The Income Tax Appellate Tribunal Delhi has clarified a critical principle in tax assessment: when an assessee’s sales linked to disputed purchases are accepted by the tax authorities, the entire purchase value cannot be treated as unexplained expenditure. This decision reinforces the necessity of proportionality and evidentiary consistency in invoking Section 69C of the Income Tax Act.
Background & Facts
The Dispute
The assessee, The Silk Factory, declared an income of Rs. 44,62,810 for Assessment Year 2019-20. The Assessing Officer (A.O.) reopened the case under Section 147 based on CBDT’s risk management insights, alleging that purchases worth Rs. 2.88 crore from three entities - M/s Rajshree Vanijaya Udyog, M/s Sarraf Enterprises, and another - were bogus. These entities were claimed to be non-existent shell companies with cancelled GST registrations and no actual business in textiles.
Procedural History
- March 2024: A.O. passed assessment order under Section 144B, adding Rs. 2.88 crore as unexplained expenditure under Section 69C.
- October 2024: Ld. CIT(A) deleted the addition, restricting it to 5% of the alleged bogus purchases, citing the assessee’s production of invoices, e-way bills, bank statements, and stock registers.
- February 2026: Revenue appealed to ITAT Delhi; the assessee filed a cross-objection for delay condonation.
Relief Sought
The Revenue sought full restoration of the Rs. 2.88 crore addition under Section 69C, arguing that the suppliers were non-existent and the transactions were accommodation entries. The assessee sought confirmation of the CIT(A)’s order restricting the addition to 5%.
The Legal Issue
The central question was whether Section 69C permits full disallowance of purchase value when the corresponding sales made from those purchases have been accepted by the tax authorities as genuine.
Arguments Presented
For the Appellant (Revenue)
The Revenue contended that the entities from whom purchases were made were non-existent shell companies with cancelled GST registrations and no physical business operations. It relied on investigation reports, third-party confirmations, and the Supreme Court’s decision in NK Proteins Ltd. v. DCIT to argue that once the origin of purchases is proven fraudulent, the entire amount must be added as unexplained expenditure. It asserted that the assessee failed to prove actual movement of goods or source of funds.
For the Respondent (Assessee)
The assessee submitted that it had produced comprehensive documentary evidence - including invoices, e-way bills, consignment notes, bank statements, and stock registers - to establish the genuineness of transactions. It emphasized that the A.O. had accepted the sales figures derived from these purchases, making it legally inconsistent to treat the purchases as entirely fictitious. It cited the Tribunal’s own earlier order in its 2022-23 assessment to argue for consistency and proportionality.
The Court's Analysis
The Tribunal examined the relationship between purchases and sales under Section 69C, noting that the provision targets unexplained expenditure, not mere suspicion of supplier irregularities. It held that the Revenue’s reliance on the non-existence of suppliers was insufficient without disproving the actual receipt of goods or the legitimacy of the transaction chain.
"If the purchases were entirely held to be bogus, it would be impossible for the Assessee to complete the sale and thus, the corresponding sales would also be bogus. Therefore, in such circumstances when corresponding sales remained undisputed, purchases cannot be held to be entirely bogus."
The Tribunal emphasized that Section 69C cannot be invoked merely because suppliers had suspended or cancelled GST registrations, or failed to respond to notices under Section 133(6). It distinguished NK Proteins Ltd. by noting that in that case, the assessee had no documentary proof of receipt of goods, whereas here, the assessee had maintained consistent stock and sales records.
The Tribunal also relied on its own prior decision in the assessee’s 2022-23 assessment, which had similarly upheld the restriction of addition to 5% on the ground that the sales were accepted and no fabrication of documents was alleged. It concluded that the burden of proving the transaction’s falsity lies with the Revenue, and suspicion alone cannot override documented evidence.
The Verdict
The Revenue’s appeal was dismissed. The Tribunal upheld the CIT(A)’s order restricting the addition under Section 69C to 5% of the alleged bogus purchases. The cross-objection was dismissed as infructuous. The Court held that corresponding sales, if accepted, preclude full disallowance of purchases under Section 69C.
What This Means For Similar Cases
Corresponding Sales Validate Purchases
- Practitioners must argue that if the Revenue has accepted the assessee’s sales figures, it cannot later treat the underlying purchases as entirely fictitious without disproving the physical movement of goods.
- The doctrine of consistency applies: accepting one leg of a transaction (sales) while rejecting the other (purchases) violates the principle of natural justice.
Suspicion Alone Cannot Trigger Section 69C
- Merely showing that suppliers had cancelled GST registrations or failed to respond to notices under Section 133(6) is insufficient to invoke Section 69C.
- The Revenue must prove that the goods were never received or that documents were fabricated - mere supplier irregularities are not conclusive.
Proportionality Is Mandatory
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Full disallowance under Section 69C is disproportionate when a portion of the transaction is corroborated by sales and stock records.
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A 5% or similar restricted addition, as upheld here, is now a recognized benchmark where partial genuineness is established.
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Practitioners should routinely file stock registers and e-way bills as primary evidence in cases involving disputed purchases.
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Where the Revenue relies on GST database anomalies, counter with proof of actual receipt and sale of goods.
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Always cite The Silk Factory to resist blanket disallowances under Section 69C when sales are accepted.
