The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has granted major relief to a fabric trader by deleting additions of ₹3.51 crore made on account of alleged bogus purchases and ₹4.20 lakh towards management and consultancy fees. 

The bench of Pawan Singh (Judicial Member) and Makarand Vasant Mahadeokar (Accountant Member) has observed that a mere allegation by a supplier that his PAN was misused cannot be the sole basis for treating purchases as non-genuine when the assessee has produced substantial documentary evidence supporting the transactions.

The assessee, an individual proprietor engaged in the business of trading in fabrics under the name “Active Sports,” had filed his income tax return for Assessment Year 2021-22 declaring income of approximately ₹1.15 crore. During scrutiny assessment, the Assessing Officer (AO) examined purchases amounting to ₹38.61 crore and raised concerns regarding transactions undertaken with certain suppliers who were either non-filers of income tax returns or had disclosed comparatively low turnover in their returns.

The controversy centered around purchases worth ₹3.51 crore, including GST, made from a concern named Delightful Collections. During verification proceedings, the AO issued a notice under Section 133(6) of the Income Tax Act to the supplier. In response, the proprietor of the concern, Chandraparakash Shukla, claimed that his PAN had been misused by a friend and that he had already informed GST authorities about the alleged fraud. Based primarily on this response, the AO treated the purchases as bogus and disallowed the entire amount.

The assessee strongly contested the proposed disallowance and submitted a comprehensive set of supporting documents, including purchase invoices, transport receipts, e-way bills, bank statements evidencing payments, and GST records. The assessee pointed out that the Input Tax Credit (ITC) arising from the purchases was duly reflected in GSTR-2A and that the supplier’s GST registration was active during the relevant period. It was also argued that the purchases were fully supported by corresponding sales, making it impossible to generate sales without the underlying purchases.

Despite these submissions, the AO relied upon portions of the supplier’s affidavit and concluded that the purchases had been booked merely to suppress profits. The Commissioner (Appeals) subsequently upheld the addition.

While examining the matter, the ITAT observed that the tax authorities had failed to conduct any meaningful investigation beyond relying on the supplier’s statement regarding alleged PAN misuse. The Tribunal noted that neither the identity of the alleged friend who supposedly misused the PAN nor any supporting evidence regarding such misuse had been brought on record. Furthermore, the AO did not summon the supplier under Section 131 for examination, nor was any opportunity of cross-examination provided to the assessee.
The Tribunal emphasized that payments had been made through banking channels into the account of Delightful Collections, GST returns had been filed, and the purchases were supported by transport documents and e-way bills containing complete details of goods, value, GST, vehicle numbers, and transporter information. None of these documents were found to be false or fabricated.

A significant factor considered by the Tribunal was that the Revenue had not disputed the corresponding sales made by the assessee. The books of account were also not rejected. The Bench observed that the assessee had consistently reported a gross profit exceeding 6%, with the gross profit for the relevant year being approximately 6.94%. In the absence of any adverse evidence contradicting the documentary material produced by the assessee, the Tribunal held that disallowance of the purchases was unjustified.

Accordingly, the ITAT deleted the addition of ₹3.51 crore made on account of alleged bogus purchases.

The Tribunal also examined the disallowance of ₹4.20 lakh paid as management and consultancy fees to Hetal Patel. The AO had questioned the expenditure primarily on the ground that the recipient was not highly educated and had disclosed income below the taxable threshold. The expenditure was therefore treated as an attempt to reduce taxable profits.

Rejecting the Revenue’s approach, the Tribunal observed that the services rendered and the actual payment were not disputed. It further held that educational qualifications alone cannot be the basis for doubting the genuineness of a business expenditure. Considering the scale of the assessee’s business and the fact that the payment amounted to only ₹35,000 per month, the Tribunal found the expenditure reasonable and incurred for business purposes. Since no adverse material had been brought on record, the disallowance was deleted.

Allowing the appeal in full, the Mumbai ITAT deleted both additions and held that genuine purchases supported by invoices, e-way bills, transport documents, GST records, and banking transactions cannot be disallowed merely because a supplier later alleges misuse of his PAN without any supporting investigation by the tax department. The Tribunal also reaffirmed that consultancy expenses cannot be disallowed solely on the basis of the recipient’s educational qualifications when the business purpose and payment itself remain undisputed.

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