Sangeetha Prathap

The Income Tax Appellate Tribunal (ITAT), Mumbai, has held that when purchases are conclusively established as bogus and the assessee fails to prove the existence and genuineness of suppliers, the entire purchase amount must be disallowed. The Tribunal ruled that the benefit of estimating only a profit element does not apply in cases of sham transactions. The decision was delivered by a Bench comprising Smt. Beena Pillai (Judicial Member) and Shri Omkareshwar Chidara (Accountant Member) in a Revenue appeal challenging partial relief earlier granted by the Commissioner of Income Tax (Appeals).

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The assessee, engaged in the business of building and developing properties, had filed his return declaring an income of ₹9.89 lakh. Based on information from the Maharashtra Sales Tax Department and the Investigation Wing, the Assessing Officer reopened the assessment under Section 147, finding that the assessee had made purchases worth ₹26.49 lakh from five suppliers flagged as hawala operators. The order records on page 2 that all five entities—V3 Enterprises, S K Trading Co., Ace International, Liberty Trading Corporation, and Deep Enterprises—were categorised as non-genuine suppliers and were untraceable.

Summons under Section 131 and notices under Section 133(6) issued to all parties were returned unserved. The assessee failed to produce a single supplier or provide any supporting documents such as delivery challans, transport records, or stock registers. In fact, in his own statement under Section 131, the assessee admitted that the parties were accommodation entry providers and no material was ever supplied. The Assessing Officer accordingly treated the purchases as entirely non-genuine and made a 100% disallowance under Section 37(1).

Aggrieved by the disallowance, the assessee approached the CIT(A). The Commissioner accepted that the suppliers were listed as hawala dealers but reduced the disallowance to 15% on the ground that sales had not been doubted. The CIT(A) applied a profit-estimation approach commonly used in cases of unverifiable purchases. The Revenue filed an appeal before the ITAT, arguing that the CIT(A) ignored conclusive evidence of bogus purchases and that once suppliers are proven to be non-existent, no estimation of profit can be applied.

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Before the Tribunal, the Revenue submitted that the assessee had been completely non-cooperative, as reflected in the repeated non-appearance before both the Assessing Officer and the Tribunal. The Tribunal noted from the order-sheet that the assessee had failed to appear on more than ten hearing dates and the matter was therefore adjudicated ex parte.

In its analysis, the Bench observed that the undisputed facts demonstrated complete non-genuineness of the transactions. The order (page 5) notes that all summons and notices were returned unserved, no delivery evidence was furnished and the assessee admitted during his statement that no goods were purchased.

The Tribunal held that in such cases, the estimation theory—commonly applied when purchases are unverifiable but sales are accepted—has no application. Instead, where purchases are sham, the entire addition must be sustained. The Tribunal relied on the Bombay High Court decision in Pr. CIT v. Kanak Impex (India) Ltd., where the High Court upheld 100% disallowance in similar circumstances.

The Tribunal further observed that the assessee’s statement that he had no actual dealings with S K Trading Co. could not be selectively ignored, and therefore the alleged transaction with that party was removed from consideration. However, the purchases from the remaining four parties—V3 Enterprises, Ace International, Liberty Trading Corporation and Deep Enterprises—were held to be completely bogus.

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Accordingly, the Tribunal reversed the order of the CIT(A) and restored the full disallowance made by the Assessing Officer in respect of the four suppliers. The Revenue’s appeal was thus partly allowed.

Appearance

Appearance for the Appellant: None

Appearance for Respondent: Shri Bhagirath Ramwat, Sr. D/R

Cause Title: DCIT, Circle- 41(3)(1) Mumbai Vs. Deepak Shah

Case No: ITA No. 3870/Mum/2024

Coram: Smt. Beena Pillai (Judicial Member), Shri Omkareshwar Chidara (Accountant Member)