The Income Tax Appellate Tribunal, Delhi, has reaffirmed a critical principle in direct tax jurisprudence: when an assessee’s sales are not disputed, the entire value of purchases cannot be treated as unexplained income under Section 69C of the Income Tax Act. The Tribunal upheld the Commissioner (Appeals)’s decision to restrict the addition to the gross profit margin, emphasizing that tax liability must be confined to the actual profit element.
Background & Facts
The Dispute
The Revenue appealed against the order of the National Faceless Appeal Centre/Ld. Commissioner of Income Tax (Appeals), New Delhi, dated 07.04.2025, which had substantially reduced an addition of Rs. 2,69,79,069/- made by the Assessing Officer under Section 69C of the Income Tax Act, 1961, for Assessment Year 2021-22. The AO had treated purchases from six parties as bogus due to non-cooperation from those parties and lack of documentary verification, and disallowed the entire purchase amount as unexplained expenditure.
Key Facts
- The assessee was engaged in trading activities with a meager gross profit margin of 2.03%
- The AO issued notices under Section 133(6) to six suppliers; four did not respond and two denied any business relationship with the assessee
- The assessee submitted audited financial statements, purchase bills, cheque payments, ledger accounts, PAN details, bank statements, and supplier confirmations
- The Assessing Officer did not dispute the genuineness of the sales made by the assessee using these purchases
- The assessee’s books of accounts were audited under Section 44AB and the audit report was filed
- The assessee maintained inventory records and consumed the purchased materials in business operations
- The total purchase value under dispute was Rs. 2,65,79,069/-
Procedural History
- 19.12.2022: Assessment order passed under Section 143(3) read with Section 144B, adding Rs. 2,69,79,069/- under Section 69C
- 07.04.2025: Ld. CIT(A) deleted the entire addition of Rs. 2,65,79,069/- and restricted the addition to Rs. 5,39,555/- (2.03% of purchase value) as gross profit
- 05.02.2026: Appeal filed by Revenue before ITAT Delhi (ITA No. 3455/Del/2025)
- 05.02.2026: Hearing held; assessee was absent
- 30.03.2026: Order pronounced dismissing the appeal
Relief Sought
The Revenue sought restoration of the original addition of Rs. 2,69,79,069/-, arguing that the CIT(A) erred in restricting the addition to the gross profit margin and ignored judicial precedents supporting full disallowance.
The Legal Issue
The central question was whether, under Section 69C of the Income Tax Act, the entire value of purchases can be treated as unexplained income when the assessee’s sales are not disputed and the purchases are supported by documentary evidence, or whether the addition must be restricted to the gross profit margin.
Arguments Presented
For the Appellant/Revenue
The Revenue contended that the assessee failed to prove the genuineness of transactions with six suppliers, as none of them appeared or submitted corroborative evidence. It relied on decisions such as PCIT-12 Mumbai v. Drisha Impact Pvt. Ltd. and PCIT v. Shri Ganesh Developers to argue that non-production of suppliers justifies full disallowance under Section 69C. It submitted that the CIT(A) erred in relying on profit margin as the basis for addition, ignoring the statutory mandate to treat unexplained purchases as income.
For the Respondent/Assessee
The assessee was absent and did not file any written submissions. However, the CIT(A) had relied on the assessee’s earlier submissions, which included audited accounts, payment proofs, and supplier confirmations. The argument, as adopted by the CIT(A), was that since sales were not disputed, the entire purchase value could not be treated as unexplained income; only the profit element (2.03%) could be added as income.
The Court's Analysis
The Tribunal examined the findings of the CIT(A) and the judicial precedents cited therein, particularly Principal Commissioner of Income-tax v. Hitesh Mody (HUF), Principal Commissioner of Income-tax v. Max Flex and Imaging Systems Ltd., and Principal Commissioner of Income-tax v. Tirupati Earth Neerprima JV, all delivered by the Bombay High Court.
"The Courts have time and again held that only the profit element in the alleged bogus purchases amount can be treated as income, particularly, when the sales has not been disputed."
The Tribunal noted that the Assessing Officer had not challenged the authenticity of the sales made by the assessee. The assessee had furnished comprehensive documentation: audited financials, cheque payments, tax invoices, ledger accounts, and supplier confirmations. The mere failure to produce suppliers, without evidence of collusion or fabrication, could not render the entire purchase value unexplained.
The Tribunal emphasized that Section 69C is not a tool for penalizing procedural lapses but for addressing genuine unexplained expenditures. Where the cost of goods sold is supported by verifiable records and the corresponding sales are accepted, the tax liability must be confined to the profit element. The CIT(A)’s estimation of 2.03% as gross profit was factually grounded and consistent with the assessee’s audited accounts.
The Tribunal further held that the Bombay High Court’s rulings were directly applicable: when inventory is maintained, payments are made via account payee cheques, and tax invoices are obtained, the entire purchase value cannot be disallowed. The burden shifts to the Revenue to prove that the profit margin is understated, which it failed to do.
The Verdict
The Revenue’s appeal was dismissed. The Tribunal confirmed the order of the CIT(A) dated 07.04.2025, upholding the restriction of the addition to Rs. 5,39,555/-, which represents 2.03% of the disputed purchase value of Rs. 2,65,79,069/-. The addition of Rs. 2,65,79,069/- was deleted in full. No further interest, penalty, or costs were imposed.
What This Means For Similar Cases
Gross Profit Margin Is the Ceiling for Section 69C Additions
- Practitioners must argue that where sales are accepted and purchase documentation exists, the entire purchase value cannot be disallowed under Section 69C
- The burden is on the Revenue to prove that the profit margin is artificially low, not on the assessee to prove supplier genuineness beyond documentary evidence
- Additions under Section 69C must be limited to the actual profit element, not the cost of goods
Documentary Evidence Trumps Non-Cooperation of Third Parties
- Non-response or denial by suppliers does not automatically render purchases bogus
- Payment via account payee cheques, tax invoices, and audited books constitute prima facie proof of transaction genuineness
- Assessing Officers must conduct further investigation before disallowing entire purchases
Judicial Precedent Is Binding on Lower Forums
- Decisions of High Courts on identical facts are binding on ITAT
- CIT(A)s and ITATs must apply the principle that only profit is taxable, not cost, when sales are not disputed
- Revenue’s reliance on isolated decisions ignoring this principle will not prevail
