2025 (5) TMI 1701 - AT - Income Tax

Suspicious purchase u/s 69C - additions made by AO being 4% of allegedly evaded VAT tax on the suspicious purchase - HELD THAT - The arguments advanced on behalf of the revenue are quite convincing and the Ld. CIT(A) has based his judgment on sound and convincing legal reasoning supported by settled legal precedents while making addition on account of evaded VAT tax @ 4% - we are not convinced by the arguments advanced by the Ld. AR and there is no legal infirmity in the findings returned by the Ld. CIT(A) and accordingly the grounds raised by assessee/appellant are rejected.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

• Whether the additions made by the Assessing Officer (AO) under section 69C of the Income Tax Act, 1961 (the Act), on account of alleged bogus purchases amounting to Rs. 1,28,93,048/-, are justified and sustainable.
• Whether the estimation of gross profit embedded in the bogus purchases and consequent addition of Rs. 16,11,631/- (12.5% of bogus purchases) by the AO is appropriate.
• Whether the Learned Commissioner of Income Tax (Appeals) [CIT(A)] was correct in deleting the portion of addition relating to estimated gross profit and confirming only the addition of Rs. 5,15,721/- being 4% of the alleged evaded VAT tax on bogus purchases under section 69C of the Act.
• Whether the appellant's challenge to the confirmation of addition of 4% VAT on alleged bogus purchases under section 69C is legally sustainable.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification of additions under section 69C on account of bogus purchases

Relevant legal framework and precedents: Section 69C of the Income Tax Act empowers the Assessing Officer to make additions to the income of the assessee where the assessee has entered into any expenditure or investment or has accepted any loan or deposit or any sum, and the source of such sum is found to be from an undisclosed source or is otherwise unexplained to the satisfaction of the AO. The AO is entitled to reject purchases shown through suspicious parties if the genuineness of such parties and transactions is not satisfactorily established.

Precedents cited by the revenue include the judgment of the Hon'ble Bombay High Court in PCIT vs. Kanak Impex (India) Ltd. (2025), which upheld the AO's power to make additions of the entire amount of bogus purchases under section 69C.

Court's interpretation and reasoning: The AO initiated proceedings under section 147 on receipt of information from the Sales Tax Department and DGIT(Inv.) regarding bogus purchase bills from hawala bill providers. Notices under section 133(6) issued to the parties concerned were returned unserved with remarks indicating non-availability ("left"), and the assessee failed to produce any cogent evidence such as stock registers or purchase records to substantiate the genuineness of these purchases.

The AO concluded that the purchases amounting to Rs. 1,28,93,048/- were bogus and non-genuine, as the parties did not exist at the addresses provided and no evidence was furnished by the assessee. Accordingly, the AO made additions under section 69C.

Key evidence and findings: The non-service of notices to the parties, failure of the assessee to produce relevant documents, and information from enforcement authorities established the suspicious nature of the purchases.

Application of law to facts: The AO's rejection of the purchases as bogus was based on the assessee's failure to discharge the onus of proving the identity and genuineness of the parties and transactions. The reopening of assessment under section 147 was justified on the basis of credible information received.

Treatment of competing arguments: The assessee contended that the purchases were genuine and that the additions were excessive and arbitrary. However, the Court found the AO's and CIT(A)'s reasoning to be consistent with the legal framework and supported by evidence.

Conclusions: The additions under section 69C on account of bogus purchases were justified and sustainable.

Issue 2: Appropriateness of estimation of gross profit embedded in bogus purchases and consequent additions

Relevant legal framework and precedents: The principle for estimating profit on bogus purchases is to bring the gross profit rate on such purchases to the same rate as on genuine purchases, as held by the Hon'ble Bombay High Court in Pr. CIT vs. M. Haji Adam & Co. (ITA No. 1004/2016 dated 11.02.2019). The AO initially estimated a gross profit of 13.5% on bogus purchases (12.5% hidden profit plus 4% VAT), whereas the assessee declared a gross profit of approximately 5% on genuine purchases.

Court's interpretation and reasoning: The CIT(A) followed the High Court precedent and observed that since the gross profit declared on suspicious purchases (4.99%) was almost the same as that on genuine purchases (4.93%), no further addition on account of embedded profit was warranted. The CIT(A) deleted the addition of Rs. 10,95,910/- relating to estimated gross profit but confirmed the addition of Rs. 5,15,721/- being 4% VAT on the bogus purchases under section 69C.

Key evidence and findings: The gross profit rates declared by the assessee on genuine and suspicious purchases were nearly identical, negating the rationale for additional profit estimation. However, the evasion of VAT on purchases from the grey market was established.

Application of law to facts: The CIT(A) applied the legal principle that additions for bogus purchases should only equalize the gross profit rate, not exceed it. The addition for VAT evasion was separately confirmed as a legitimate source of income escaping assessment.

Treatment of competing arguments: The assessee argued that addition of 4% VAT was unjustified due to lack of material. The revenue countered with legal precedents and factual basis for VAT evasion. The Tribunal upheld the CIT(A)'s reasoning and rejected the assessee's contention.

Conclusions: The deletion of addition on account of embedded profit was appropriate, but confirmation of addition on account of evaded VAT at 4% was legally sound and justified.

Issue 3: Validity of confirming addition of 4% VAT under section 69C on alleged bogus purchases

Relevant legal framework and precedents: Section 69C allows addition of unexplained expenditure or investment, including evasion of indirect taxes such as VAT, when linked to bogus transactions. The CIT(A) relied on the principle that evasion of VAT constitutes income escaping assessment.

Court's interpretation and reasoning: The Tribunal noted that the CIT(A) had sound and convincing legal reasoning supported by settled precedents in confirming the addition of Rs. 5,15,721/- being 4% of the bogus purchases as evaded VAT tax. The Tribunal found no infirmity in this finding.

Key evidence and findings: The purchases were made from grey market sources, resulting in evasion of VAT at 4%, which was quantifiable and attributable to the assessee.

Application of law to facts: The addition under section 69C for VAT evasion was a direct consequence of the bogus purchases and was properly quantified at 4% of the purchase value.

Treatment of competing arguments: The assessee challenged the addition as excessive and lacking material. The Tribunal rejected this, holding that the CIT(A) had rightly applied the law and considered the evidence.

Conclusions: The confirmation of addition of 4% VAT on bogus purchases under section 69C was valid and upheld.

3. SIGNIFICANT HOLDINGS

The Tribunal upheld the following key principles and findings:

"The AO had reason to believe that income has escaped assessment within the meaning of section 147 of the Act and accordingly initiated proceedings. The assessee failed to discharge the onus of proving the genuineness of purchases from suspicious parties. The purchases were rightly treated as bogus."

"As held by Hon'ble High Court of Bombay in Pr. CIT vs. M. Haji Adam & Co., the addition in respect of bogus purchase is to be limited to the extent of bringing the gross profit rate on such purchases at the same rate as on other genuine purchases."

"Since the gross profit declared on suspicious purchases was similar to that on genuine purchases, no further addition on account of embedded profit was required."

"However, the appellant has made purchases from the grey market and evaded VAT at the rate of 4%, which should be taxed under section 69C of the Act."

"The addition of Rs. 5,15,721/- (4% of Rs. 1,28,93,048/-) is confirmed under section 69C of the Act."

"The reopening of assessment under section 147 was justified on the basis of credible information received from Sales Tax Department and DGIT(Inv.)."

"The assessee's failure to produce relevant documents and the non-service of notices to the parties supported the conclusion that purchases were bogus."

"The grounds of appeal challenging the addition under section 69C were rejected as lacking merit."