The Gujarat High Court has reaffirmed that where an assessee’s sales are accepted and the books of account are not rejected, the entire value of alleged bogus purchases cannot automatically be added to taxable income. 

Dismissing cross appeals filed by both the Income Tax Department and the assessee, the bench of Justice Bhargav D. Karia and Justice Pranav Trivedi upheld the Income Tax Appellate Tribunal’s (ITAT) decision restricting the disallowance to 10% of the disputed purchases, holding that no substantial question of law arose for consideration. 

The respondent/assessee is engaged in the manufacture of TMT bars. During reassessment proceedings, the Assessing Officer alleged that the company had made bogus purchases worth ₹39 crore from four suppliers. The allegations were based on information received from the Investigation Wing and reports indicating that the suppliers were engaged in issuing accommodation bills without actual movement of goods. 

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The four suppliers from whom purchases aggregating to ₹39,00,60,232 were questioned were Om Shiv Metallicks, Shakambari Metallicks, Kanchan Alloys and Steel, Vishkarma Industries. The Assessing Officer treated the entire purchase amount as bogus and added it to the assessee’s income. The Commissioner (Appeals) affirmed the addition. 

When the matter reached the ITAT, the Tribunal agreed that the assessee had failed to conclusively establish that the purchases were made from the named suppliers. It noted that notices issued under Section 133(6) either remained unanswered or the parties were not traceable, making the genuineness of the transactions unverifiable. 

However, the Tribunal also observed that the assessee’s sales had been accepted; the turnover was not disturbed; it would therefore be inappropriate to tax the entire purchase amount.

Relying on several precedents of the Gujarat and Bombay High Courts, the Tribunal held that only the profit element embedded in the disputed purchases should be brought to tax and accordingly restricted the disallowance to 10% of the alleged bogus purchases. 

Before the High Court, the Income Tax Department argued that the case was distinguishable from ordinary “grey market purchase” cases.

According to the department designated Verification Unit (DVU) inquiries established that the suppliers either did not exist or could not be traced. Notices under Section 133(6) remained uncomplied with. Investigation reports suggested the suppliers merely issued accommodation invoices without actual movement of goods. The assessee failed to produce transport documents and other evidence demonstrating physical delivery of goods.

The department relied heavily on the Gujarat High Court’s decision in N.K. Industries Ltd., subsequently affirmed by the Supreme Court, to contend that once purchases are found to be bogus, the entire purchase value should be disallowed rather than merely estimating a profit element. 

The assessee, on the other hand, contended that no addition should survive at all.

It argued that sales had never been questioned by the Department; books of account had not been rejected under Section 145; quantitative records of raw materials and finished goods were available; payments had been made through banking channels; only real income can be taxed under the Income-tax Act.

The assessee also highlighted that its gross profit and net profit ratios during the relevant assessment year were higher than the average of preceding years, suggesting there was no suppression of profits. It further challenged the validity of reopening under Section 147, alleging that the reassessment proceedings were initiated solely on borrowed satisfaction without independent application of mind. 

The High Court observed that all authorities had concurrently recorded findings that the assessee failed to establish actual movement of goods corresponding to the disputed invoices. At the same time, the Court noted an equally important aspect—the Assessing Officer had not rejected the books of account, nor had the sales recorded by the assessee been disputed. 

The Bench further found that although the Commissioner (Appeals) referred to Section 69C while discussing the issue, the actual assessment order merely treated the purchases as bogus and disallowed them; it did not invoke Section 69C in the manner argued by the Revenue. This weakened the Department’s contention that the entire purchase amount necessarily had to be added as unexplained expenditure. 

The Court held that the Tribunal had correctly relied upon judicial precedents dealing with estimation of profit embedded in disputed purchases and that its decision to sustain only a 10% disallowance was based on appreciation of facts and settled legal principles. Since the findings were essentially factual, no substantial question of law arose warranting interference. 

The Gujarat High Court dismissed both appeals—rejecting the Revenue’s plea for restoration of the entire ₹39 crore addition and declining the assessee’s request to delete even the 10% disallowance or invalidate the reassessment proceedings. The ITAT’s order restricting the addition to 10% of the alleged bogus purchases was allowed to stand. 

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