The Income Tax Appellate Tribunal, Mumbai, has clarified a critical principle in indirect tax litigation: when sales are accepted as genuine, the entire amount of alleged bogus purchases cannot be disallowed under Section 69C of the Income Tax Act. Only the embedded profit element in such transactions may be added to income, ensuring proportionality and commercial realism in tax assessments.
Background & Facts
The Dispute
The assessee, Ms. Utkarsha Vivek Parkar, is an individual proprietor operating a business under the name Neoimage CTP, engaged in supplying printing plates to offset printers. For Assessment Year 2011-12, she filed her return on 28.09.2011 declaring total income of Rs. 27,38,943. The return was processed under Section 143(1) on 17.08.2012. Subsequently, the Assessing Officer received intelligence from the DGIT (Investigation), Mumbai, based on inputs from the Maharashtra Sales Tax Department, alleging that the assessee had availed accommodation entries through bogus purchase bills from two parties: Crystal Corporation (Rs. 5,06,785) and Shruti Traders (Rs. 23,21,328), both identified as hawala operators.
Key Facts
- The assessee’s total sales for A.Y. 2011-12 were Rs. 3,71,90,972
- Gross profit declared: Rs. 1,31,58,153 (gross profit rate: 35.38%)
- Net profit declared: Rs. 28,38,943 (net profit rate: 7.63%)
- Alleged bogus purchases: Rs. 28,28,113
- Payments for purchases were made through banking channels
- Invoices for purchases were maintained in books of account
- The assessee had furnished ledger accounts of suppliers and purchase-sale correlation
- The Assessing Officer acknowledged that purchases were correlated with raw material consumption and sales
- Notices under Section 133(6) to the suppliers were returned unclaimed with remarks "Left" and "Not Known"
- Field verification failed to locate the suppliers at their registered addresses
- No delivery challans, transport receipts, weighment slips, or stock register entries were produced
- In A.Y. 2009-10, on identical facts, the Assessing Officer had restricted addition to 12.5% of alleged bogus purchases
Procedural History
- 28.09.2011: Original return filed for A.Y. 2011-12
- 17.08.2012: Return processed under Section 143(1)
- 21.03.2018: Notice under Section 148 issued for reassessment
- 14.08.2018: Assessee filed revised return electronically declaring income of Rs. 27,38,940
- 20.12.2018: Assessment order passed under Section 143(3) read with Section 147
- 28,28,113/- added as unexplained expenditure under Section 69C
- Total income assessed at Rs. 55,67,060
- Penalty proceedings initiated under Section 271(1)(c)
- 21.08.2025: CIT(A) allowed appeal, restricting addition to 12.5% of alleged bogus purchases (Rs. 3,535,141)
- 16.03.2026: ITAT Mumbai heard appeal filed by Revenue
Relief Sought
The Revenue sought to set aside the CIT(A)’s order and restore the Assessing Officer’s addition of the entire Rs. 28,28,113 as unexplained expenditure under Section 69C. The tax effect involved was Rs. 7,64,651.
The Legal Issue
The central question was whether, when sales are accepted as genuine and purchases are recorded in the books of account, the entire amount of alleged bogus purchases can be disallowed under Section 69C of the Income Tax Act, or whether only the embedded profit element in such purchases may be added to income.
Arguments Presented
For the Appellant (Revenue)
The Revenue contended that the purchases were unverified, unsupported by documentary evidence, and linked to known hawala operators. It relied on two recent judgments of the Bombay High Court - Principal Commissioner of Income-tax v. Kanak Impex (India) Ltd. [2025] 172 taxmann.com 283 and Principal Commissioner of Income-tax v. Drisha Impex (P.) Ltd. [2025] 173 taxmann.com 571 - to argue that where purchases are found to be bogus and the assessee fails to prove their genuineness, the entire amount must be added under Section 69C. It submitted that the CIT(A) erred in estimating a profit margin and that judicial precedents mandated full disallowance.
For the Respondent (Assessee)
The assessee argued that the sales declared were accepted by the Assessing Officer, and the purchases were duly recorded in the books of account with banking trail and invoices. She contended that the entire disallowance was unjustified because the corresponding sales were not in dispute. She highlighted that the gross and net profit margins were reasonable and consistent with prior years. She further pointed out that in A.Y. 2009-10, on identical facts, the department had restricted the addition to 12.5%, and applying a different standard violated the principle of consistency. She relied on the well-established principle that where sales are accepted, only the profit element embedded in unverifiable purchases can be taxed.
The Court's Analysis
The Tribunal carefully examined the factual matrix and the judicial precedents cited by both parties. It noted that the Assessing Officer had not questioned the genuineness of the sales, which amounted to Rs. 3,71,90,972. The Tribunal emphasized that if the sales are genuine, the procurement of goods to effect such sales is a necessary corollary. The fact that the suppliers could not be verified does not negate the reality of the underlying transaction.
"Once the sales are accepted as genuine, it necessarily follows that the assessee must have procured goods for effecting such sales. In such circumstances, the entire purchases cannot be treated as non-genuine."
The Tribunal observed that the assessee had maintained proper books of account, made payments through banking channels, and provided purchase-sale correlation. The failure to produce delivery challans or conduct field verification did not, by itself, justify full disallowance. The Tribunal distinguished the cases relied upon by the Revenue:
In Kanak Impex, the assessee had completely failed to appear or produce any evidence. In Drisha Impex, there were categorical findings of involvement in accommodation entry schemes. In contrast, the present assessee had actively participated in proceedings, submitted documentation, and demonstrated commercial plausibility.
The Tribunal further noted that adding the entire Rs. 28,28,113 would inflate the gross profit rate from 35.38% to 42.98% and net profit from 7.63% to 15.23% - figures inconsistent with the nature of the printing plate supply business. The 12.5% addition, representing the likely profit embedded in the accommodation bills, was deemed a reasonable and balanced approach.
The Tribunal also upheld the principle of consistency, noting that the same 12.5% approach had been applied in A.Y. 2009-10 on identical facts.
The Verdict
The appeal filed by the Revenue was dismissed. The order of the CIT(A) dated 21.08.2025 was upheld. The addition of Rs. 28,28,113 under Section 69C was restricted to 12.5% thereof, i.e., Rs. 3,535,141. The tax effect of Rs. 7,64,651 was accordingly reduced. No further directions were issued as the matter was concluded.
What This Means For Similar Cases
Purchases Cannot Be Disallowed in Full When Sales Are Accepted
- Practitioners must argue that if the Assessing Officer has accepted the sales, the underlying procurement of goods is presumed to have occurred
- Full disallowance under Section 69C is disproportionate unless there is clear evidence of fabrication of sales
- The burden shifts to the Revenue to prove that the sales themselves are fictitious, not merely the suppliers
Profit Element Is the Only Justifiable Addition
- Only the profit embedded in unverifiable purchases - not the entire cost - is taxable
- A reasonable profit margin (e.g., 10-15%) may be estimated based on industry norms or past assessments
- This approach prevents artificial inflation of income and aligns with commercial reality
Consistency in Assessment Practices Is Legally Binding
- Where the department has previously accepted a 12.5% addition on identical facts, it cannot unilaterally impose full disallowance in subsequent years
- Arbitrary variation in treatment violates the doctrine of consistency and natural justice
- Taxpayers may invoke past assessments as binding precedent in similar circumstances
