Purchases Allowed u/s 37 as Sales Accepted; Supplier's Liquidation Alone Not Proof of Bogus Transactions

ITAT set aside the disallowance of purchases under s. 37 on the ground of alleged bogus purchases. It held that, since the AO and CIT(A) had accepted the corresponding sales, the purchases could not be treated as non-genuine merely because the supplier was under liquidation. The Tribunal noted that the supplier's assets were subjected to sale by a liquidator, contradicting the finding that it was merely providing accommodation entries. Holding that CIT(A) had misappreciated the facts, ITAT deleted the addition and allowed the assessee's appeal.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether disallowance of purchases under section 37 of the Income-tax Act, 1961, by treating them as bogus, was justified where corresponding sales were accepted and documentary evidence of purchases and movement of goods was produced.

1.2 Whether non-response to notice under section 133(6) by the supplier and an adverse verification report based on an incorrect address were sufficient grounds to treat the supplier as a paper/bogus concern and the purchases as merely accommodation entries.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Disallowance of purchases as bogus under section 37; effect of non-response to section 133(6) and adverse verification report

(a) Legal framework (as discussed)

2.1 The disallowance was made under section 37 of the Act by treating the impugned purchases as bogus. The Assessing Officer relied on section 133(6) proceedings and a report from the Verification Unit to infer that the supplier was a non-existent/bogus entity indulging in paper transactions without actual movement of goods.

(b) Interpretation and reasoning

2.2 The Tribunal noted that the assessee was engaged in wholesale trading of iron and steel on consignment basis and had made purchases from the concerned supplier, which were back-to-back supplied to customers. Copies of invoices issued by the supplier, transport receipts and ledger accounts were placed on record.

2.3 The Tribunal recorded that the assessee had made payment of purchase consideration to the supplier through banking channels and that transport documents and delivery-related evidence were available in the paper book. Details of vehicles used for transportation, obtained from the official "NextGen mParivahan" app, showed that the vehicles were registered heavy goods carrier vehicles with valid registration.

2.4 The Tribunal observed that while disallowing the purchases, the Assessing Officer did not disbelieve or disturb the corresponding sales. The sales were accepted both by the Assessing Officer and by the appellate authority, thereby implying acceptance of the business transactions and turnover.

2.5 The Tribunal further took note that the supplier was a public limited company, was under liquidation, and had substantial paid-up capital. From the notice of sale/e-auction by the liquidator, it was evident that the supplier had tangible assets which were put up for sale. This factual matrix was held to be inconsistent with the conclusion that the supplier was merely a bogus accommodation-entry provider.

2.6 The Tribunal examined the basis of the adverse verification report relied upon by the Assessing Officer. It was found that the address mentioned on the invoices and ledger, as provided by the assessee, was in Jharkhand, where the manufacturing unit of the supplier was located. However, the physical verification by the department's inspector had been carried out at a Kolkata address. The Tribunal found that this mismatch in addresses undermined the reliability of the verification report and the resultant conclusion that the supplier "never existed" at the given address.

2.7 The Tribunal also noted the assessee's explanation that, post introduction of GST from 01.07.2017 and abolition of border commercial check posts, invoices would not bear any check-post seal, which was consistent with the period under consideration. The nature of the transactions was explained as consignment sales, for which delivery notes and supporting documents were produced.

2.8 In evaluating the evidentiary position, the Tribunal held that the observations of the Assessing Officer and the first appellate authority branding the supplier as a bogus company providing only accommodation entries were "completely unfounded and devoid of merit", particularly in light of the documentary evidence of existence, operations, liquidation proceedings, banking channel payments, and proved movement of goods.

2.9 The Tribunal also relied on the principle, supported by cited precedents, that once sales have been accepted, the corresponding purchases cannot be disallowed as bogus in the absence of cogent contrary evidence showing that no goods were actually purchased.

(c) Conclusions

2.10 The Tribunal held that the disallowance of purchases under section 37, on the basis that they were bogus/accommodation entries, was unsustainable in law and on facts.

2.11 The Tribunal concluded that the first appellate authority had mis-appreciated the facts on record in sustaining the addition.

2.12 The order of the Assessing Officer disallowing the purchases was set aside, and the Assessing Officer was directed to delete the entire addition relating to the alleged bogus purchases.

2.13 The appeal was allowed in favour of the assessee.

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