2025 (12) TMI 279 - AT - Income Tax

Disallowance on alleged bogus purchases restricted to 11.54% gross profit on Rs 32,75,050 as embedded profit

The ITAT Mumbai allowed the assessee's appeal in respect of alleged bogus purchases. The AO had disallowed the entire amount of purchases based solely on ... Bogus purchases - GP estimation - HELD THAT:- As in the present case, all the requisite documents and details have been filed by the assessee and the only doubt raised by ld. AO pertains to the delivery challans showing delivery by hand carts. We are inclined to consider the alternate prayer of the assessee to restrict the disallowance only to the amount computed at the declared GP rate of 11.54% on genuine purchases. Accordingly, we direct the ld. AO to reduce the disallowance to the amount computed @ 11.54% of Rs. 32,75,050/-. Assessee’s appeal is allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the purchases from the stated supplier, treated as bogus under section 69C, warranted disallowance of the entire purchase amount or only to the extent of profit element embedded therein. 1.2 Whether, in the facts of the case, the precedents upholding 100% disallowance of bogus purchases were distinguishable, justifying restriction of addition to the gross profit rate declared by the assessee. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Extent of disallowance on alleged bogus purchases under section 69C and applicability of precedents Legal framework (as discussed) 2.1 The addition was made under section 69C of the Act by treating disputed purchases as unexplained expenditure, based on investigation reports from DGGI/CGST authorities and the Investigation Wing indicating that the supplier was engaged in providing accommodation entries. 2.2 The Tribunal considered the applicability of jurisdictional High Court decisions: (i) decisions in which 100% disallowance of bogus purchases was upheld when genuineness was not established, and (ii) the decision holding that, where sales are accepted and only purchases are disputed as bogus, addition should be restricted to the profit element (gross profit) embedded in such purchases. Interpretation and reasoning 2.3 The Assessing Officer treated the purchases as bogus primarily because the delivery challans recorded transport of heavy quantities of goods by handcart, which was considered implausible given that the supplier's factory was in Ahmedabad and delivery was shown at Mumbai. On this basis, the entire amount of such purchases was disallowed under section 69C. 2.4 The assessee produced multiple supporting documents, including GST returns, purchase details, product-wise details, payment details, delivery challans, and stock vouchers. The Court noted that, except for doubting the delivery challans (mode of transportation), the Assessing Officer did not reject or disprove the other documents. 2.5 The assessee's explanation was that, although the supplier's factory was located in Ahmedabad, the supplier had a godown and GST registration in Mumbai, situated about 500 meters from the assessee's premises, and that delivery by handcart was from this Mumbai godown. The Assessing Officer did not accept this explanation but also did not disprove the existence of the Mumbai godown or the Mumbai GST registration. 2.6 The Court observed that sales declared by the assessee had not been disputed by the Department, and that the case therefore fell within the category where sales are accepted and only the source of purchases is in doubt. 2.7 The Court distinguished the jurisdictional High Court decisions relied on by the Department (including decisions where 100% disallowance of purchases was confirmed) on the factual basis that, in those cases, the assessee had failed to produce any evidence or had not complied with requisitions of the Assessing Officer, whereas in the present case the assessee had filed requisite documents and made compliance, and only the mode of transportation was doubted. 2.8 Relying on the principle laid down by the jurisdictional High Court that, where sales are accepted and purchases are treated as non-genuine or from accommodation entry providers, the addition should be restricted to the profit element embedded in such purchases, the Court accepted the assessee's alternate plea to confine the disallowance to the gross profit rate. Conclusions 2.9 The Court held that, in the facts and circumstances of the case, full disallowance of the purchase amount under section 69C was not justified. 2.10 The Court directed that the disallowance be restricted to the gross profit element by applying the declared gross profit rate of 11.54% on the disputed purchases of Rs. 32,75,050/-, and that the addition be reduced accordingly. 2.11 In view of allowing the alternate claim regarding quantum of addition, the remaining legal grounds, including those challenging the validity of the reassessment, were treated as academic and were not adjudicated.