtful status accounted for Rs. 5,21,52,513/-. The assessee's evidence included ledger copies, bank statements, invoices with GST numbers, e-way bills, and stock tallies. The Court found that the Assessing Officer and CIT(A) had accepted these evidences but still made additions on estimated basis.

Application of law to facts: The Court applied the principle that non-response or denial by suppliers cannot automatically render purchases bogus if the assessee has established the genuineness of transactions through valid documents. The Court relied on the Calcutta High Court's decision in M/s LGW Industries Ltd. holding that if purchases are genuine and supported by valid documents made before cancellation of GST registration, benefit of input tax credit and recognition of purchases must be allowed.

Treatment of competing arguments: The Revenue's argument focused on the non-filing of returns and inactive GST status of some suppliers. The Court rejected this on the ground that GST registration was valid at the time of purchase and e-way bills were generated accordingly. The Court further rejected the Revenue's reliance on the Apex Court decision in N.K. Proteins Ltd. as not applicable on facts.

Conclusions: The Court held that the purchases from the parties cannot be treated as bogus merely because of non-response or denial by suppliers. The documentary evidence submitted by the assessee was sufficient to establish genuineness, and no addition on this ground was warranted.

Issue (f) and (g): Reliance on legal precedents and correctness of CIT(A)'s order rejecting Revenue's grounds

Relevant legal framework and precedents: The Court considered judgments of the Hon'ble Supreme Court, various High Courts, and ITAT decisions including CIT vs Century Plyboards, Orissa Trading Corporation, Prime Steel Industries Pvt. Ltd., M/s LGW Industries Ltd., and others. The Revenue relied on N.K. Proteins Ltd. (SC) and Gujarat High Court's decision in Bholanath Poly Fab (P) Ltd.

Court's interpretation and reasoning: The Court found that the CIT(A) had rightly rejected the applicability of N.K. Proteins Ltd. on the facts of the case, as the assessee had produced valid documentary evidence and the books of accounts were not rejected. The Court held that the CIT(A)'s approach of not sustaining additions based on mere non-response of suppliers was consistent with judicial precedents.

Key evidence and findings: The Court noted that the Revenue failed to bring on record any proof to doubt the genuineness of purchases beyond non-response of suppliers. The CIT(A) had carefully considered the evidence and case laws and had reduced the additions substantially.

Application of law to facts: The Court applied the principle that additions or disallowances must be based on cogent evidence and not mere suspicion or non-response. The CIT(A)'s reliance on judgments that recognize the validity of documentary evidence and reject additions when books are not rejected was affirmed.

Treatment of competing arguments: The Revenue's contention that CIT(A) erred in rejecting their grounds was dismissed as the Court found no legal infirmity in the CIT(A)'s order. The Court emphasized that the Revenue's appeal was untenable given the facts and evidence.

Conclusions: The Court dismissed the Revenue's cross-appeal and upheld the CIT(A)'s order.

3. SIGNIFICANT HOLDINGS

"The mere non-response of the parties to the notices issued under section 133(6) of the Income Tax Act cannot be a ground to reject the purchases made by the assessee when the assessee has produced cogent documentary evidence including tax invoices, e-way bills, bank payment proofs, and GST returns confirming the genuineness of such purchases."

"Where the books of accounts have not been rejected and the purchase prices from the alleged doubtful parties are at par or lower than those from regular parties, the basis for estimating profit embedded in such purchases and making additions thereon is not sustainable."

"The validity of GST registration and generation of e-way bills at the time of transaction is a strong indicator of genuine purchases, and such evidence must be given due weightage in the assessment proceedings."

"Additions or disallowances must be founded on concrete evidence and cannot be based on mere suspicion or absence of response from third parties, especially when the assessee has maintained complete and consistent records."

"The CIT(A) did not err in rejecting the applicability of the decision in N.K. Proteins Ltd. (SC) as the facts of the present case are distinguishable and the assessee has satisfactorily established the genuineness of purchases."

Final determinations:

(i) The addition of Rs. 1,32,34,287/- made on estimated profit embedded in purchases is set aside.

(ii) The purchases from parties who denied transactions or did not respond to notices under section 133(6) are held to be genuine based on documentary evidence.

(iii) The Revenue's cross-appeal challenging the CIT(A)'s order is dismissed.

(iv) The appeal of the assessee is allowed in full.

---