ITAT Bangalore Deletes ₹20.16 Lakh Bogus Purchase Addition — Holds That "Borrowed Satisfaction" Cannot Replace Independent Inquiry

Background and Case Overview

The Bangalore Bench of the Income Tax Appellate Tribunal, in the matter of Kuppaswamy Murthy Vs ITO, delivered a significant ruling concerning the disallowance of purchases allegedly made from a bogus supplier. The Tribunal completely set aside an addition of ₹20,16,630/- that had been made by the Assessing Officer for Assessment Year 2018-19 and subsequently confirmed by the National Faceless Appeal Centre (NFAC), Delhi, vide order dated 19.12.2025.

The case raises fundamental questions about the evidentiary standards required before an Assessing Officer can treat purchases as non-genuine, and underscores the limits of relying exclusively on inter-departmental intelligence without conducting any independent verification in the assessee's own case.

Facts of the Case

The assessee, an individual engaged in the manufacturing and supply of wooden and packing cases, had declared sales of ₹2.62 crores and purchases of ₹2.36 crores during the year under consideration. The opening and closing stock stood at ₹33.14 lakh and ₹51.59 lakh respectively. The financial results reflected a gross profit margin of 6.7% and a net profit margin of 5.89% — figures that were not disputed or flagged as abnormal by the Revenue at any stage.

During the course of assessment, the Assessing Officer received information from the Commercial Tax Department, Government of Karnataka, which had conducted an investigation and identified 60 entities as fictitious bill providers or accommodation entry operators. Among the identified parties was M/s Royal Enterprises. According to the investigation, M/s Royal Enterprises was involved in GST bill trading without any actual supply of goods or services. Out of the 60 flagged parties, nine individuals had been arrested and criminally prosecuted.

Based solely on this inter-departmental information, the Assessing Officer issued a show cause notice proposing to disallow purchases of ₹20,16,630/- reportedly made from M/s Royal Enterprises, treating them as bogus.

Assessee's Response Before the Assessing Officer

In reply to the show cause notice, the assessee furnished:

• Copies of purchase invoices issued by M/s Royal Enterprises
• Bank statements demonstrating that all payments were routed through proper banking channels
• Details of sales and books of account reflecting the corresponding transactions

The assessee argued that the purchases were genuine, fully recorded, and properly disclosed. It was further contended that the assessee had no means of independently verifying the internal operations or compliance status of its supplier, and therefore no adverse inference ought to be drawn solely on the basis of allegations against a third party.

Assessment Order

The Assessing Officer rejected the assessee's submissions and proceeded to disallow ₹20,16,630/-. The core reasoning was that M/s Royal Enterprises had been conclusively identified as an entry provider through a detailed field investigation, and that payment through banking channels alone was insufficient to establish the genuineness of the transactions. The AO held that the assessee had availed fictitious bills to inflate purchase expenses and reduce taxable profits.

First Appellate Order — CIT(A) / NFAC

The assessee challenged the addition before the learned CIT(A), reiterating that the purchases were supported by tax invoices, e-way bills, ledger accounts, and banking evidence. The assessee also raised the ground that no opportunity of cross-examination had been provided, amounting to a violation of the principles of natural justice. An alternative plea was raised that if the purchases were to be disallowed, the corresponding sales and closing stock should also be reduced proportionately.