Bombay High Court Partially Allows Revenue’s Appeal in Dispute Over Bogus Purchases
Safiya Malik
The Bombay High Court has delivered its judgment in an appeal filed by the Revenue against an order of the Income Tax Appellate Tribunal (ITAT) concerning alleged bogus purchases made by a real estate firm. The division bench, comprising Justice M.S. Sonak and Justice Jitendra Jain, adjudicated on whether the ITAT was justified in restricting the disallowance of purchases to profit margins without confirming the complete disallowance under Section 69C of the Income Tax Act, 1961. The court upheld the ITAT's decision for most of the purchases under dispute but reversed the Tribunal's findings concerning purchases from two specific suppliers. The appeal was thus allowed in part, with the court directing that the total additions concerning these suppliers should not exceed ₹1,00,10,773.
The case pertained to the assessment year 2010-11, in which the assessee, a firm engaged in real estate development, filed a return declaring an income of ₹61,05,420. During scrutiny assessment, the Assessing Officer (AO) passed an order on March 25, 2013, assessing the income at ₹15,41,95,860. This included an addition of ₹14,30,90,442 on account of alleged bogus purchases from various suppliers, along with an additional sum of ₹50,00,000 under Section 68 of the Income Tax Act.
The assessee challenged this order before the Commissioner of Income Tax (Appeals) [CIT(A)], which, on May 29, 2015, deleted the additions concerning all suppliers except two entities, M/s Neptune Trading Co. and Hari Om Traders. For these two suppliers, the CIT(A) partially upheld the AO's findings but restricted the addition to 12.5% of the total purchases made from them.
The Revenue, dissatisfied with this order, appealed to the ITAT, arguing that the CIT(A) had erred in deleting the additions and that even for the two remaining suppliers, the entire purchase amounts should have been disallowed rather than being restricted to a profit margin. The ITAT upheld the order of the CIT(A) in its entirety on May 24, 2017, leading to the present appeal before the Bombay High Court.
The High Court examined whether the Tribunal erred in restricting the disallowance to the profit margin rather than confirming a complete disallowance. The court noted that in cases where the purchases are suspected to be bogus, the onus lies on the assessee to prove their genuineness. The court recorded that "the respondent-assessee did not discharge its onus of proving the purchases made from various parties during the course of the assessment proceedings."
The judgment noted that during appellate proceedings before the CIT(A), additional evidence was submitted, and the AO was asked to verify the documents. The court observed: "In the said remand report, the AO stated that in response to summons issued under Section 133(6), all the suppliers filed the details called for. Out of various suppliers except M/s Neptune Trading Co. and Hari Om Traders, bank statements were also filed by these suppliers."
Based on these findings, the CIT(A) and ITAT held that for most suppliers, the purchases could be treated as genuine, as the AO had verified that the funds were not withdrawn in cash after cheques were issued. However, for M/s Neptune Trading Co. and Hari Om Traders, no bank statements were submitted, leading the High Court to note that "the Officer could not verify whether there were any cash withdrawals after the transactions with the respondent-assessee."
The court observed that "the respondent-assessee has accepted the addition of 12.5% of the purchases from these two parties. By accepting the said percentage, the respondent-assessee has impliedly accepted that the transactions with these two parties could not be proved." Given this acceptance, the High Court held that the Tribunal and CIT(A) should have confirmed the complete disallowance instead of restricting it to 12.5%.
The Bombay High Court upheld the ITAT’s order for most of the suppliers but reversed its decision regarding purchases from M/s Neptune Trading Co. and Hari Om Traders. The judgment recorded:
"With respect to the purchases from M/s Neptune Trading Co. and Hari Om Traders, the question is answered in favor of the appellant-revenue and against the respondent-assessee. The order of the CIT(A) and the Tribunal is reversed insofar as the purchases from these two parties are concerned."
However, the court stated that the total additions concerning these two suppliers should not exceed ₹1,00,10,773. The appeal was disposed of accordingly.
Case Title: The Principal Commissioner of Income Tax-25 v. Shree Ganesh Developers
Neutral Citation: 2025:BHC-OS:3554-DB
Case Number: Income Tax Appeal No. 719 of 2018
Bench: Justice M.S. Sonak, Justice Jitendra Jain
[Read/Download order]
