2025 (10) TMI 804 - AT - Income Tax

Assessment upheld: bogus purchases treated under section 69C with 1.39% gross profit addition; carriage-inward expenses disallowed

ITAT (Del) - AT upheld the CIT(A)'s finding that purchases from eleven parties were not genuine and affirmed the addition by applying a 1.39% gross profit ... Unverifiable and bogus purchases - addition of 25% of the total purchases from them was made u/s 69C by AO - CIT(A) confirmed the addition by applying GP rate of 1.39% on such bogus purchases - HELD THAT:- CIT(A) has reached the conclusion that purchases made from these 11 parties was not genuine purchases and under these circumstances a fair estimation is to be made, therefore, the profit rate of 1.39% on such bogus purchase as applied by ld. CIT(AP appears to be fair and reasonable and accordingly, the order of the Ld. CIT(A) on this score is hereby upheld. Disallowance on account of carriage inward expenses - Since, we have already held the purchase of bogus and upheld the action of the Ld. CIT(A) in confirming the addition by applying the G.P. rate of 1.39%, we find no infirmity in the impugned order of Ld. CIT(A) in confirming the disallowance to the extent of the carriage inward related to such purchases. Accordingly, this Cross Objections of the assessee is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether purchases allegedly made from eleven suppliers could be held non-genuine/unverifiable so as to attract addition under section 69C as unexplained expenditure. 2. If purchases are held non-genuine, what is the correct method and quantum for estimating the profit element to be added - whether AO's blanket 25% of purchases is sustainable or the gross profit rate declared in books may be applied. 3. Whether the assessing officer's enquiries under section 133(6) and physical verification were sufficient to justify treating suppliers as non-existent and to draw adverse inference in absence of replies. 4. Whether the confirmed disallowance of carriage inward expenses relating to such purchases is justified once purchases are treated as bogus. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legality of treating purchases from eleven suppliers as non-genuine/unverifiable Legal framework: The Tribunal considered provisions empowering AO to verify transactions and treat unexplained expenditure under section 69C where transactions are not satisfactorily explained. Procedural provisions for enquiry under section 133(6) and reliance on physical verification reports were applied to test existence and genuineness of suppliers. Precedent treatment: The Court referred to authorities recognising that AO cannot make additions merely on suspicion without independent inquiry (e.g., Pr. CIT v. Shapoorji Pallonji), and to cases where profit element only (not entire purchases) was disallowed where books/sales were otherwise accepted (e.g., Rajeev G. Kalathil; Belmarks Metal Works; cases cited in para 6.34-6.41). The decision in N.K. Proteins was discussed but not mechanically applied. Interpretation and reasoning: The AO issued notices under section 133(6) to suppliers; physical verification was carried out by verification unit which found most suppliers not traceable at given addresses and that GST registrations of most suppliers were cancelled (some cancelled before or during year under appeal). None of the called suppliers responded. The Tribunal accepted the AO's independent inquiries as adequate, distinguishing situations where AO made no independent inquiry. Given cancellation of GST numbers during or prior to the year under appeal and non-filing/non-response by suppliers, the Tribunal concluded the existence and creditworthiness of suppliers were doubtful and purchases could be treated as non-genuine. Ratio vs. Obiter: Ratio - AO's independent enquiry by notices under s.133(6) and physical verification that suppliers were non-existent or had cancelled GST registrations, combined with non-response, can justify treating purchases as unverifiable/bogus under s.69C. Obiter - references to other cases where higher GP rates were applied in different factual matrices serve as contextual support. Conclusion: Purchases from the eleven suppliers were correctly held non-genuine/unverifiable based on documentary and verification evidence and non-cooperation by suppliers; AO's enquiries were sufficient to draw adverse inference. Issue 2 - Appropriate method and quantum of addition: 25% of purchases v. application of declared gross profit rate Legal framework: Where purchases are held bogus but sales and books are otherwise accepted, the correct approach is to estimate the suppressed profit element embedded in bogus purchases rather than disallow entire purchase amount; estimating profit may be done by reference to gross profit rate in books or other reliable benchmarks. Precedent treatment: The Tribunal relied on multiple precedents (e.g., Rajeev G. Kalathil; Belmarks; various Tribunal/High Court decisions) which often restrict addition to the profit element - sometimes applying book gross profit, sometimes applying higher rates where factual indicia justify it. The Supreme Court's non-speaking order in N.K. Proteins was considered but its factual distinction and non-speaking nature were noted; the Tribunal did not treat it as automatically mandating a 25% addition. Interpretation and reasoning: The AO applied a flat 25% disallowance without articulating basis for that specific rate in the facts of this manufacturing concern. The Tribunal found that (i) gross profit of the assessee for the year under appeal was 1.39% as per audited books; (ii) sales were accepted and books were not rejected in totality; (iii) in absence of basis for 25% the fairer approach is to estimate suppressed gross profit by applying the assessee's declared GP rate to the unverifiable purchases. The Tribunal acknowledged precedents permitting higher estimation in harsher factual matrices but concluded those were distinguishable on facts (e.g., admissions of bogus turnover, statements of suppliers, search cases). Accordingly it upheld the CIT(A)'s use of 1.39% on the aggregate unverifiable purchases to compute the addition (Rs. 56,94,317/-). Ratio vs. Obiter: Ratio - Where sales/books are otherwise accepted and AO applies no reasoned basis for a higher rate, the profit element embedded in bogus purchases may be fairly estimated by applying the gross profit rate declared in the assessee's books for the year under appeal. Obiter - Discussion of cases applying much higher rates in more adverse factual situations illustrates the range of permissible estimation depending on facts. Conclusion: AO's blanket 25% addition was not sustained; applying the declared GP rate of 1.39% to the unverifiable purchases was held fair and reasonable and the addition was accordingly limited to the profit element so computed. Issue 3 - Sufficiency of enquiries under section 133(6) and physical verification to draw adverse inference Legal framework: AO must conduct independent enquiries and afford opportunity to assessee to rebut adverse material before making additions. Section 133(6) and physical verification reports are appropriate investigative tools; absence of responses may justify adverse inference if enquiries were properly conducted. Precedent treatment: The Tribunal distinguished authorities where AO drew adverse inference without conducting independent enquiry, and aligned with cases upholding adverse inference where AO's independent probes (including statutory notices and verification) yielded no credible response from alleged suppliers. Interpretation and reasoning: AO issued notices u/s 133(6); verification unit physically visited addresses and reported non-availability of parties; GST cancellations substantiated doubts. The Tribunal found these constituted adequate independent investigation. Because none of the suppliers replied, the assessee's documentary production (invoices, e-way bills, bank payments, GST returns) did not negate the absence/invalidity of suppliers. The Tribunal thus upheld drawing adverse inference based on these enquiries. Ratio vs. Obiter: Ratio - Independent inquiries under s.133(6) and physical verification that demonstrate non-existence or cancellation of registrations permit drawing adverse inference in absence of supplier responses. Obiter - Observations about digital footprints and non-issuance of some notices where contact details missing. Conclusion: The AO's and verification unit's enquiries were sufficient to justify adverse inference; non-cooperation of suppliers reinforced the finding of unverifiable purchases. Issue 4 - Disallowance of carriage inward expenses linked to bogus purchases Legal framework: Expenses directly attributable to purchases held bogus are liable to be disallowed to the extent those purchases are disallowed; when only profit element is added, related expense disallowance should correspond to that treatment. Precedent treatment: The Tribunal applied the conclusion on bogus purchases to linked expenses; no separate novel legal principle was invoked. Interpretation and reasoning: Having upheld the finding that purchases from the 11 suppliers were non-genuine and having limited addition to the profit element (1.39% on such purchases), the Tribunal found no infirmity in the CIT(A)'s confirmation of partial disallowance of carriage inward in relation to those purchases. Ratio vs. Obiter: Ratio - Once purchases are treated as bogus and profit element added, related carriage inward expenses attributable to such purchases can be disallowed proportionately. Obiter - None. Conclusion: Confirmation of the limited disallowance of carriage inward expenses was justified and cross-objection on this score was dismissed. Overall Disposition The Tribunal upheld the CIT(A)'s findings that purchases from the specified suppliers were non-genuine/unverifiable on the basis of independent enquiries and physical verification, but restricted the quantum of addition to the profit element by applying the assessee's declared gross profit rate of 1.39% to the unverifiable purchases. Consequential disallowance of carriage inward expenses was also sustained.