2026 (1) TMI 612 - AT - Income Tax

Section 69C additions based on alleged bogus purchases cannot be invoked where sales are accepted; evidence required.

Where sales and turnover declared by the taxpayer are accepted, corresponding purchases used to effect those sales should also be accepted and the deeming ... Addition u/s 69C - bogus/unexplained expenditure - AO made addition of 100% Purchases made from 10 parties being disallowed and capital introduced by partner - CIT(A) proceeded to sustain disallowance of only 5% of the total bogus purchases on the ground that as the AO had not doubted the sales, complete purchases held as bogus cannot be doubted - HELD THAT:- Certainly if sales and turnover is accepted by department then goods purchased by the Assessee qua sales made by him are also bound to be accepted and section 69C of the Act cannot be invoked for deeming income. Where addition of purchase in total is proposed resulting intoGP exceeding the sales department must justify the addition with evidences not just suspicion that suppliers were Non Filers or did not reply to Notice u/s 133(6) of the Act, that supplier had their GST Neither suspended or suo motto cancelled or cancelled on the request of the supplier. Many of them had multiple GSTN in their names. Many of them were Transient Companies meaning thereby that they had their GST registration made on a particular date, showed crores of sale to the assessee on the same day or for few days, and then requested for cancellation of GSTN, sometimes even within a few days or a month or that the GST Database showed that almost all of them were not dealing in fabrics (which was what the assessee had claimed to have purchased from them). These suspicious circumstances should be relied only after rejecting the books like stock and sales and other corresponding expenditures. There is no allegation of fabricated evidences being filed so to justify the contentions of ld. DR. Thus the conclusion of ld. CIT(A) require no interference. The grounds have no substance. The appeal deserves to be dismissed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether, on the facts found, the entire amount of purchases treated as bogus could be added as unexplained expenditure under section 69C, despite the assessee having produced primary purchase and movement documents and the Department having accepted sales/turnover. (ii) Whether the appellate restriction of disallowance to 5% of the purchases (though holding the suppliers/purchases to be bogus) required interference, having regard to the evidentiary material produced and the absence of rejection of books and allied records. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i) & (ii) (grouped): Sustainability of full addition under section 69C versus limited disallowance where sales are accepted and primary purchase evidence is on record Legal framework (as discussed by the Court): The Court considered invocation of section 69C in the context of an addition of purchases treated as bogus. It reasoned that where sales/turnover are accepted and corresponding purchase/stock records are available and relied upon, section 69C cannot be used to deem the entire purchase amount as income merely on suspicion arising from supplier-related adverse indicators. Interpretation and reasoning: The Court noted that the assessee had furnished substantial primary evidence acknowledged in the assessment order, including invoices, e-way bills, transport consignment notes, bank statements, month-wise purchase and sales details, and opening/closing stock details in value and quantity. The Court treated these documents as discharging the assessee's initial onus and as evidencing receipt of stock and its subsequent sale as reflected in the financial results and stock records. It further held that when sales and turnover are accepted by the Department, the goods purchased in relation to such sales are 'bound to be accepted' unless the Department first dislodges the underlying book results/records with cogent reasons and evidence. The Court found that the revenue's reliance on suspicious circumstances about the suppliers (non-filing of returns, non-response to notices, GST cancellation/suspension, multiple GST registrations, 'transient' registrations, and database indications about non-dealing in fabrics) could not, by itself, justify a 100% purchase addition under section 69C without rejecting the books/stock and sales records and other corresponding expenditures. The Court also emphasised that there was no allegation that the documentary evidence produced by the assessee was fabricated. Conclusions: The Court upheld the appellate conclusion that full disallowance/addition of the purchases under section 69C was not warranted on these facts. It held that the restricted disallowance sustained by the appellate authority required no interference because the Department had accepted sales and had not rejected the supporting stock/sales records or demonstrated fabrication of the assessee's purchase evidence. Consequently, the revenue's grounds seeking restoration of 100% addition were dismissed.