2025 (5) TMI 1068 - AT - Income Tax

Bogus purchases - as argued when the department itself is accepting the purchase in assessee s sister concern as genuine the action taken in the hands of the assessee by treating the same as non-genuine is unjustified - HELD THAT - Revenue has not brought any evidence on record that purchase made from these parties are bogus or hawala transactions or accommodation entries. Assessee has brought on record the fact that these concerns run into heavy losses and to avoid the payment to the creditors they have left their premises and are absconding for which copy of the case filed by these parties against these suppliers for dishonoring the cheques against the supply of goods to them was filed. Assessee has also linked the purchases made from these parties with the corresponding sales and the GP rate and NP rate declared by the assessee during the year is comparable with earlier years. CIT(A) considering these facts has also held that addition is not justified. This finding of Ld. CIT(A) is not challenged by the revenue. Assessee has placed on record the decision of Suresh Kishinchand Changwani 2025 (1) TMI 1164 - ITAT MUMBAI where addition for alleged non genuine purchases made from 10 parties was deleted by holding that assessee has placed on record all the corroborative documentary material to establish the genuineness of the purchases mapping them to the export sale made by him revenue has accepted the purchases made from the same parties in the subsequent years and therefore merely because the suppliers did not appear before the Ld. AO or Ld. CIT(A) it cannot be concluded that the purchases were not made by the assessee. Appeal filed by the revenue is dismissed.

Summary

The core legal question considered in this appeal is whether the Assessing Officer (AO) was justified in disallowing purchases amounting to Rs. 9,60,01,182/- made by the assessee from three suppliers on the ground that these purchases were not genuine, and whether the appellate authority was correct in deleting this disallowance.

Another related issue is the appropriate method of income estimation if the purchases were found unverifiable, specifically whether the gross profit (G.P.) rate based on past history can be applied instead of disallowing the entire purchases.

Further, the appeal also touches upon the evidentiary standards required to prove genuineness of purchases and the relevance of the suppliers' failure to file income tax returns or respond to notices under section 133(6) of the Income Tax Act.

Issue-wise Detailed Analysis

1. Genuineness of Purchases from the Three Suppliers

Legal Framework and Precedents: The issue revolves around the principle that purchases cannot be treated as bogus if they are supported by proper documentary evidence, payments are made through banking channels, suppliers confirm the transactions, and there is no evidence of the purchase consideration being returned in cash. The Supreme Court decision in PCIT vs. Tejua Rohitkumar Kapadia (2018) 256 Taxman 213 was relied upon, where the Court upheld the Gujarat High Court's ruling that such criteria must be met before disallowing purchases as bogus. The Tribunal also referred to decisions where the acceptance of sales linked to such purchases and payment of taxes by suppliers were critical factors.

Court's Interpretation and Reasoning: The Tribunal noted that the AO disallowed the entire purchases solely because the suppliers had not filed income tax returns and did not respond to notices under section 133(6). The AO also questioned the genuineness of transport vouchers and invoices based on alleged deficiencies such as incomplete addresses, similar handwriting on transport vouchers, use of same vehicle numbers by different transporters, and non-existence of vehicles.

The Tribunal carefully examined these observations and found them to be factually incorrect or insufficient to discredit the purchases. It was noted that the purchase bills contained complete addresses of suppliers, and transporters' details were adequately mentioned in the transport documents and e-way bills. The Tribunal accepted the explanation that transporters often use vehicles from the market and the same vehicle might be used by different transporters at different times, which is a common commercial practice.

The Tribunal also found that the same handwriting on transport vouchers was explained by the fact that all three suppliers were family concerns sharing the same accountant, and it is customary for transport documents to be prepared by supplier personnel.

Key Evidence and Findings: The assessee produced extensive documentary evidence including purchase bills, transport bilty, e-way bills, GST returns (GSTR-2A and GSTR-3B), ledger accounts, confirmations from suppliers, bank statements showing payments by cheque, stock registers, and affidavits affirming genuineness. The suppliers had filed GSTR-1 returns, which were reflected in the assessee's GSTR-2A. The supplier concerns were shown to have run into losses and absconded due to dishonoured cheques and legal proceedings filed against them, explaining their non-cooperation with the AO's notices.

Additionally, the purchases were linked to corresponding sales accepted by the department, and the purchase rates were comparable to those from other suppliers. The Tribunal also noted that similar purchases made by the assessee's group concern were accepted as genuine by the department in separate assessments.

Application of Law to Facts: Applying the principles established in the cited Supreme Court decision, the Tribunal held that the assessee had discharged the burden of proving genuineness of purchases. The absence of supplier responses to notices or their non-filing of returns alone could not render the transactions bogus. The Tribunal emphasized that the AO had not brought any evidence to show that the purchases were accommodation entries or hawala transactions.

Treatment of Competing Arguments: The Revenue relied on the decision of the Bombay High Court in PCIT vs. Kanak Impex India Ltd., where purchases were disallowed as bogus due to the assessee's failure to cooperate in reassessment proceedings and evidence of hawala transactions. The Tribunal distinguished the facts, noting that in the present case, the Revenue had not produced any such evidence, and the assessee had cooperated by furnishing voluminous evidence.

Conclusions: The Tribunal upheld the CIT(A)'s finding that the purchases were genuine and that the AO's disallowance was unjustified.

2. Appropriate Method of Income Estimation if Purchases are Unverifiable

Legal Framework and Precedents: Where purchases are found unverifiable or bogus, the law permits the AO to reject books of accounts and estimate income based on gross profit rates derived from past years or industry standards. However, such estimation must be reasonable and based on reliable data.

Court's Interpretation and Reasoning: The CIT(A) accepted the assessee's alternate contention that if purchases were unverifiable, the correct approach would be to reject the books and apply the gross profit rate based on past history rather than disallowing the entire purchase amount. The Tribunal noted that the gross profit and net profit rates for the year under consideration were comparable or better than those of previous years, as shown in the detailed tabulation submitted by the assessee.

Key Evidence and Findings: The assessee provided a comparative table of turnover, gross profit rate, and net profit rate for the assessment year and three preceding years, demonstrating consistency and no indication of understatement of income.

Application of Law to Facts: Since the gross profit and net profit rates were in line with or better than prior years, the Tribunal agreed with the CIT(A) that no addition was warranted on this ground. The Revenue did not challenge this finding, rendering the ground moot.

Conclusions: The Tribunal affirmed that even if the purchases were unverifiable, the AO's disallowance was excessive and the proper course would be estimation based on gross profit rates, which did not justify any addition in this case.

3. Evidentiary Standards and Burden of Proof

Legal Framework and Precedents: The burden of proving the genuineness of transactions lies on the assessee when the AO raises suspicion. However, once the assessee produces credible documentary evidence and the AO fails to produce contrary evidence, the benefit of doubt must be given to the assessee.

Court's Interpretation and Reasoning: The Tribunal observed that the assessee had maintained day-to-day books, audited under section 44AB, and had furnished comprehensive evidence including purchase and transport documents, bank payments, GST returns, and supplier confirmations. The AO's observations were found to be general and lacking in concrete proof of fabrication or non-existence of transactions.

Key Evidence and Findings: The Tribunal highlighted that the suppliers' GST filings and the linkage of purchases to accepted sales transactions reinforced the genuineness. The absence of supplier response was explained by their financial difficulties and legal issues, supported by court documents.

Application of Law to Facts: The Tribunal applied the principle that mere non-cooperation or non-filing of returns by suppliers does not ipso facto render transactions bogus. The presence of corroborative evidence and absence of contrary proof from the Revenue tipped the balance in favour of the assessee.

Conclusions: The Tribunal held that the assessee had met the evidentiary standard required to prove the genuineness of purchases and that the AO's disallowance was not sustainable.

Significant Holdings

"Purchases cannot be treated as bogus if (a) they are duly supported by bills, (b) all payments are made by account payee cheques, (c) the supplier has confirmed the transactions, (d) there is no evidence to show that the purchase consideration has come back to the assessee in cash, (e) the sales out of purchases have been accepted & (f) the supplier has accounted for the purchases made by the assessee and paid taxes thereon."

"The transporter's GST/PAN/contact number/stamp or seal of the transporter company are not available on bilty does not make the purchase as non-genuine especially when the same is supported by the other evidences."

"The same handwriting on transport vouchers is explained by the fact that all three suppliers are family concerns and the accountant is the same person, and it is common practice that transport documents are prepared by supplier personnel."

"Where the purchases are treated as non-genuine, the gross profit rate shall be applied and the disallowance shall be made to the extent of shortfall in the gross profit rate. Since the gross profit and net profit rates for the year are better than last year, no addition is justified."

"Merely because the suppliers did not appear before the AO or CIT(A), it cannot be concluded that the purchases were not made by the assessee."

"The absence of evidence from the Revenue to show that the purchases were bogus or accommodation entries, coupled with the assessee's extensive documentary evidence, leads to the conclusion that the disallowance is unjustified."

Final determination: The Tribunal dismissed the Revenue's appeal and upheld the deletion of the addition made by the AO, holding that the assessee had satisfactorily proved the genuineness of the purchases and that no addition was warranted either on the ground of bogus purchases or on estimation by gross profit rate.