Estimation of income from bogus purchases: addition under unexplained investment restricted to 8.87% of gross profit, appeal dismissed

Estimation of income from alleged bogus purchases was challenged where the assessing officer discarded the assessee's supporting documents without reasons and relied on uncommunicated information from an investigation wing; such reliance and failure to confront the assessee rendered the addition under unexplained investments arbitrary, and GST cancellation occurring after the relevant year did not prove that the supplier was struck off in the relevant year. Consequently the appellate restriction of the addition to gross profit at 8.87% was upheld and the revenue appeal dismissed.

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Issues: Whether the Assessing Officer was justified in disallowing the entire purchase consideration of Rs.1,20,99,998/- as unexplained expenditure under Section 69C of the Income-tax Act, 1961, or whether the restriction of the addition by the Commissioner of Income Tax (Appeals) to the profit element @8.87% of gross profit is sustainable.

Analysis: The issue turns on (i) whether the AO could reject the transactions as bogus despite the assessee filing purchase registers, bank payment proofs, sales invoices, GST returns and ledger entries, and (ii) whether reliance on information from the Investigation Wing and alleged striking off of the supplier without confronting the assessee or producing that material justified addition of the entire purchase amount. The AO reopened assessment under Section 147/148 and made an addition under Section 69C based on investigation information, but did not rebut or confront the assessee's documentary evidence nor produce the adverse material to the assessee. The CIT(A) restricted the addition to the profit element on the view that sales were accepted and the profit portion only ought to be added; the Tribunal examined applicability of that approach to the facts and whether the AO's summary rejection of documents and reliance on uncommunicated investigation material was tenable.

Conclusion: The AO's disallowance of the entire purchase consideration is untenable because the assessee produced corroborative documentary evidence and the AO relied on investigation material that was not confronted or furnished to the assessee; therefore the restriction of the addition by the CIT(A) to the profit element @8.87% amounting to Rs.10,73,269/- is upheld and the Revenue's appeal is dismissed.

Ratio Decidendi: Where an assessee produces contemporaneous books, bank payment evidence and statutory returns, an AO cannot disallow entire claimed purchases under Section 69C solely on the basis of investigation information not confronted or furnished to the assessee; at most the profit element may be added if sales are accepted and purchases are otherwise unprovable.

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