Revenue appeal allowed; addition under Section 69C set aside; matter returned for GST-ITC reconciliation and supplier inquiry

ITAT AHMEDABAD allowed the revenue's appeal for statistical purposes and set aside the addition under s. 69C relating to unexplained purchases from five suppliers, restoring the matter to the AO for fresh inquiry. The tribunal upheld the AO's concerns about supplier identity, document credibility and delivery of goods, but directed the AO to specifically reconcile GST input tax credit (ITC) claims and obtain GST-return/status information from GST authorities to determine whether ITC was claimed or accepted and how any ITC loss was borne, since this materially affects the genuineness of the transactions.

---

---

ISSUES PRESENTED AND CONSIDERED

1. Whether the appellate authority was justified in deleting additions made under Section 69C of the Income Tax Act for alleged unexplained purchases where the creditworthiness, identity and genuineness of suppliers were not established.

2. Whether the appellate authority was justified in deleting additions treated as income arising from purchases from parties found untraceable or non-genuine where evidential defects existed.

3. Whether reconciliation of Input Tax Credit (ITC) under the GST regime and related GST returns of the suppliers is a material aspect that must be examined to determine the genuineness of purchases and whether the matter should be restored to the Assessing Officer for such examination and further enquiry (including suppliers' bank accounts and correlating proceedings against suppliers).

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Deletion of addition under Section 69C for purchases from suppliers whose business activity/turnover was not commensurate with purchases

Legal framework: Section 69C permits treating certain unexplained credits/expenditure as income where the assessee fails to explain the source; Assessing Officer may make additions where identity, creditworthiness or genuineness of transactions are not established. Administrative/verificatory steps (e.g., notices under Section 133(6), physical verification by Designated Verification Units) are relevant evidentiary sources.

Precedent treatment: No judicial precedents were cited in the judgment; therefore, precedent treatment is not applied in the Court's reasoning.

Interpretation and reasoning: The Tribunal found that the Assessing Officer relied on adverse findings from DVU physical enquiries - suppliers engaged in unrelated low-scale occupations and having turnovers not commensurate with amounts shown by the assessee - to make large additions under Section 69C. The appellate authority (CIT(A)) confined its review to bills, invoices, ledger confirmations and bank statements and did not address the adverse evidences collected by DVU regarding identity/creditworthiness. The Tribunal emphasized that the adverse findings are material and required consideration; deletion of additions without dealing with those adverse findings was insufficient.

Ratio vs. Obiter: Ratio - where the AO records adverse material on identity/creditworthiness derived from independent physical verification, the appellate authority cannot properly delete additions under Section 69C solely on the basis of invoices, ledger confirmations and bank entries without addressing and reconciling such adverse evidence. Obiter - none beyond observations about evidentiary sufficiency.

Conclusion: Deletion by the appellate authority was not sustainable without addressing adverse DVU findings; matter restored to Assessing Officer for further enquiry and reasoned decision on genuineness, including examination of additional material as directed.

Issue 2 - Deletion of addition on account of purchases from parties found untraceable / treated as non-genuine

Legal framework: Where suppliers are not traceable or where there are serious doubts about the identity/existence of suppliers, Assessing Officer may treat purchases as non-genuine and make additions; corroborative evidence (delivery proofs, commercial substance, third-party confirmations, GST returns/ITC) bears on genuineness.

Precedent treatment: No precedents were relied upon in the order; therefore, none followed/distinguished/overruled.

Interpretation and reasoning: The Tribunal observed that three suppliers were found untraceable by DVU and that the AO treated 10% of purchases from them as additional profit while two other suppliers were found to have occupations inconsistent with the volume of purchases. The CIT(A) deleted additions relying on invoices, ledgers and bank payments but failed to address (a) non-traceability findings, (b) absence of evidence of actual delivery/commercial substance, and (c) whether GST Input Tax Credit in respect of these purchases was claimed or accepted. The Tribunal held these are material lacunae that could not be ignored.

Ratio vs. Obiter: Ratio - where suppliers are found untraceable or independent enquiries raise serious doubts about the commercial substance of transactions, appellate relief cannot be granted without thorough examination of delivery evidence, corroborative commercial records and GST/ITC implications. Obiter - the adequacy of ledger confirmations and bank payments as sole proof of genuineness is questioned.

Conclusion: Deletion of additions in respect of purchases from untraceable/non-genuine parties was set aside; the matter remitted to Assessing Officer to examine GST/ITC status, suppliers' bank accounts, and related proceedings to determine genuineness and correct tax treatment, with opportunity to the assessee to be heard.

Issue 3 - Necessity and materiality of reconciling Input Tax Credit (ITC) and GST returns in assessing genuineness of purchases

Legal framework: GST regime records (GST returns, ITC claims/acceptance) are material evidence in income-tax scrutiny for purchases; reconciliation between ITC claimed and underlying commercial transactions demonstrates whether supply was genuine and whether the tax incidence was borne/accepted under GST.

Precedent treatment: No specific precedents were invoked; the Tribunal treated GST/ITC reconciliation as a necessary element of inquiry based on statutory and commercial rationale.

Interpretation and reasoning: The Tribunal noted an unexplored GST component (3% on aggregate purchases) and that neither AO nor CIT(A) examined whether ITC was claimed, accepted or rejected by GST authorities. The Tribunal reasoned that GST/ITC treatment has direct bearing on commercial reality and economic burden - e.g., if purchases were fictitious, ITC loss or mismatch should arise and be traceable. Consequently, verification of GST returns/ITC and coordination with GST authorities and supplier proceedings is a material and necessary step before concluding on genuineness.

Ratio vs. Obiter: Ratio - reconciliation of GST returns and ITC claims is a material aspect in determining genuineness of purchases and must be examined where there is doubt; remand is appropriate to procure and examine GST records and correlate them with income-tax enquiries. Obiter - steps such as calling suppliers' bank accounts and correlating with suppliers' assessments are recommended investigative measures.

Conclusion: The Tribunal directed restoration to the Assessing Officer to obtain and reconcile GST/ITC information from GST authorities (if required), examine suppliers' bank accounts and any proceedings against suppliers, provide the assessee a reasonable opportunity to be heard, and thereafter pass a speaking, reasoned order determining genuineness and tax consequences.

Cross-references and Procedural Directions

The Tribunal emphasized that the Assessing Officer should: (a) obtain GST return/ITC status and, if necessary, seek information from GST authorities; (b) correlate findings with any assessments/proceedings against the five suppliers; (c) call and examine suppliers' bank accounts to trace ultimate destination of funds; (d) afford the assessee a reasonable opportunity of being heard and permit submission of evidence/clarifications; and (e) pass a speaking and reasoned order thereafter. These directions form the operative relief and constitute the binding procedural mandate on remand.

---