Genuineness of purchases: unproved supplier transactions treated as income, ad hoc expense disallowance sustained but reduced.

Issue of genuineness: taxpayer failed to discharge the primary onus to establish identity, creditworthiness and genuineness of suppliers; suppliers were untraceable despite enquiries and documentary indicia were insufficient, therefore impugned purchases of Rs. 1,35,66,404 were treated as unproved and added to income, and that addition is affirmed. Issue of ad hoc disallowances: deficiences in vouchers and verifiability justified a reasoned estimate, but the quantum was reduced on appeal and the ad hoc disallowance allowed only in a lower proportion in favour of the assessee.

---

---

Issues: (i) Whether purchases of Rs. 1,35,66,404/- from certain suppliers were genuine and liable to be disallowed under the Income-tax Act; (ii) Whether ad hoc disallowances of business expenses should be sustained or reduced.

Issue (i): Whether the impugned purchases were genuine and therefore deductible, or non-genuine leading to addition under the Income-tax Act.

Analysis: The legal framework requires the assessee to establish the identity, creditworthiness and genuineness of suppliers and transactions. Verification steps under section 133(6) of the Income-tax Act, 1961 and the untraceability of suppliers provide relevant indicia for doubting genuineness. Material factors considered include returned/unserved notices at multiple addresses, inability of assessee's representative to locate suppliers, absence of quantity-wise stock records, marked disparities in month-wise gross profit ratios, and the sufficiency of documentary evidence such as invoices, VAT/TIN, bank payments and balance confirmations. Payments through banking channels and sales tax registration are relevant but not conclusive where existence or genuineness of suppliers is doubtful. Authorities and precedents establish that where primary onus is not discharged and suppliers are untraceable despite reasonable inquiries, additions of unproved purchases may be sustained.

Conclusion: The purchases of Rs. 1,35,66,404/- were not proved to be genuine; the appellate findings upholding the addition are affirmed and the grounds challenging this disallowance are dismissed.

Issue (ii): Whether ad hoc disallowances of various business expenses should be sustained in full.

Analysis: Allowability of business expenses depends on proof of being wholly and exclusively for business and availability of verifiable vouchers or records (for example log books for motor vehicle expenses). Where records are deficient, a reasoned estimate of disallowance is permissible. The assessment record identified specific shortcomings in vouchers and verifiability, and the disallowances were not purely mechanical but based on those deficiencies. Proportionality and reasonableness of the estimate are relevant in the exercise of appellate revision.

Conclusion: The ad hoc disallowances are justified in principle but reduced in quantum; the disallowance is restricted to 10% instead of 20% and the balance is deleted, so the ground is partly allowed in favour of the assessee.

Final Conclusion: The appeal is partly allowed by confirming the addition for unproved purchases and by reducing the quantum of ad hoc disallowance of expenses to 10%, with the assessment otherwise sustained.

Ratio Decidendi: Where an assessee fails to discharge the primary onus of proving identity and genuineness of suppliers and transactions, and suppliers are untraceable despite reasonable inquiries, the unproved purchases may be treated as income; ad hoc disallowances based on identifiable deficiencies in verifiability are permissible but must be reasonable in quantum.

---