Bogus purchase disallowance requires cogent evidence; accepted sales may justify only embedded-profit estimation for unverifiable purchases.

Section 37 places the initial burden on the taxpayer to substantiate business expenditure, but invoices, books, GST records, banking payments and corresponding accepted sales shift the burden to the Revenue to produce cogent evidence that purchases are sham. The notes state that incomplete supplier records alone do not justify disallowance where books are not rejected and no cash trail, accommodation-entry evidence or undisclosed sourcing is established. Where purchases remain insufficiently verifiable but sales are accepted, only embedded profit may be estimated rather than disallowing the full purchase value. They also explain that closing stock is a derived accounting figure and cannot independently support an addition without disproving reconciliations or establishing undisclosed inventory, fictitious purchases, or non-business expenditure.

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Issues: (i) Whether disallowance of aggregate purchases as bogus expenditure was sustainable; (ii) Whether additions based on alleged closing-stock differences in seized Tally data were sustainable.

Issue (i): Whether disallowance of aggregate purchases as bogus expenditure was sustainable.

Analysis: Under Section 37 of the Income-tax Act, 1961, the assessee initially bears the burden to establish business expenditure; upon production of invoices, books, GST records, banking evidence and corresponding sales, the burden shifts to the Revenue to rebut that evidence with cogent material. No seized material, cash trail, accommodation-entry evidence, or material showing that the goods were obtained from undisclosed sources was identified. The Revenue accepted the sales, did not reject the books under Section 145(3), and did not establish that the suppliers or invoices were fictitious. Deficiencies in a supplier's records or failure to furnish the supplier's own procurement details could not, without independent evidence, establish that the assessee's purchases were sham. For AY 2021-22, however, the supporting evidence for purchases from RKG Earth Movers was weaker; since sales remained accepted and no evidence established that no goods were procured, complete disallowance would produce artificial profits. Only the embedded profit could therefore be estimated by applying the assessee's disclosed gross-profit rate.

Conclusion: Purchases for AYs 2018-19, 2019-20 and 2020-21, including purchases from RKG Earth Movers for AY 2020-21, were allowable; the findings are in favour of the assessee. For AY 2021-22, the disallowance was restricted to 20.38% of Rs. 1,06,84,717, with deletion of the balance; the finding is partly in favour of the assessee.

Issue (ii): Whether additions based on alleged closing-stock differences in seized Tally data were sustainable.

Analysis: Closing stock is a derived accounting figure and cannot be treated as an independent source of income without establishing defects in the underlying purchases, consumption, quantitative records or sales. The seized Tally data showed anomalous diesel and explosive stock exceeding recorded purchases, while no corresponding physical stock was found during search. The records and the search officer's own profit-suppression analysis supported the explanation that consumption entries had not been posted and purchases were incorrectly retained under stock-in-hand. Supplier ledgers, banking evidence, regular audited accounts and statutory records supported the purchases. The Revenue neither disproved this reconciliation nor established undisclosed inventory, fictitious purchases, or non-business use of the consumables. Section 37 could not be invoked without identifying expenditure not incurred wholly and exclusively for business.

Conclusion: The alleged closing-stock balances represented accounting misclassification and not actual undisclosed stock; deletion of the additions for AYs 2018-19 to 2020-21 was upheld in favour of the assessee.

Final Conclusion: The Revenue's challenges to deletion of bogus-purchase and closing-stock additions failed. The assessee obtained full relief for AY 2020-21 and substantial relief for AY 2021-22 through restriction of the surviving purchase addition to the estimated embedded profit.

Ratio Decidendi: Where accepted sales, regular books, invoices, statutory records and banking payments support purchases, a disallowance cannot rest on suspicion or incomplete supplier evidence without cogent material proving that the transactions are sham; where purchases remain unverifiable but sales are accepted, only the embedded profit may be assessed.

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